Starbucks announced yesterday that it was going to close 600 stores (NY Times). Apparently, there is no exception to the basic rules of real estate—it’s all about “location, location, location.”
Starbucks’ business model was an unsustainable one. There are only so many people in a crowded marketplace who drink coffee, and sooner or later, you start competing against yourself. In the 1980’s, when I was a junior consultant with a firm that specialized in hotel consulting, we always told our clients that the number one killer of a hotel was another hotel being built next door. Our mathematical model used to project future demand was reflective of how professionals viewed the market.
Demand equaled the total room-nights that guests stayed within a market place. So if downtown LA had six properties, the total number of guest-nights (demand) is simply the total of how many rooms were occupied for that given night. If another property came in next year, it would be the same number of occupied rooms divided by a larger denominator, driving down occupancy. The secret in the old days was for us to cheat and create a category called “induced demand” in which we embellished stories about how a new hotel will bring new guests through superior reservation systems or marketing.
In the long run, for any real estate related business to grow on a sustainable basis, there needs to be population growth of the target market. Otherwise, businesses end up stealing each other’s share in a zero-sum game. Starbucks wasn’t really creating a new market of coffee drinkers. They simply helped re-channel monies that would have gone to buying a Coke, or perhaps a donut. When the cell phone industry took off in Japan, it drained the young adult market of its disposable income, killing off a slew of industries including clothing, toys, and other gadgets. When gas prices sky-rocketed in the US, people had less money to spend elsewhere.
Going back to Starbucks, they’ve brought back a few old pros to fix the problem. This is something that the nation’s banking industry needs to do. In the 1990s when the RTC took over the Savings & Loans, work-out specialists were brought in from Texas, since that’s where most of the expertise existed in those days. In 2008, very few in the mortgage banking sector have a clue of how to work out a loan. The investment bankers who bought up all the bad assets back in those days are now either gone, or are trying to clean up their own balance sheets.
Perhaps this entire mess could have been avoided if the highly paid professionals in the financial services industry had simply listened to the words, “location, location, location.”