Starbucks (SBUX) executive chairman Howard Schultz has observed an “abundance of empty storefronts across” in prime locations in a number of U.S. cities.
“We are at a major inflection point as landlords across the country will be forced (sooner than later) to permanently lower rent rates to adjust to the ‘new norm’ as a result of the acute shift (consumer behavior) away from brick and mortar retailing to e-commerce,” Schultz wrote in a memo to his leadership team that’s been reviewed by Yahoo Finance.
Around four years ago, Schultz predicted that retail was going to witness “a seismic change” in consumer behavior. With the rise of e-commerce, customer foot traffic has fallen at many brick-and-mortar retailers, making it so many can no longer afford the rent rates that date back to leases signed 3-7 years ago, Schultz explained.
“Landlords will be faced with having to answer two questions: Do they maintain their current rent expectations while their storefronts remain unoccupied? Do they begin to significantly lower the rent?,” Schultz wrote, adding, “Trust me, rents are coming down!”
The good news is that lower rents create an opportunity for businesses to build out more stores.
“This is not going to be a cyclical change in our occupancy expenses, but a permanent lowering of the cost of our real estate,” Schultz wrote.
Since 2016, Starbucks has made a push to build out its premium Reserve brand, including opening 20 to 30 Roasteries, 1,000 Reserve stores, and converting 20% of the existing stores to Reserve bar locations. On Tuesday, the first Starbucks Reserve store opened to the public in Seattle located at the company’s headquarters. This new format offers “a marketplace-style environment” with an “immersive” experience at the Roasteries. Roasteries are expected to open in Milan and New York later this year and Tokyo and Chicago in 2019.
The company also recently invested in Princi, an artisanal Italian baker from Rocco Princi, which offers the food at the company’s premium brand locations. Starbucks also plans to open stand-alone Princi stores in Seattle, Chicago, and New York.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.