Cabrini Green Public Housing Project

The Starbucks Factor
Instead of Reading Tea Leaves, Use Starbucks to See if Your Neighborhood has Arrived
By Benjamin Carlisle & Eugene Goldfarb

Vince Michael, chair of the Historic Preservation Department at the School of the Art Institute, had long pointed to the Starbucks in the Printers Row neighborhood as proof that the neighborhood had “arrived.” Printer’s Row, a Chicago neighborhood immediately south of Chicago’s downtown Loop, had been abandoned by the printing industry after World War II.

In the 1970s, investors, as they prepared to adapt the factory lofts for residential use, foisted a historic district upon the neighborhood in order to take advantage of newly enacted federal tax incentives. Fifteen years later, after most of the buildings had been rehabbed and young urban professionals populated the area, Starbucks moved in.

History has shown that you can predict a neighborhood upswing when residents nominate an area for a historic district. In the same light, you can measure the success of a neighborhood revitalization if Starbucks moves into the area.

Watching the Tides

For millennia neighborhoods have risen and fallen like the tides. Last generation we spoke of slum and blight and the invasion and succession of neighborhoods using racial descriptors. Today we can measure the success of brownfield revitalization. But while lunar tides are predictable and can be charted, fortunes are made and lost by those who recognize (or fail to recognize) the early signs of neighborhood change.

Real estate professionals who track market values monitor neighborhood vitality. Brokers track sales and appraisers use comparable sales or rental data to establish values. Market analysis firms help investors gauge market rates and trends. Neighborhoods on the rise are able to attract private capital while declining areas are not.

The role of government is to “even the playing field,” and although government has an obligation to each neighborhood, the reality is that there is a limited amount of funding available each year. Many “black hole” neighborhoods can suck an unlimited amount of funds, while other areas don’t need any help because private capital is flowing freely.

Urban planners attempt to identify those borderline neighborhoods where a little government money will bridge the gap between the market and what is needed to attract private investment. Like the private market, government and politicians want the greatest return on their investment. Government and the private market look for specific indicators to gauge neighborhood revitalization. Some say that Starbucks might be one of these indicators.

The Midas Touch

1) Populate urban areas which fit the targeted demographics; and

2) Cluster stores in prime locations, placing outlets across from one another in the same block to maximize the market share in the target area.

Starbucks understood the reality of new stores subtracting from an existing store’s consumer base, creating a Starbucks “cannibalization.” However, the company placed more value on creating a brand name. Since the stores are company-owned and not franchised, the company is free to take this risk. Starbucks would rather give a consumer two options for Starbucks rather than the customer go to another coffee shop.

To implement this strategy, Starbucks was very aggressive, even seeking city code changes to obtain optimal locations. To implement their geographic expansion strategy, Starbucks has used many tools.

Targeted Demographics

Initially, the Starbucks-targeted demographic was young, urban, college-educated adults with above average incomes. However, the targeted demographics have evolved. Starbucks has found that it can locate in diverse neighborhoods, which might not include the initial targeted demographics, as seen in the Cabrini Green location in Chicago and the Harlem location. Retailers, especially Starbucks, realize that Americans are more willing to pay for extra “amenities” or “luxury” items than ever before. Though a premium product, Starbucks in not an expensive item for consumers. Additionally, coffee has a high inelasticity, meaning consumers are more willing to pay for premium coffee. By charging $2-$5 for a cup of coffee, Starbucks generates sufficient cash flow — something they couldn’t do with a product that sold for less.

Quality Real Estate Research

Clustering

For example, Starbucks will literally place stores on opposite sides of the same street to capture a larger market share in high pedestrian traffic locations. Unlike other retailers, which divide a geographic area into regions so not to cannibalize themselves, Starbucks realizes that proximity to customers is more important than the market coverage of an individual store. Typically each store needs about 1,000 customers daily.

Starbucks has been doing informal location analysis for many years, however they called it “experience.” It wasn’t until recently that Starbucks began to view their site selection decisions as more methodical rather than experimental. With the large expansion program gearing up in the early ‘90s, Starbucks knew quantitative and qualitative numbers were needed because simply experimenting was not going to work.

Starbucks started using more-defined location analysis as a method for determining site locations. By using location analysis, Starbucks can target specific areas that meet their demographics. It’s a simple case of using technology to lower risk and create a return on investment.

The Coffee Connection

James Van der Kloot, urban revitalization coordinator for U.S. EPA Region 5, opines that brownfields usually attract young urban professional pioneers hoping to make a killing as the neighborhood improves. They are Starbucks’ primary demographic target.
Often brownfields are in places that are greatly underserved by retail options. Starbucks realizes that often these areas have a much greater demand for retail than supply, and is looking to fill the gap. (See sidebar on Urban Coffee Opportunities).

Research on the value of inner-city revitalization conducted by Harvard Business Professor Michael Porter, the nonprofit group Initiative for a Competitive Inner City, and the business-leaders coalition Social Compact, has revealed that untapped business opportunities exist in urban neighborhoods.

Some, like Weissbourd & Berry of Shorebank, claim that conventional businesses undervalue inner-city markets. In April 2000, the CAO at the Federal Reserve Bank of Richmond released “A Window of Opportunity: The Concentrated Buying Power In Inner Cities.” This study examined the “competitive business advantages” (a phrase coined by Prof. Porter) of ten major inner-city communities in the Federal Reserve’s Fifth District to determine the purchasing power of local residents.

Despite the low average incomes of urban residents, the study supports the view that a sustainable economic base exists or can be created in inner cities. The idea is that population density can make up for average income in computing the purchasing power of the neighborhood.

Starbucks typically uses its bargaining power to reject the common commercial leasing practice of tying rents to sales.

If you can time it right and lock in your rents at a low level then you’ll have greater margin for profits as the neighborhood improves and sales increase.

Benjamin Carlisle is an Urban Planning Master-candidate student at the University of Illinois at Chicago and works full-time as an urban planner for a Chicagoland suburb. Eugene Goldfarb is an almost-retired HUD Midwest Environmental Officer and an adjunct professor of Environmental Planning at the University of Illinois at Chicago.

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See sidebar on Starbucks Urban Coffee Opportunities venture.

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