Starbucks Stops Paying the Rent

The Wall Street Journal “Starbucks Leases in Dispute” reports that Starbucks (SBUX) is playing hardball with landlords for existing stores that it is vacating and new stores that it does not intend to occupy. Starbucks claims that its leases contain a clause allowing it to negotiate early terminations. When landlords refuse to negotiate, Starbucks simply stops paying the rent for unoccupied stores. Starbucks will let the courts decide how much it owes.

Starbucks’ attitude is particularly harsh on developers that build custom buildings, or engaged in custom renovations for them. Starbucks sold themselves as partners with developers; now they say shareholder interest tops all. This could make for tough public relations for the virtuous company. Does the barista’s health insurance come next?

The Journal points out an interesting twist. While landlords covet the traffic that Starbucks brings to their development, Starbucks has not been able to leverage this into attractive lease rates. Starbucks typically pays top rent for the best locations with shopping centers.

Stand alone locations might be willing to be paid for an empty store for a long period of time, before settling on a termination fee. But, good economy or bad, an empty store in a mall or shopping center spells trouble. First, empty stores in a mall or shopping center present a depressing environment for shoppers. Shoppers will migrate to malls and shopping centers with more life. Second, landlords typically get a percentage of sales (above threshold) in retail leases. Some mall and shopping center leases even require tenants to remain open for the length of the lease.

Replacement tenants are likely to pay a lower rent than Starbucks, so Starbuck needs to provide incentives for the landlord to find a new tenant quickly and mitigate the landlord’s damages. In these difficult times if landlords refuse buyouts, Starbucks should pay a negotiated percentage of the rent for the length of the lease to subsidize a future tenant.

Once Starbucks core values begin to erode, the company’s decline will accelerate. As I wrote in "Starbucks became Day Old Coffee Long Ago", the aspirational lure of Starbucks is already fading.

No Disclosures.

Sphere: Related Content