Starbucks Chairman: "We Took A Walk On Madison Avenue. It Reminded Me Of The Financial Crisis In 2008"

Back in June 2009, in one of our earliest posts in the aftermath of the financial crisis, we took a "random walk down Madison Avenue" and found empty storefront after empty storefront after empty storefront.

In retrospect, the ghost town that was New York's "Golden Mile" was not surprising: after all the US economy had just been hit with the worst recession since the Great Depression, and only an emergency liquidity injection of trillions of dollars prevented a global financial collapse.

What is more surprising is why nearly 9 years later, at a time of what is supposed to be a coordinated global recovery, a walk along Madison Avenue reveals the exact same picture.

But don't take our word for it: here is Starbucks Executive Chairman Howard Schultz speaking during the company's annual general meeting on Wednesday, and making some stunning observations.

From the transcript:

... let me shift just quickly into the business a bit and what's going on in terms of the seismic change that we're all witnessing in terms of consumer behavior in Retail.

No, I wasn't clairvoyant three years or four years ago, but I did notice something and you didn't have to be a genius to figure it out that the e-commerce effect of things was going to have a dramatic effect on people physically shopping for goods and services. And that has resulted in a tremendous level of compression in terms of the amount of retailers that are serving customers today because less customers are coming into their stores and that has resulted in unfortunately many, many stores national, regional, and local going out of business.

Now this is a photo as you can see of a mall that is very, very busy with people shopping for goods and services. Unfortunately, that was then, this is now. And it's a dramatic change. And what it means and you saw this today and what we've tried to present to you is that we've got a push for reinvention and innovation and we have to do - everything we can to become a primary destination.

Now, as a result of what we're witnessing, we're also seeing something else and that is, there is a proliferation around the country right now of empty storefronts. We took a walk in New York two weeks ago from 59th street to 79th on Madison Avenue, and we lost count of how many empty storefronts there were in Manhattan. It reminded me of the cataclysmic financial crisis in 2008. But what's happening is very simple, the rent structures for the last 5 to 10 years, have been rising at historic rates and retailers do not have the amount of  customers they had during these last 5 to 10 years and could no longer economically survive.

So they're closing stores and as a result of this, I can promise you just like I predicted in 2014 that rents are coming down and landlords are going to have to get religion, or else their stores are going to stay empty. And we're already beginning to see a different level of reception in terms of what we believe the cost of occupancy should be. And this is going to bode extremely well, specifically for us. We're adding almost 700 new Starbucks stores a year. And so we are going to take full advantage of the economic reality of this situation. And as we go forward two, three, four, five years out even though labor is going up in terms of cost of labor, we believe rents are going down and the economic model of Starbucks is going to be enhanced as a result of this macro situation. And we're just at the beginning of this trend.

In other words, if 2017 was the year the "retail bubble burst" as Urban Outfitters CEO Richard Hayne said one year ago, 2018 will be the year when not only the retail sector slides into purgatory, but the deflationary shockwave that is being unleashed as rents finally hit a brick wall, will lead to the next, and far more violent crash in commercial real estate, and the hundreds of billions in debt that prop it.

Don't believe us? Just take a walk on Madison between 59 and 79th...

Comments

Laowei Gweilo FEDbuster Fri, 03/23/2018 - 00:24 Permalink

unlike 2008 tho, it's not a mortgage crisis -- it's just rents are too damn high*

*for dying retail business model o.0

as more and more business shift to e-commerce because physical space gives them no additional value, this is the inevitable side effect.

it's fine. eventually zoning laws will change. commercial space will be turned into condos. condo supply will provide more housing. it's already pretty rampant in Vancouver. and any debate of 'prices' aside, more supply (while it may not lower prices) always at least HELPS affordability (just a question if it lowers prices or only causes prices to increase a bit slower).

 

same thing happened when people moved to the suburbs. a lot of 'apartment' space was commercialized... now it's gonna full circle lol

In reply to by FEDbuster

any_mouse Erek Fri, 03/23/2018 - 03:48 Permalink

Did the Starbucks CEO notice how many empty stores were the Starbucks tea shops that were closed recently?

Can't even remember the name.

DiBlasio wanted to force Starbucks to keep the unprofitable shops open for the few jobs.

Just have the City "nationalize" [municipalize?] the empty shops.

More union members and more contributors to the NYC pension fund.

