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Why is Starbucks coffee so bad?

"Why is Starbucks coffee so bad?" was the thought that came to my mind as I was writing this in one of the Starbucks outlet located in Harbour City on a weekend morning. I had gone here obviously not for the coffee but mostly because it was relatively less populated due to the fact that is at least a 7 minute walk from the main shopping arcade.

If you are a coffee "connoisseur" like me, you will appreciate what goes into a good cuppa. The type of coffee beans, the quality of the milk used (for lattes and whites), the crema at the top when it is served.

Yet Starbucks, despite all its Seattle legacy, fails to impress those (or perhaps just me) who have acquired a certain palette for quality coffee. Most of us will also agree that for the same volume, prices have gone up significantly over the years.

The topic of Starbucks is a perennial topic in my valuation classes.

The argument being people are willing to pay premium, attributed to classy branding over the traditional local chains. In addition to brand, the quality of coffee beans used in the grind are also a contributing factor. There is also the element of Starbucks selling ambience.

Based on my limited observations of several cafes in Asia, most operators tend to shun patrons who hang out for too long at their premises.

From minimum spend, time-limited seating to restrictions on the use of Wi-fi, cafes in Asia use a variety of tactics to maximise table-turnover. Understandably, they don't really like their customers sitting around for too long as this is bad for business. This is quite different in the US, based on this this Starbucks story which glamourises one entrepreneur's experience of working out of an outlet located in San Francisco.

This of course raises a more fundamental question: Is Starbucks selling overly-priced coffee, a lifestyle or something else?

Starbucks has been known to drive up the prices of real estate in the places they have been opened. In 1999, Starbucks also made headlines when it opened its first store in China.

It's almost like a bellwether for the gentrification of cities.

So maybe Starbucks coffee tastes so bad because Starbucks isn't really selling coffee but real estate. The cup of coffee buys you the right to sit in one of their outlets. Those who order takeaways are basically just an added bonus for the shop. The value of that right to sit in the shop comes in different forms: a business meeting, catch-up with friends, quiet time alone to work on your proposal or simply arriving early and waiting for someone.

Just for trivial comparison, retail rents in Singapore ranges anywhere between $8 to $37 psf monthly. In Hong Kong, the range is between HK$1,200 to HK$1,400 monthly. Here's a very rough breakdown of what it takes to keep that coffee outlet afloat:

A few things to note here:

  • Breakeven sittings per day and gross profit excludes manpower costs. We also assume that the outlet operates for 30 days a month

  • Monthly rent and price per cuppa varies by location

  • The average real estate per sitting is much smaller in HK as compared to Singapore. Also, each sitting assumes an average of 1 to 2 pax, hence 1.5. Pax count and sitting real estate again varies depending on location and the interior decor of each outlet.

  • Rental cost per sitting assumes that 50% of the lettable area is for customers i.e. not the entire shop space is for sitting, half is set aside for common areas, the barista, cashier counter and the kitchen. Configurations vary per outlet.

  • Gross margins are roughly between 70-80%, inputs costs comprises ingredients, electricity, and packaging.

  • Excludes additional revenue earned from other products and channels e.g. food items, takeaway and online orders

In fact, many retail businesses find it helpful to think about their business in terms of sales per square foot/meters rather than units sold, which enables the business to re-focus on asset-utilisation since a huge part of the overheads are attributed to maintaining the store front (i.e. real estate).

Here's another helpful tip: By breaking down the cost-economics by real estate and sittings, you can essentially monitor the number of table-turns over the day to assess (i) whether you have achieved break-even (ii) which days are you making more money, and potentially (iii) which sittings have the highest turnover.

Like real estate, retail yield is also a function of the footfall and surrounding amenities. Because a good number of people go to Starbucks for the space and not so much the coffee, it is probably also more helpful to evaluate the business on an income per area basis.

At a breakeven of seven to eight cups per day, feel free to sit freely in your cafes. Starbucks isn't selling coffee, you are after all paying for the lease, and the nice drink is just a bonus.

[updated for number of cups]


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