Dive Brief:
- A letter written by Starbucks COO Roz Brewer and obtained by Restaurant Business shows the company has asked its landlords for a year’s worth of rent breaks for its corporate-owned units starting June 1.
- The letter states that the 12-month break is “to support modified operations and adjustments to lease terms and base rent structures, so we can withstand this uncertainty together ... None of us know the full extent of the challenges ahead, but it’s clear the value of commercial real estate has changed. We understand what we ask of you may not be easy, and our commitment is to be fair in our discussions.”
- The request comes on the heels of Starbucks' Q2 2020 earnings report, in which the company reported a 5% drop in revenue and a 47% drop in earnings per share due to the novel coronavirus outbreak. The company plans to have about 90% of its company-owned U.S. stores reopened by early June.
Dive Insight:
With about 15,000 U.S. locations, Starbucks has a lot of rent to cover. And with sales down due to nationwide lockdowns — the company estimated the COVID-19 impact to be approximately $915 million due to temporary closures and restrictions — rent relief would be a logical place to aid in a recovery process. Rent and utilities are traditionally some of the highest costs for restaurant operators, behind labor and food, taking up about 9% to 12% of revenue.
This is why it has become quite common for restaurants and retailers, big and small, to seek rent relief as business is paused. The Cheesecake Factory, for example, declared it would not pay April rent across its system (the company has since received a $200 million investment from Roark Capital). A number of independent operators have also asked for rent abatements or deferrals. In fact, national retailers paid just 58% of their billed rent in April, according to TheRealDeal, citing information from Datex Property Solutions. Datex’s report looks at large chains that have a gross monthly rent of at least $250,000 or lease at least 10 properties, a category that fits Starbucks’ profile. But Starbucks could face some resistance, especially with other restaurant chains, including Applebee's, Five Guys and Subway, paying at least a portion of rent, according to Datex.
Fortunately, some of these asks by restaurants have been answered by individual landlords providing relief, as is the case with one Ann Arbor, Michigan-based Subway’s landlord who deferred rent for three months, for example. Restaurant Business International, the parent company of Burger King, has also offered rent deferrals to franchisees of the roughly 3,700 locations it owns.
However, as the Restaurant Business story points out, it’s the length of Starbucks’ request that may seem unusual. While most operators seeking rent relief are doing so to get through the brunt of the downturn — one or two, maybe three months — Starbucks’ 12-month ask seems like a lengthy timeline. This is especially the case for a company with such deep pockets and with relative elasticity to bounce back due to its significant order-ahead and drive-thru presence. During that Q2 call, CEO Kevin Johnson said nearly 60% of company-owned stores include a drive-thru, while over 80% of customer occasions were on-the-go before the coronavirus pandemic.
We’ll likely see more rent relief requests as the full picture of damage from the COVID-19 crisis becomes clearer. Starbucks expects a bumpy Q3, but CFO Pat Grismer said during the earnings call that sales should start to recover heading into Q4, with capital expenditures normalizing in fiscal 2021. Starbucks’ request for a rent break, however, has a targeted start date of June 1, which is already partially through that challenged Q3.
