Location, Location, Starbucks... A Different Approach To <b>Real Estate</b> <b>...</b> | Real Estate Investing |
| Location, Location, Starbucks... A Different Approach To <b>Real Estate</b> <b>...</b> Posted: 04 Dec 2014 02:04 AM PST
Real estate is one of the most fundamental, and most likely the first, businesses in human history. There is no denying the importance of owning real estate, as this is one of the core concepts of the "American Dream". Whether leasing to commercial or residential tenants, or simply passing down a house to the generations to come, we all know that real estate can be one of the best paths to build wealth and financial security. We may even know that McDonald's (NYSE:MCD) is one of the best real estate companies the world has ever seen. But have we considered Starbucks (NASDAQ:SBUX) as a close second? We all know what Ray Kroc said about McDonald's, "We are in the real estate business, not the hamburger business." In 1956, shortly after Ray Kroc acquired the rights to sell McDonald's franchises, Ray Kroc and Harry J. Sonneborn created the Franchise Realty Corporation. This entity would enter into lease agreements with property owners, and then sub-lease the property to the individual franchises. At that time, MCD would charge franchisees up to 40% of their lease payments and pocket the spread. To this day, MCD continues to collect royalty fees (4% of monthly sales), and rent from its franchisees. Is SBUX taking a page out of MCD's playbook? (click to enlarge) MCD's target audience is families with young children. These families are interested in finding quick, convenient and cost effective meals. I'm sure you can remember the first time you had a Happy Meal. MCD has one of the most recognizable brands in the world, and one of the most recognizable characters that children love - Ronald McDonald. MCD is very strategic when choosing locations; searching for real estate that is near schools, on major intersections with a lot of foot traffic, and is near major shopping centers. SBUX target audience is young, urban professionals with a high amount of disposable income, aged 25-40, as well as college aged young adults aged 18-24. SBUX has expanded its menu to include children's items, but its main focus is on the high earning professional. SBUX's brand is also becoming very recognizable, and it has been more strategic in selecting its store locations. We've all heard the joke about a Starbucks on every corner, and The Onion even wrote an article talking about SBUX opening new stores in their own bathrooms. Starbucks began licensing stores in 1991, and opened their first location outside of the U.S. in 1996. Their growth exploded, and from 2006-2007 they opened a whopping 2,571 stores, the most they had ever opened in one year. Of course, the markets crashed and drove the country into a recession. From 2007-2011, SBUX only opened 1,996 stores, just 498 annually, the lowest year over year amount since 1998. In addition to new competitors and the global recession, over expansion cannibalized the revenue of its stores. Comparable store sales growth began to decline in 2004, so their financial troubles were brewing before the recession hit. This decline could not be attributed to a considerable change in the disposable income of their target audience. Even in a recession, the income and spending habits of those with higher disposable income are not as adversely affected as those with less disposable income. In other words, if a SBUX customer wanted a pumpkin spice latte in 2009, they bought their pumpkin spice latte with little hesitation. Comparable store sales hit rock bottom in 2009, to -6%. SBUX began closing stores, and focusing on the three most important aspects of real estate: location, location, location. In NYC, we've seen an influx of upper-middle class inhabitants, in what has been coined "gentrification". I'm not here to argue for or against this phenomenon, but the result has been more SBUX locations in up and coming neighborhoods like Harlem, Washington Heights, Fordham, Yankee Village, Morris Park, and even Parkchester. Of course, all of these areas aren't seeing the same kind of influx of professionals as other areas like Brooklyn and lower Manhattan. Using the store locators of both MCD and SBUX, we see that the new SBUX locations in these areas are within 3-5 blocks of an existing MCD location. Is this enough to conclude that SBUX is a real estate company, looking to capitalize on the influx of urban professionals and their families? Not quite. (click to enlarge) (click to enlarge) Before you berate me in the comments about how franchising is vastly different from licensing, and how each of MCD's and SBUX's business models are completely different, let me elaborate. SBUX is currently renting their brand recognition to local store owners in the form of licensing and servicing fees, which is very similar to MCD. SBUX doesn't collect rent from its licensees, but it also doesn't incur the costs MCD does in developing spaces, which increases profit margin. SBUX also seems to be focusing on growing licensed stores, rather than company owned ones. From 2013 to 2014, licensed store openings increased by 1,029, from 9,624 to 10,653. In the same period, company owned stores only increased 570 from 10,143 to 10,713. If this trend continues, next year will be the first time there are more licensed stores than company owned stores, which is something SBUX should embrace and encourage. At this point, the hesitance from SBUX to franchise to the same scale as MCD has been to control their brand image. SBUX continues to be named one of the top ethical companies in the world, and its core values include being socially responsible to improve communities. It may be hard to instill this kind of culture in autonomous franchised locations. And to be fair, 10% of their revenue comes from fees paid by licensees, so they are still making the bulk of their money with company operated stores. But I don't think this is a case of "if