Tag Archives: Rent to Revenue Ratio

Bold Coffee and Bold Corporate Tactics

StaBold Coffee and Bold Corporate Tacticsrbucks Coffee is known for being particularly bold (some say it is too bold). When a person mentions the boldness of Starbucks, the topic of discussion is typically the amount of time that the beans are roasted. However, it turns out that Starbucks is quite a bold tenant when it comes to managing their commercial real estate expenses. In January of 2009 Starbucks sent letters to nearly all of its landlords asking for rental rate reductions of up to 25%; that was a bold move indeed. Many times they were successful in achieving the savings they requested. Naturally this triggered similar requests from many other local and national tenants. In fact, in the past twelve months, I have helped one of my clients reduce their rent roll by over $300,000 per month and this very tool helped us achieve a large part of that significant savings. Unfortunately for business owners and corporate real estate executives, after more than a year of such requests Landlords are now fed up with providing concessions and tend to ignore these petitions.

The good news is that there is still an opportunity for rent reduction. However, a tenant must have a much more compelling case than “Starbucks asked for this reduction and we’re not doing as well as Starbucks”. These conversations must be grounded in hard economics.  Of particular note is our strategy of calling attention to a client’s rent-to-revenue ratio (the portion of corporate revenue that is paid out in the form of rent). This ratio can quickly be determined from P + L statements and often reveals that a company is overpaying for their office, retail, or industrial real estate. We can also compare this ratio to the industry rent-to-revenue ratio (I-RRR) to determine if they have an advantage or disadvantage against competitors within their industry. Knowing where you stand in relation to competitors is the best way to stay ahead of them.

An examination of the rent-to-revenue ratio can also reveal that while many companies’ revenue has dropped precipitously over the past two years, their leases have escalations every year so their rent has continued to rise. The result is an unbalanced and unhealthy rent-to-revenue ratio. A case can be made that If a landlord wants to retain a tenant for a prolonged period of time, the tenant needs to be a healthy competitor in their industry and rebalance their rent-to-revenue ratio. These are the ground upon which we can build an economic analysis to show that your current rent may be handicapping your current profits and your future growth. The end result should be a reduction of your rent which frees up working capital for you to retain the competitive advantage within your industry.

While I will admit that Starbucks coffee is not my #1 choice their philosophy is terrific. The following excerpt from Starbucks.com describes the roasting process that lends itself to extra boldness: “The Starbucks Roast® is more than a color – it’s a philosophy of helping each bean reach its maximum potential.”

Are you helping each of your company’s offices and stores reach its maximum potential? Would your business improve its competitive edge if you saved $300,000/month? We would like to help you do that.

To compare your company’s rent-to-revenue ratio to your industry competitors please e-mail me today.

You can read more about the Starbucks Rent reduction letter here.

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Non-Profit Success and For Profit Strategies

Asked to pick the ten largest home builders in the USA, you might throw out the names of large publicly traded companies (KB Homes, Ryland, etc.) If those names did not come to mind, you might be able to reach back into your memory of public access TV advertisements and recall the name of some regional home builders to add to the list. Rarely would you pick the surprise #8 appearance on Builder Magazine’s recently published Top Ten List: non-profit organization Habitat for Humanity.

Dawn Wotapka of the the Wall Street Journal observes, “Habitat’s ability to out-build some of the nation’s largest corporations partly reflects the insatiable demand for affordable housing in a nation where more than a quarter of the population can’t afford a median-priced home in their area.”

Here is a link to Wotapka’s in depth article from the Wall Street Journal that discusses the unique development further.

This article drew my attention to two things:

1) The importance of continuing to support non-profit organizations which are making a difference in our country despite having their budgets slashed.

2) The degree to which corporations have put the brakes on their productive output. The implicit message in the article is that businesses are increasingly focusing on reducing operating expenses. Everyone has shifted to a cost-savings focus.

As you refine your cost savings plan, one variable that is important to consider is your company’s rent-to-revenue ratio. This is a simple calculation: How much of your revenue do you pay out in rent every year? The standard ratios vary from industry to industry, but it is important to consider the fact that despite dramatically reduced revenues many companies are now paying 4 or 5% annual increases on the premium rents that were signed into place three years ago. The result is an unhealthy percentage of revenue leaving your books. This may be a good topic for discussion with your operations team. If you can reduce your operating expenses faster than your competitors you can grab market share now before everyone else ramps up their marketing budget.

As a corporate real estate advisor and tenant leasing representative, I am committed to helping you design and implement a cost savings plan that meets your company’s specific needs now and in the future. Please contact me anytime to discuss specifics. In the meantime, please continue to support worthwhile non-profit causes.

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Filed under Executive Summaries, Non-Profit