Win-Win in a commie's world.

We have the choice in USA of Socialist control or Corporate control.

Lose-Lose in reality.

In reply to by Erek

fleur de lis GotAFriendInBen Fri, 03/23/2018 - 05:55 Permalink

Most of the storefronts are vacant because the landlords suddenly charge huge rent increases that the stores cannot pay and the neighborhood cannot support.

Then the landlord takes the huge, unpayable rent off his taxes as a loss.

Win win for the landlord.

Either he gets the huge rent or the taxpayers cover it and he can buy more property elsewhere.

The problem is that a tax bailout is in the mix.

If he cannot adjust the rent he should sell.

If he really wants the huge rent he should dig in his heels and wait for a tenant with money to burn.

There is no point in asking the taxpayers to cover the scam then donate more property to the landlords who are causing blight.

That tax loophole needs to be closed.

 

In reply to by GotAFriendInBen

Refuse-Resist fleur de lis Fri, 03/23/2018 - 06:14 Permalink

Basically the same thing is happening in small towns all over America as well.

In my town, the building (((owners))) won't improve the buildings, and want to charge thousands per month. Said storefront space on Main St. might be worth something if the people in this county had a higher median income than $25k per year.

But the rentiers don't care. The buildngs sit empty and decaying.  Almost every business that has tried to move into these spaces has failed... microbreweries, music shops, book stores, restaurants, coffee shops, all of them.

Being self employed and renting a much cheaper space one block off Main St, we see it every day and we know many of the people struggling to make it work on Main. 

But the (((rentiers))) just don't care. If they get rent good. If not it's a tax writeoff. Fuck the town and the fuck the people. None of the (((landlords))) live here anyway.

 

Jewish morality really has ruined everything in America. I wish they would all be sent to Israel. Then we can start fixing this country.

Till then we keep paying (((them))) and living under their fucked up morality and ponzi schemes.

 

In reply to by fleur de lis

fleur de lis Tarzan Fri, 03/23/2018 - 11:51 Permalink

Amazon has a lot to do with it but not everything.

Small businesses and retail chains alike are targeted by the tax scam.

The chain businesses move because they know the racket, and either close that branch or set up shop someplace else.

The smaller businesses are simply ruined.

A young couple in a nearby town opened up a deli and did a pretty good business with a growing customer base.

Last time I was there they were teaching their toddler how to sell and make change under the watchful eye of a relative -- a story that has been repeated for centuries.

Then they suddenly left -- the landlord realized that they were doing so well that he could hike the rent.

That meant that they would be making considerably less for the same work, so they left.

The store remained vacant for a couple of years until another developer bought the building.

So the landlords use the taxpayers as pawns to destroy healthy businesses, which in turn has a negative effect on many others in the supply end, nearby businesses, and neighborhood tax revenue.

And they get away with it because the law is specially set up for them to do so.

 

 

In reply to by Tarzan

ejmoosa Refuse-Resist Fri, 03/23/2018 - 08:17 Permalink

For decades cities have had the false belief that they needed more commercial development.

Why?  They fantasize of an endless stream of revenues from businesses to spend.

They dream so much, some have development authorities that reduce property taxes to encourage even more development.

1)  There is no free lunch

2)  All business taxes are eventually paid for by consumers.

 

Were they ever to recognize this in government, then we could focus on budgets balanced against what the local residents are willing to spend.

 

We were overbuilt on commercial space BEFORE Amazon.  The question is what will become of all this empty space?  Residential, Yoga, Karate, or gyms?

 

 

In reply to by Refuse-Resist

Singelguy fleur de lis Fri, 03/23/2018 - 08:04 Permalink

That is oversimplistic. Property taxes in NYC are very high. Sure, you can write off the property taxes but they still have to be paid or the city will take your property. Things are even worse if the owner has a mortgage. He needs income to make the monthly payments. I suspect that some of those storefront properties might be owned by Russian or Chinese oligarchs who paid cash but the majority of owners cannot afford to go on indefinitely without tenants.

In reply to by fleur de lis

fleur de lis Singelguy Fri, 03/23/2018 - 11:56 Permalink

It is happening everywhere.

The problem is the tax write off which encourages predatory behavior.

It is just like the college/university scam -- the banks loan money and the schools offer fake subjects because both know that they will profit in the end.

