Starbucks is a brand that is known to most every American. The highly popular coffee franchise hit troubled waters. In response, the company wants landlords to agree to concessions. The concessions need to start June 1 and extend for a year.
The popular coffee chain lost $915 million during its 2nd fiscal quarter (Q1 on calendar). This was the result of store closures, reduced operating hours, and slower traffic in many locations.
This epitomizes the showdown that is taking place between landlords and tenets. While Starbucks is currently up to date on its rents, many companies opted to forge payment to landlords.
As the country shut down, the dominoes started to fall. Retailers and restaurants saw their revenue streams dry up to just about zero. This meant the inclination to pay rents was reduced since companies found themselves in uncharted waters. Without rental income, landlords are faced with the decision of whether to pay their mortgages or turn the burden over to the mortgage servicers.
In this changing landscape, it only makes sense for Starbucks to push for concessions. Truthfully, while the company was highly successful over the years, how are things going to proceed in the future? It is becoming evident the work from home model is taking hold, at least to some degree.
This is a hit as many people stop at the company on their way to work. Go by any Starbucks during the morning rush hour and the drive thru is backed up around the building. How many of these people are removed from the mix?
At the same time, the company tends to operate small stores where seating is close together. In the age where social distancing is the norm, how will this affect the company. We might see the model shift to drive thru only.
The final piece of the puzzle is the fact that Starbucks is considered a luxury item. While there are many who "cannot live without their Starbucks coffee", when it comes to dropping $4-$6 during a recession, there are going to be people who pause that the thought. With so much uncertainty surrounding the employment situation, most are going to be cautious.
Will the landlords agree to giving concessions to Starbucks? This is a situation that bears watching. It stands to reason that most companies are going to pursue the same path. After all, what are the landlords going to do, kick Starbucks out? The only thing that does is create an empty building.
The impending crash in commercial real estate could make landlords very nervous. We might be in an environment where they realize that locking a company in, even at a reduced rate, will save them. This is only possible, of course, if the landlord is not burdened with an onerous mortgage payment that will not be covered at the new payment level.
We are only now to witness the beginning of the fallout from this virus. Over the next couple months, we are going to see the damage that was done.
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