Starbucks Coffee is known for being particularly bold (some say it is too bold). When a person mentions the boldness of Starbucks, the topic of discussion is typically the amount of time that the beans are roasted. However, it turns out that Starbucks is quite a bold tenant when it comes to managing their commercial real estate expenses. In January of 2009 Starbucks sent letters to nearly all of its landlords asking for rental rate reductions of up to 25%; that was a bold move indeed. Many times they were successful in achieving the savings they requested. Naturally this triggered similar requests from many other local and national tenants. In fact, in the past twelve months, I have helped one of my clients reduce their rent roll by over $300,000 per month and this very tool helped us achieve a large part of that significant savings. Unfortunately for business owners and corporate real estate executives, after more than a year of such requests Landlords are now fed up with providing concessions and tend to ignore these petitions.
The good news is that there is still an opportunity for rent reduction. However, a tenant must have a much more compelling case than “Starbucks asked for this reduction and we’re not doing as well as Starbucks”. These conversations must be grounded in hard economics. Of particular note is our strategy of calling attention to a client’s rent-to-revenue ratio (the portion of corporate revenue that is paid out in the form of rent). This ratio can quickly be determined from P + L statements and often reveals that a company is overpaying for their office, retail, or industrial real estate. We can also compare this ratio to the industry rent-to-revenue ratio (I-RRR) to determine if they have an advantage or disadvantage against competitors within their industry. Knowing where you stand in relation to competitors is the best way to stay ahead of them.
An examination of the rent-to-revenue ratio can also reveal that while many companies’ revenue has dropped precipitously over the past two years, their leases have escalations every year so their rent has continued to rise. The result is an unbalanced and unhealthy rent-to-revenue ratio. A case can be made that If a landlord wants to retain a tenant for a prolonged period of time, the tenant needs to be a healthy competitor in their industry and rebalance their rent-to-revenue ratio. These are the ground upon which we can build an economic analysis to show that your current rent may be handicapping your current profits and your future growth. The end result should be a reduction of your rent which frees up working capital for you to retain the competitive advantage within your industry.
While I will admit that Starbucks coffee is not my #1 choice their philosophy is terrific. The following excerpt from Starbucks.com describes the roasting process that lends itself to extra boldness: “The Starbucks Roast® is more than a color – it’s a philosophy of helping each bean reach its maximum potential.”
Are you helping each of your company’s offices and stores reach its maximum potential? Would your business improve its competitive edge if you saved $300,000/month? We would like to help you do that.
To compare your company’s rent-to-revenue ratio to your industry competitors please e-mail me today.
You can read more about the Starbucks Rent reduction letter here.
Commercial Real Estate Insights 