I think that Starbucks gets sweet real estate deals. I think they pay from nothing to a heavily discounted price for the leases on their stores. That is how they are able to afford to install so many stores in so many prime locations, and still be able to be profitable without having to franchise.
I figured this out back in 2001 when I was working in Culver City. Off the I-405, there was a new high-end shopping mall being built called the Howard Hughes Center. The first shop to open at the mall was Starbucks, and they did well selling coffees to the construction workers finishing up the rest of the mall.
Besides opening 6 months before the rest of the mall stores were open, the Starbucks store also grabbed the best spot in the mall... front and center at the main entrance.
I was thinking about how they managed to do this, and it dawned on me that the answer was simple. The developer give it to them.
So why would a developer and/or a retail property owner decide to give away their premium location for a coffee shop? Why would they not try to get as much money as possible from every square foot of space they own? Isn't that what capitalism is all about? Efficiency?
The answer is simple. They need Starbucks more than Starbucks needs them. They want the cach'e of a recognized and respected coffee chain to draw paying customers to the rest of their property, which in turns allows them to market their property to other merchants.
This is not a new idea. It is called a "Loss Leader". Large store chains do this all the time. Grocery store chains and Best Buy has made an art of it. The merchant selects an item to sell at cost, or even less than cost (a loss), in order to get customers in the door. They hope to make up for the loss by being able to entice the customer to buy other items while there.
So why can't the idea of a Loss Leader also be applied to retail real estate? If I owned a shopping center, I would be thrilled to have a Starbucks in my center. It gives the center respectability, and makes my center a "destination" for people to relax and shop. They will hang around a little while longer, which give the other stores an opportunity to sell. It increases the frequency of customer visits as they stop by for their daily coffee fix.
The key to this success, and the reason Starbucks has never franchised, is consistancy. They took McDonald's main idea, consistant product and brand recognition, and applied it to high-end coffee. Customers, and property owners, are comfortable with Starbucks. People know what they are getting.
If this is true, then I have to congratulate Starbucks for their genius. Can you image back in 1985 if you put this idea on paper as your thesis for your MBA? Yes Professor... I am proposing that I open a chain a coffee stores in the best spots all over the country that sells coffee at $4 a cup and doesn't have to pay rent. They would have flunked you!
1 comment:
In my town there are 2(!) Starbucks on the same friggin block. One on each end of the same downtown block. Directly across the street from one of them is an Allan Bros Coffee house and it is clearly oriented toward the hippie/slacker types. I can see why Starbucks is the winner in this town. Whenever I go in there, I get a "Hello" and a "Thank You" and a "Have a good day" and they are glad to cater to your every coffee request, no matter how rediculous or snobby it may seem. At the other Starbucks they have nice lush couches and recliners and the radio overhead is not too loud and never have I had to ask for a table to be wiped off for it to be used. All of this is not the case at the Allen Bros store. Yes you pay more for the cup o' joe at Starbucks but would you rather sit amongst dirty tables and too loud trash music and have soy for creamer? Not this chick.It is my strong belief that you get what you give and that explains why Starbucks is the best.
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