Tag Archives: SBUX

SIMON V. STARBUCKS – BIG BOY COURT CASE – WARMS MY HEART!

SIMON V. STARBUCKS  – BIG BOY COURT CASE!!

THE DISPUTE

On August 21st, Simon Property Group filed a lawsuit that challenged Starbucks’ decision to close 78 Teavana stores that are located in Simon malls. Starbucks announced recently their intention to close all 379 Teavana locations within the next year.

We have not seen the terms of the leases, but no doubt they are iron clad in terms of Starbucks rental obligations, no doubt at top dollar rents, with productive locations within Simon developments. I have not read anywhere that Starbucks does not intend to honor their rental obligations, including rents and common area charges. They will no doubt pay out hundreds of millions of dollars in the process of closing 379 stores. Fortunately, with quarterly cash flow from operations of $1 billion, and growing, they can afford mistakes of this magnitude, and Simon will get their rent due, early in fact.

Simon’s suit contends that Starbucks would be “shirking its contractual obligations at the expense of Simon’s shopping centers.” Apparently, in an effort to broaden the lease terms dealing with “covenant to operate”, Simon says Starbucks must keep the stores open for the term of the lease whether they are making money or not. It wouldn’t “look good”, would be damaging to the mall, Simon implies, if a fairly prominent store location is vacant. Simon seems to forget that, once notified that the store is closing and the rental obligation is paid out (which there is every expectation that Starbucks will do), the space can be rented again, actually improving the overall return on Simon capital investment. The new tenant can’t do much less business than Teavana is doing (or Starbucks wouldn’t be leaving), so traffic will improve from the current disappointing situation. Simon, however, will try to argue that the Teavana store was an “attraction” for mall shoppers, so Simon is damaged when that traffic pattern is disturbed. I wonder if Simon gave Starbucks a rent concession because of that traffic building appeal which both parties expected would be a benefit to all tenants and the success of the mall. I’ve been part of lease negotiations with major mall developers and have found that it tends to be a one way street.  It is no doubt different for Starbucks than for Joey’s Pizza (generically speaking) because Starbucks’ lease is “bankable” and Starbucks can get the good location it wants, still though at top dollar rent. Poor Joey will only get a good location, also of course at top dollar, if he takes two bad ones elsewhere. Put the three locations together and Joey will barely break even. The mall developers seem almost uncanny in their ability to understand these economics, exactly what rent will allow the tenant to work almost entirely for the landlord.

UNFORESEEN CONSEQUENCES

Sometimes bad stuff happens, even with the best of intentions. An architect has an omission in his building plans, changes have to be made on the fly, the end user pays, there is no recourse to the architect. A mall tenant signs a lease, takes occupancy on time, but the mall doesn’t get completed and/or fully occupied for many months, perhaps never. Does the tenant get a concession from Simon (in this case)? Not likely. The hamburger QSR chain signs a top dollar lease in the food court, and is (by the terms of the lease) the “exclusive” hamburger provider, but Nathan’s Famous Hot Dog’s moves in (for example), also has a pretty good hamburger. Does the mall operator do anything about it? Not likely? The retail tenant on 2nd Avenue in New York City signs a twenty year lease (at top dollar), and the City spends 10 years building the new subway line, with traffic disruption bankrupting retailers. Bad luck. A snowstorm of historic proportions puts mall traffic at a standstill on the weekend before Christmas when retailers make their profit for the year. Simon gets their rent; the retail operator has coal in its stocking.

CONCLUSION

Simon Properties, and other major mall developers, have had their day in the sun for forty years. It’s been “their way or the highway”.

To Starbucks I say: You gave it your best shot, you are paying the price. Move on.

To Simon Properties I say: GROW UP!!

STARBUCKS – WHY IS STOCK LAGGING? – THE TIMES THEY ARE A’CHANGING

STARBUCKS – STOCK UNDERPERFORMING – WHAT’S GOING ON?

The stock charts, shown below, of the largest capitalization restaurant stocks raise serious questions about Starbucks fundamental prospects. Charts and fundamentals don’t always go hand in hand, especially over the short term, but longer term the stock price and the company’s performance converge.  Starbucks has been one of the great stock market winners of all times since going public in 1992, up well over 100x over 25 years. However, all good things come to an end at some point, at least level out in this case, and over the last two years Starbucks’ stock has substanially lagged the general market and its large cap restaurant industry peers.

IT’S A ‘BUM RAP”, STARBUCKS DOES NOT SELL “$5.00 CUPS OF COFFEE”

It’s a “bum rap”. The media, and the skeptics like to point to the folly of customers paying $5.00 for a cup of coffee. However, we priced (before tax) Starbucks, Dunkin’, and Horton’s in Detroit (to avoid NYC prices) this morning. Starbucks’ 12 oz.“tall” coffee is $2.20, Dunkin Donuts 10 oz. “small” is $1.75, and Horton’s 10 oz. “small” is $1.58. Per oz., Starbucks costs $.183, Dunkin’ is $.175 and Horton’s is $.158. If you want a latte’, the gap is wider ($.312 per oz. at Starbucks, $.253 at Dunkin’, and a materially cheaper $.222 at Horton’s). A latte’ costs more at Starbucks, but Dunkin’ and Horton’s don’t even offer the Soy Latte’ that I order. I can’t vouch for the “quality” of latte’ at Dunkin’ or Horton’s. You can judge for yourself whether the service component, or the type of coffee, is worth the price premium at SBUX but, in any event, it is not a “$5.00 cup of coffee”, and Starbucks’ prices are not grossly higher than the competition.