Win/win for the banks and schools, even though they know it is warping the social development of families and by extension, all of society.

What we now have thanks to the academic racket is a generation of angry, unemployable morons who are convinced of their superior intelligence.

Same with the landlords -- it is win/win for them because they either get the stratospheric rent or the get the tax write off.

They really prefer the tax racket because it's all on paper and they can buy more property which is what they really want.

The tax write off has to go.

 

 

In reply to by Singelguy

stilletto2 any_mouse Fri, 03/23/2018 - 07:10 Permalink

Starbucks idiot CEO cant see the tank coming down the road. He says that the empty stores are making rents fall so he's madly opening new stores. But the empty stores are because there are fewer people out on the streets shopping, and most coffee shop trade it impromtu passing trade (does anyone leave home to GO to a coffee shop?!!). You use a coffee shop because you are passing. Those empty retail shops mean less shoppers to buy his crap coffee (starbucks is the worst of the blenders for taste). So he's opening stores into the face of declining demand. Watch for his profit warning!!!

In reply to by any_mouse

zippedydoodah stilletto2 Fri, 03/23/2018 - 20:04 Permalink

I thought exactly the same.

Just how much does the rental overhead cost in percentage terms? If footfall's down 25%, can a lower rent continue to make it profitable? Do they keep the shops the same size and have them looking empty, or create small pokey shops that might look less inviting?

Personally, I make my own coffee and wouldn't go in a Starbucks, or similar, ever. Give me a bar any time.

In reply to by stilletto2

mkkby Laowei Gweilo Fri, 03/23/2018 - 02:02 Permalink

Starbucks building 700 stores in a year.  Where?  Is there any street corner left without 3 of them facing each other?

To grow any more s-bucks needs to sell something stronger than coffee.  Get your latte with a double shot of opiods, fentanyl and a line or 2 of cocaine.  Pay for it with your EBT card because the fed is the only thing left standing.

In reply to by Laowei Gweilo

DocBerg ldd Fri, 03/23/2018 - 10:24 Permalink

I once was a city administrator in a small rural Illinois town.  Towards the end of my tenure there, I realized that the town owned most of the buildings in the downtown area, and that most of the tenants were way behind in their rents.  Even the Albanian owned restaurant was down to serving only breakfast and lunch.  A house could be bought at auction for $12,000.  Not the Taj Mahal, but serviceable.  Keeping a downtown viable is a nightmare for any city.  It is made much more difficult when NAFTA, GATT, and Globalism take away all of the decent paying manufacturing jobs.  The FREE TRADE fanatics apparently are blind to what is really going on.  Until their job leaves these shores, or they are replaced by a robot.

In reply to by ldd

sgt_doom DocBerg Fri, 03/23/2018 - 19:12 Permalink

"The FREE TRADE fanatics apparently are blind. . ."

Like your commentary overall, but I'm pretty certain the Freak Trade types know exactly what they are doing and what is taking place . . .

Just as Erik Prince, head of Frontier Services Group, knows exactly what he is doing when acting as an agent on behalf of his number one investor, China.

In reply to by DocBerg

Offthebeach Offthebeach Fri, 03/23/2018 - 09:24 Permalink

So Fed Reserve temple  priests, control the value of sacred fiat, and recently( this generation ) have scleroticly stabilised land valuations, above market.  There is so much paper, cred-dick jiz, looking for...."rents".  Geniuses( ahem ) world wide, hear the music and dance the Central Planed Banker two step and credit up property, deduce rents based upon Fed and Co shoving firehose volumes of credit down the throats of what ever real economy might actually exists, which no one knows since for a hundred years its been so distorted, warped, stimulated, throttled , stabilized, shocked....

So we are at a place were rents will increase until renter costs improve via the hordes of no cash lower, muddle,  upper middle flood the shops and overpay for aspirational junk. 

In reply to by Offthebeach

Offthebeach Offthebeach Fri, 03/23/2018 - 09:28 Permalink

"......what it means and you saw this today and what we've tried to present to you is that we've got a push for reinvention and innovation and we have to do - everything we can to become .....a primary destination"

Love this part.............."..become .....a primary destination"

Sad.

Going to a frkn Formica/Ikea coffee joint...is...is ....like you have done something.

They're not selling coffee...but a place for sheeples to go.  And sad people like abused wives, over pay and take it.

 

In reply to by Offthebeach