At one time in the not too distant past, futurists could reasonably believe there would be a Starbucks on every street corner in Manhattan. That prediction has gone the way of moving sidewalks, spotless subways and a Knicks championship.
The ubiquitous caffeine concessionaire has more than 200 stores in New York City (including 175 in Manhattan), and operates in 37 countries worldwide. Indeed, the coffee purveyor has become the most frequented retailer in the world, with an estimated 40 million customers visiting their 11,500 stores worldwide each week.
The word “saturation” apparently isn’t part of the Starbucks lexicon — the company continues to open more stores every year than it opened the year before nationally, and eventually expects to double its U.S. stores from its current total of 7,700.
But while some markets, such as China, can’t open stores fast enough to keep up with demand, brokers in New York report Starbucks is quietly closing stores that don’t meet the company’s profitability markers.
Industry sources said Starbucks is looking to close locations that cannot maintain a 25 percent profitability margin. That will vary from store to store, as the Seattle-based retailer can often adapt to unusual spaces with smaller footprints than other food and beverage retailers.
Brokers won’t call the closings a retrenchment, instead soft-pedaling issues of overextension and a possible caffeine glut as a realization of density goals stemming from the company’s intense buildup in the 1990s.
“They’re being more deliberate and they’re not opening as close to other Starbucks for fear of cannibalizing themselves,” said broker Josh Strauss, managing director at Robert K. Futterman & Associates.
Patrick Breslin, president of GVA Williams Retail Group, also sees a change in strategy, noting that Starbucks stores are downsizing along with sporadic closings.
“Starbucks realized it could sell just as much coffee out of a 1,200- or 1,500-square-foot store as opposed to 3,000 footers,” Breslin said.
David Firestein, president of Northwest Atlantic, which represents Starbucks in its lease negotiations, said he was unaware of any change in corporate strategy and insisted there were not any cookie-cutter formulas but a wide range of store sizes dependent upon location demographics.
Firestein acknowledged the growing popularity of the Hear Music Coffeehouses first opened by Starbucks in California in 2004 — where folks can not only buy CDs but download them while sipping away — but said there were no immediate plans to roll these out in New York City.
Firestein also debunked as “legend” the notion that Starbucks pays higher than market rents for its prime locations, noting that recent deals such as the one signed at 485 Fifth Avenue was significantly below the $350 asking rent reported in the press.
Strauss concurred in this assessment, adding that because landlords see Starbucks as a tenant able to draw in other high-profile tenants, they’ve been able to pay market rents and below market rents for prime locations and, at the same time, muscle out the competition.
And this aggressive strategy has paid off, Strauss said, noting the departures of coffee retailers Timothy’s World Coffee, Seattle Coffee Roasters, and LA-based Coffee Bean and Tea Leaf from the New York market. “A lot of companies tried to come in and fill in select areas but they didn’t have a fighting chance,” Strauss said.
Starbucks drove them out of the market and even gobbled up a portion of the tea segment with its Tazo brand tea label. When Timothy’s pulled its 18 stores back in 2002, analysts cited Starbucks’ better real estate locations as a principal factor.
Yet with Starbucks reassessing certain locations, some analysts see an opportunity for others to enter the market.
On possibility is Juan Valdez — the mustachioed, poncho-clad icon who, with his mule Conchita, has promoted Colombian coffee for more than four decades — and the Juan Valdez Cafes, which will roll out 300 retail locations in the United States by 2008, according to Gary Schwartzman, assistant managing director for the retail group at Grubb & Ellis’ New York office.
The National Federation of Coffee Growers of Colombia, which represents Colombian coffee growers and is behind the cafes, is looking to achieve density in key urban areas and then roll out a significant advertising campaign, said Schwartzman.
Already, they have three stores in the city, with their flagship store in Times Square located, appropriately enough, directly across the street from a Starbucks.
“We have no desire to take on Starbucks,” Schwartzman said of the federation’s plans for the U.S. market. “However, don’t forget Colombia is the second-largest producer of coffee in the world.”