THE STARBUCKS DIFFERENCE

In my opinion, what has distinguished Starbucks over the years has been the corporate “culture”, which they have incredibly duplicated in 27,000 stores worldwide. Their employees, selected, trained, and motivated to an unmatched degree in food service, look you in the eye, remember your name and drink if you are anything close to a regular customer, and become part of your daily social life. A couple of years ago, about the time that Chipotle ran into trouble, I asked a SBUX employee if he knew anything about Chipotle. This young man, perhaps 18 or 19 years old, told me he used to work at Chipotle, then gestured kind of frenetically with his hands saying: “at Chipotle it was all about speed. Starbucks makes me a better person”. That’s what Starbucks has been all about, creating a uniquely welcoming retail environment that produces “better persons” of their employees.

THE TIMES THEY ARE A’CHANGIN’

BARRON’S MAGAZINE this morning has a front cover entitled THE FUTURE OF COFFEE (AND RETAIL). The subtitle reads “Starbucks has succeeded where Silicon Valley hasn’t: changing the way consumers pay. The behavioral shift holds big promise for the coffee giant and its stock”.

Not exactly, in my opinion. It is not just about “the law of large numbers”, and the difficulty of satisfying investors by building on profit margins that are well above peers. The business model has changed, and the question becomes whether the new model will match the original. It’s well known that a new loyalty program bothered some customers and also that an increasing number of customers are ordering and paying online, often in advance of entering the store. In the most recent quarter, 30% of US transactions were paid using the smartphone app, up from 25% a year earlier and 20% two years ago. More important, to my view, is that 9% of US orders were ordered and paid for in advance. The company has been discussing the store level congestion for several quarters now, as mobile orders slow down service for customers going through the line. Perhaps it’s just me, but I am put off somewhat when the line at the register (where I like the human contact) is short, but I have to wait while eight or ten orders are pumped out ahead of my own.

MILLENIALS, WHO ARE THE SPENDERS, DON’T VALUE HUMAN CONTACT (AS MUCH)

It’s not so long ago that pundits dismissed the internet as a retail venue. The public was not expected to give out their credit card information, and certainly was not going to buy “touchy, feely” products like apparel or shoes through online channels. The public is not only ordering “everything” through Amazon and others, but relationships are maintained through Facebook and other social channels. As a corollary, customers are increasingly seeking “experiential” retail situations, rather than visit the malls, with their undifferentiated stores and restaurants, most often staffed with poorly trained employees.

WHAT’S IT ALL MEAN TO EMPLOYEES, AND CUSTOMERS?

Relative to Starbucks, their leadership with mobile order and pay, increasingly in advance of the store visit, may well be appropriate and necessary, but the business model has changed. It’s become a production challenge, not a relationship driven enterprise. The employed “people person” who was the star of the previous model, is not going to be as easily satisfied, because most of the employees, for most of their time, are busy pumping out product. It’s going to be harder to find someone as described above who says that Starbucks “is making me a better person”. From the customer side, there are 27,000 stores already existing that are already tightly configured and can’t be reconfigured too much to handle a lot more production. From a customer standpoint, some, like myself (perhaps in the minority these days), who value the human contact, may decide that the local independent shop, or even the home or office kitchen, can provide an adequate cup of coffee at a competitive price without the “tumult”.

CONCLUSION

I remember when Howard Schultz said that food will never be a material part of Starbucks’ sales. Today, it represents 30% of revenues. Schultz originally envisioned his coffee shops as a “third place”, to hang out other than home or office. That’s a little hard today, in a small busy shop, but we can call this an “unintended consequence” of building one of the still growing premier worldwide brands. Comps and traffic have slowed in recent years, due to the “law of large numbers”, the natural limitations of small stores that were not originally built to handle today’s volumes, and the evolving environment that every successful retailer must adjust to. Starbucks is one of the most successful retailers ever created, and we don’t doubt that they will continue to succeed in a major way. We caution however, that the rate of progress demonstrated in the past, already slowing, will be increasingly difficult to replicate. The business model has evolved. Starbucks was a retail “disrupter” but their previous approach may not be quite as successful. Accordingly, valuation parameters that have applied to SBUX equity in the past may not apply in the future. The stock chart that has languished over the last couple of years may well be reflecting the most likely future business model; still good, just not quite as great.

WALL STREET JOURNAL – MONDAY 7/18 : WILL CONSUMERS STEP UP SPENDING ? – OUR TAKE

PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

INVEST IN RESTAURANT COMPANIES ? – IT’S DISCOURAGING

PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

SHAKE SHACK RESULTS – IS THE VALUATION FINALLY WITHIN REASON ?

PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

WHAT’S HAPPENING ON MAIN STREET ? – FIRST QUARTER SALES AND TRAFFIC TRENDS

PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

WAS CHIPOTLE (CMG) PREPARED ?? – by Steve Pettise – “Friend of Rog”

PENDING THE RELEVANT COMPANY’S REGISTRATION WITH US, THIS PARTICULAR CONTENT IS LIMITED TO SUBSCRIBERS. For $100/year, SUBSCRIBE HERE. Other content is available by way of Home Page.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Access to Corporate Descriptions of all publicly held restaurant companies and selected non-restaurant franchisors.
  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.