Starbucks, struggling with weak sales, has recently been closing stores across the United States and canceling plans for new openings, fueling a backlash among landlords who leased space to Starbucks.
On the 22nd (local time), the Financial Times (FT) of the United Kingdom reported, "As Starbucks slows its aggressive pace of store expansion, it is putting some landlords in a difficult position and straining relationships with developers that have long driven growth together," adding, "For a long time, the commercial real estate industry has regarded Starbucks as a stable, highly creditworthy tenant, which allowed Starbucks to quickly increase its store count across the United States."
Earlier, Starbucks laid off 900 employees last month and said it would close about 1% of its North American stores. Accordingly, Starbucks said the number of its North American stores, which had reached 18,734, is expected to drop to around 18,300 by the end of this month. The closures include the Seattle Capitol Hill Reserve store, known as a "coffee mecca" and a popular tourist spot, and the Reserve store inside the company's headquarters, which visitors could also use.
The problem is that Starbucks made decisions without sufficient consultation with partners that have operated stores together. According to real estate industry sources, Starbucks is unilaterally refusing to move into newly designed stores that meet its design standards this year. Darpan Patel, executive managing director of investments at commercial real estate brokerage Marcus & Millichap, said Starbucks notified some developers that it had "no intention of taking over newly built stores." He said two developers he knows completed buildings in the U.S. Midwest for Starbucks to move into, only to be left vacant.
Patrick Luther, who oversees the leasing institutional sector at commercial real estate brokerage SRS Real Estate Partners, said, "There are many stakeholders—brokers, developers and investors—who are extremely frustrated by Starbucks' decision." He added that one investor he represents has been struggling to resell the store or find a new tenant after Starbucks closed it just a few months after opening.
Clint Jamison, managing partner at Centerpoint CRE, which has developed more than 20 Starbucks stores to date, said, "If Starbucks opts not to move into completed new stores, developers that have invested more than $2 million (about 2.9 billion won) are left in limbo with no clear solution."
As Starbucks clashes with the commercial real estate industry, at least one case has escalated into a lawsuit. Commercial real estate developer Arsh Investment filed suit, saying Starbucks unilaterally withdrew from a lease signed in January this year after just a few months. Starbucks requested a halt to permitting, saying it would redesign the interior of a store in Chehalis, Washington, but did not actually proceed with the design. Moreover, at the end of June, it notified of a withdrawal from the project, breaching the contract, according to Arsh.
With same-store sales declining for six consecutive quarters, Starbucks says the move was unavoidable. Starbucks Chief Executive Officer Brian Niccol said in an internal memo last month, "We open and close stores every year for various reasons, including financial performance or lease expirations," adding, "I believe these actions are essential to make Starbucks a better, stronger and more resilient company."
FT also reported that Starbucks has a history of conflicts with landlords during past store restructurings. During the 2008 financial crisis, Starbucks carried out large-scale store closures and was sued by several landlords and developers.
Some in the industry are even moving to boycott Starbucks. Max Ulman, head of Gross Property Group, a developer whose project with Starbucks was canceled this year, said, "We will never again consider Starbucks as a counterparty or tenant," adding, "Since that incident, I have not had a single cup of Starbucks coffee."
Shay Ulkowicki, chief operating officer of The W Companies, a Chicago-based commercial real estate developer, said, "The fact that a brand that once symbolized a 'prime corner location in a key business district' is hesitating to expand suggests consumer sentiment has become more cautious," adding that the slowdown in Starbucks' expansion could trigger additional legal disputes and shake developers' confidence.