A new Starbucks location near Syracuse University doesn’t have the usual tables and chairs for the work-at-the-café set. Instead, it has drive-up and walk-up windows.
Innovation? Well, sort of. It’s a move the company had tried in 1994 before focusing more on the fuller layouts. But now competitors are on the company’s heels, both with consumers and with developers and landlords, according to Matt Lipson and Mike Philbin, both senior vice presidents and co-founders of the Northmarq Restaurant Group.
Not that Starbucks will be going away with its 16,941 U.S. stores at the end of October 2024. “But they’re not necessarily the most sought out brand and the one most selling,” Lipson told GlobeSt.com. The company’s domestic sales declined 6% with a 10% decline in comparable transactions, partially offset by a 4% increase in average ticket size.
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But there are problems beyond consumer choices. “They were so large they could do whatever they wanted,” Lipson told GlobeSt.com. For example, during the height of the pandemic, the company added force majeure clauses to their leases. They only pay net-net and, in the past, they’ve had leases with clauses allowing the company to terminate a lease with three years of notice. “It was scary to anyone that was going to invest with them. You’re not going to pay a five cap if three years from now Starbucks can up and leave without consequences.”
“During the pandemic, they said, ‘We’re going to pay half rent,’” Philbin added. “These developers have eyes. They could see 30 cars backed up at a Starbucks.” He points out that McDonald’s and Chick-fil-A have had relatively steady cap rates. Starbucks on the other hand has lost almost 100 basis points.
Over time, competitors like Dutch Bros., 7 Brew, and Scooter’s have become more popular in the net lease industry. Smaller footprints like 900 square feet solve some building issues. “You can put them up for maybe a million,” Lipson says. The average unit volume — which is the basis for projected rent when developing a party — for Dutch Bros. was $1,973,000 in 2023. For Starbucks, it was $1,955,000, putting it in second place. And, overall, Starbucks’ competitors tend to pay more rent because they don’t have the size to get their way.
“There’s over 300 Starbucks on the market now,” Philbin said. “You’ve got one in what used to be a cornfield. We’re seeing them in very tertiary markets in the Midwest and the rents are insane.” As long as those conditions continue, developers and investors might find that there’s someplace else they’d rather get their cups of coffee.
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