it isn't broke, don't fix it". SBUX will continue to grow internationally, and domestically, and in order to increase profitability, they'll need to embrace growing their licensed store base. This is their higher profit margin business, and the trend is headed in this direction. SBUX is a long way from having the franchised structure of MCD, but it could have comparable revenue stream. For MCD, 19% of their locations are company owned, while SBUX owns 50% of its stores. MCD's franchise fee revenue is 32% of total revenue, and of that rent is 21% of total revenue, compared to Starbucks' 10%. At its current price, I don't think SBUX is a buy, even when looking at it as a real estate play. The revenue from licensed stores doesn't justify it as a buy right now. It's also overvalued when looking at P/B of 11.53 and P/E of 29.3. However, investors with a current position in SBUX should hold for the long haul. SBUX will either be more open to franchising (very unlikely) or will focus on finding licensees for new locations. With their lawsuit with Kraft (NASDAQ:KRFT), increase in debt, and purchase of sole ownership in Starbucks Japan, SBUX profit will be lower next year. Company owned stores, aside from the Starbucks Japan deal, will most likely increase very little in 2015. I think SBUX's future revenue growth lies in their license model, and their ability to capitalize on locations, locations, locations. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.  |
| China, From Within: Miami <b>Real Estate</b> in <b>Investor</b> Crosshairs <b>...</b> Posted: 24 Oct 2014 03:17 PM PDT Every day, FP's China team at the Tea Leaf Nation channel scours dozens of Chinese media outlets to find compelling stories unreported in Western mainstream press. This week, we bring you Miami as a future mecca for Chinese real estate bling, an anti-corruption sting in Nigeria, Alibaba's booming e-health venture, the Chinese blogosphere on Mark Zuckerberg's Chinese, Hong Kong pro-democracy celebrities, and a former World Bank executive on the virtues of China's 7.3 percent economic growth. Miami real estate could be seeing more Chinese money. An Oct. 20 report in state-run China Economic Weekly sees the home of retirees, sun-baked beaches, and Miami Vice as the future mecca for Chinese home buyers and real estate investors. Miami homes cost only 40 percent of those in Beijing, the report argues; and the only reason Chinese buyers are overlooking the Florida seaside city is that Chinese buyers and investors simply don't associate Miami with real estate in the same way that they do San Francisco, Los Angeles, and New York. China's anti-corruption taskforce isn't afraid of anything — not even Ebola. Operation Fox Hunt — the Chinese government campaign to hunt down, repatriate, and prosecute economic fugitives — held a sting operation in Nigeria in late August, in the middle of the (now quelled) Ebola outbreak there. The state-owned Beijing Times reported on Oct. 20 that undercover Chinese police, who "faced not only the threat of Ebola, malaria, and other diseases, but also the threat of the armed robbery ubiquitous in Nigeria," successfully apprehended a small-time criminal who fled China in 2006. Mark Zuckerberg speaking Chinese was a pretty big deal on China's Twitter, too. Related posts on Weibo, China's massive microblogging platform, garnered thousands of comments, though these were often of a different character than yesterday's English-language Zuck-inspired media storm. Highly up-voted comments include: "Zuckerberg has already learned Chinese, meanwhile we on the mainland still can't get on Facebook!" and "If China didn't have so many limits, think of how many Zuckerbergs we could produce." New Alibaba health firm shares soar. Shares for the newly-named Alibaba Health jumped over 25 percent on Oct. 22. As China's first licensed online prescription drug retailer, the firm's big value-add lies in exclusively providing, monitoring, and tracking electronic identification codes for Chinese medicines, a system known as PIATS. This means Alibaba will get a complete set of drug data from production to distribution, an integral part of its "big data" plan. The state-run Global Times wrote that the stock price jump shows that "investors are bullish on the prospects for e-commerce for pharmaceutical products." State media tells pro-democracy Hong Kong celebrities to be more like Jackie Chan. And they don't mean defeating bad guys with humor and kung-fu. The Hong Kong actor is known, and sometimes despised even on the mainland, for his ardent pro-Beijing views. After several Hong Kong artists and celebrities expressed support for pro-democracy protesters, leading states news agency Xinhua to pen a scathing Oct. 22 op-ed slamming the celebrities for being selfish, destructive, and unpatriotic, and telling them to emulate Chan, who recently espoused opposition to the protests, saying, "Without strength, a country cannot be rich." Within 10 years China will become a high-income country, says former World Bank executive. Lin Yifu, former Chief Economist and Senior Vice President of the World Bank, wrote in an Oct. 24 op-ed for Communist Party mouthpiece People's Daily that if China maintains a 7.3 percent GDP growth rate, within 10 years — right around the time President Xi Jinping leaves office — China will achieve the status of a high-income country. Lin's prediction of 7.3 percent growth comes as at least one U.S.-based research group has predicted nearly the opposite: a dramatic slowdown in Chinese economic growth, to a rate of 4 percent after 2020. Lin, known for his strong pro-China stances, rejects that view, writing, "The current negative international environment presents major challenges, but if China can maintain its natural advantages, such as high-return investment opportunities, good government finance, a high savings rate, and favorable foreign exchange reserves … then 7.3 percent annual growth can be realized." |
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