Starbucks Corp., the world’s largest coffee-shop operator, is pushing some U.S. landlords for as much as a 25 percent reduction in lease rates, taking advantage of a declining real estate market to save on rent.
Faith Hope Consolo, chairman of New York-based Prudential Douglas Elliman’s retail leasing, marketing and sales division, is generally advising about a dozen landlords to work with Starbucks after they received letters seeking rent reductions of 20 percent to 25 percent. She hasn’t seen the correspondence.
Separately, two other letters were confirmed by two property managers, who declined to be named because the negotiations are still under way.
“In this environment, what we’ve seen in general is the landlords and the retailers really have to work together more closely to prevail,” Consolo, 50, said in a May 27 telephone interview. “We’re talking a lot about tenant retention.”
Starbucks began rent-reduction efforts in January as part of a plan to trim overall expenses, according to Tara Darrow, a spokeswoman for the Seattle-based company. The same month, the company said it would close about 300 cafes this year and cut as many as 6,700 jobs after first-quarter profit plunged 69 percent, hurt by an economy in which cost-conscious consumers cut back on premium coffee.
Labor, Food Costs
Starbucks is looking to trim labor, food and other costs, and had cut $195 million through the first half of fiscal 2009. In April, the company said it was on pace to lower total costs by $500 million in the fiscal year that ends in September.
Darrow wouldn’t confirm the size of the reduction the company is asking. She also wouldn’t specify how many leases the company is trying to renegotiate or how many landlords have agreed to reductions. Starbucks isn’t asking for a blanket rate reduction from the landlords it has approached, Darrow said.
Starbucks rose 68 cents, or 5 percent, to $14.39 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have advanced 52 percent this year.
“We’re taking advantage of the opportunity in as many cases as we can,” Darrow said. “We feel like it’s a positive program for us. Most of the landlords we’ve worked with have felt it is a mutually beneficial situation.”
The rent-reduction program covers the U.S. stores operated by Starbucks, a number that totaled 7,035 as of March 29. The effort doesn’t include the more than 4,400 U.S. stores in airports, supermarkets and other licensed locations, Darrow said.
Consolo said she’s generally advising landlords to give Starbucks a break in the rent, in the hope that the retailer remains a tenant. Doing so may make sense even in cases where the retailer would be required to continue paying rent if it closed a store.
“The owner or developer doesn’t want a dark store,” Consolo said. “It reduces the traffic.”
Rising vacancy rates and falling property values are spurring landlords to offer lower rents in exchange for longer lease terms, said Hudson Riehle, senior vice president of research at the Washington-based National Restaurant Association.
“In this recession, compared with the last one, we do see developers and owners being much more willing to work with the operators to make sure the restaurant remains where it is,” Riehle said. “It’s much more of a partnership than it used to be.”
Commercial real estate values dropped 22.8 percent through March from their October 2007 peak, according to a May 19 report from Moody’s Investors Service. Property prices have fallen 21 percent from a year ago, and Moody’s expects further declines.
Landlords are hoping lower lease rates will allow tenants to remain open, Riehle said. Vacancies at malls and shopping centers climbed to 9.5 percent in the first quarter, the most in a decade, as stores and restaurants closed, according to Reis Inc., a New York-based real estate research firm.
Quiznos Corp., the closely held toasted-sandwich chain, has been able to reduce rents by 15 percent to 20 percent, often in exchange for signing longer leases, Chief Executive Officer Rick Schaden said in an interview. The Denver-based company has renegotiated as many as 90 leases, including 40 using a team of three outside consulting firms. Quiznos also has grabbed more attractive sites at better prices, including an “A+” site in Denver that hasn’t been available for 25 years, Schaden said.
The phenomenon isn’t limited to the U.S. Brinker International Inc., the Dallas-based owner of Chili’s Grill & Bar, has seen lease rates fall as much as 30 percent in Beijing, John Reale, president of international operations, said in an interview.
By Chris Burritt and Courtney Dentch at Bloomberg