Founded in 1971, Starbucks is a global brand in the quick service retail sector, specializing in the sale of high-margin specialty coffee. For the fiscal year ending 2014, Starbucks generated revenue of $16.44 billion and net income of $2.07 billion, with an extremely impressive gross margin of 58.54% and pre-tax operating margin of 18.7%. As of September 2015, its stock had appreciated 48% on a year-over-year basis.
Unlike many competitors, Starbucks is benefitting from favorable branding with millennial customers, and has a strong presence in social media and technology oriented platforms, notably mobile-payment systems. Under Howard Schultz, who purchased the company from its founders in the 1980s and returned as CEO in 2008, the company has bounced back from an overly aggressive expansion strategy in the late 90's and early 2000's, and same-store sales are up 7% for the third quarter of 2015,* compared with 2% for competitor Dunkin' Donuts. An additional 1,500 new locations are slated to open this year.
Notably, Moody's upgraded Starbucks from A3 to A2 credit on September 15, 2015, reflecting the company's “global brand strength, dominant position in the US specialty coffee segment, global diversification, significant scale, and balanced financial policy.”
In aggregate, we believe this performance will continue drive faster cap rate compression for Starbucks real estate relative to the QSR sector as a whole, above what occurred from 2014 to 2015. Cap rates for Starbucks over the past two years have compressed about 19% faster than its peers in the QSR space as a whole. We anticipate the spread in cap rates between those assets occupied by Starbucks versus other QSR tenants will continue to widen as credit and unit-level performance remain a factor for the passive net lease investor.
Look for a more detailed analysis of Starbucks triple-net properties in a forthcoming publication.
* Starbucks' fiscal year ends in September, so the third quarter ends in June.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
