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The Art of Business: Starbucks Reserve’s Strategy for Success in Prime Locations

24 August, 2024

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Is an expensive lease only for pure business purposes?

In recent days, the news that Starbuck Vietnam is preparing to cease operations at its Starbucks Reserve Han Thuyen store at 11-13 Han Thuyen, Ben Nghe Ward, District 1, Ho Chi Minh City has caught the attention of many.

Starbucks has not officially given a reason for closing this premium store in Ho Chi Minh City, but some KOLs on social media have speculated that the landlord of 11-13 Han Thuyen has increased the rent by 50 million VND per month, to 750 million VND (approximately 30,000 USD), and the two parties have not reached an agreement.

Notice of temporary closure of Starbucks Reserve Han Thuyen store. Source: Starbucks Vietnam

If Starbucks had agreed to the new rent, the Han Thuyen Reserve store would have incurred a daily cost of 25 million VND. A simple calculation shows that, with an average drink price of about 100,000 VND per cup, the store would need to sell 7,500 cups per month, or 250 cups per day, to afford the new rent of 750 million VND per month.

Similarly, considering the old rent of about 700 million VND per month, the store would need to sell 234 drinks per day to cover the cost of the premises, excluding advertising, raw material, staff salary, utility, and equipment depreciation costs.

Starbucks closes its only premium store in Ho Chi Minh City

In reality, it is not uncommon for brands to choose expensive and inconveniently located addresses in the heart of Ho Chi Minh City.

Recently, one of the hottest properties in the city, located at 325 Ly Tu Trong, right at the Phu Dong roundabout, has found a new tenant. This address has seen many large F&B brands come and go, such as Phuc Long, Soya Garden, Phindeli, and even the luggage brand MIA. According to brokers, the rent for this property is estimated to be between 600 and 700 million VND per month.

Currently, the tenant at 325 Ly Tu Trong is Danny Green, a store specializing in organic fruits and vegetables, with organic honeydew melons as their signature product. According to the prices listed on their website, the organic honeydew melons sold at this store have an average price of 250,000 VND per melon (the price may vary depending on the weight).

To cover the rent of 600 million VND per month, the store would need to sell at least 2,400 melons per month. This is a significant number, especially considering that these are organic products that require additional investment in preservation methods.

Danny Green store located at 325 Ly Tu Trong, right at the Phu Dong roundabout. Photo: Thuong Ngoc

Many netizens believe that brands renting properties in District 1 are not solely focused on business purposes, as most of these locations lack parking spaces, and the high rent makes it challenging to break even, let alone turn a profit. Therefore, enterprises leasing these spaces mainly aim to promote their brand.

On the other hand, some argue that the most significant benefit of renting a centrally located property is brand positioning in the eyes of customers. For example, by positioning itself in the premium segment, Starbucks needs to establish stores in prime locations in major cities, thereby creating an “elite” psychology for its customers when they experience the services at these stores. Similar strategies are employed by high-end fashion brands such as Hermès, Dior, and Louis Vuitton.

Once the brand is established, Starbucks can easily increase its sales as customers will be drawn to its satellite stores, which offer the same “elite” experience but with added conveniences such as larger parking spaces and more seating.

Moreover, Starbucks can not only increase its sales but also build a substantial customer base, turning itself into an “unofficial bank” through its Starbucks Rewards membership program.

With Starbucks Rewards, customers load money onto their cards using their bank cards or gift cards. This prepaid amount is then converted into Starbucks products, and customers earn reward points (also known as Stars). Once customers accumulate a certain number of points and reach specific tiers, these Stars can be redeemed for free or discounted food and beverages on future Starbucks purchases.

According to reports, Starbucks (globally) holds approximately 3 billion USD in gift card credit and money stored in its app, of which about 10% is never redeemed, meaning Starbucks effectively has access to 300 million USD in free cash without paying any interest.

Starbucks: A coffee shop with the characteristics of a bank?

“Don’t teach the rich how to spend their money”

Returning to the case of the 11-13 Han Thuyen property, many people are curious as to why the landlord would risk losing a tenant like Starbucks over an additional 50 million VND per month. If they cannot find a new tenant immediately, they could potentially lose 700 million VND per month. If this situation persists for about three months, the landlord could lose more than 2 billion VND, equivalent to the price of a one-bedroom apartment in a mid-range condominium in Ho Chi Minh City. In contrast, if they successfully increase the rent to 750 million VND per month, they will only earn an additional 600 million VND per year.

Some also question what the landlord would do with the passive income of 700 million VND per month. If they choose not to spend it, they could accumulate up to 8.4 billion VND per year. This amount is equivalent to the price of a two-bedroom luxury apartment with an area of more than 90m2 on Diamond Island (Thu Duc) or a 120m2 apartment in the affluent neighborhood of Phu My Hung (District 7).

Furthermore, if they save for two years, with nearly 17 billion VND, the owner of 11-13 Han Thuyen could purchase a fully furnished three-bedroom apartment with a total area of 180m2 on Diamond Island, boasting views of the Saigon River and the Landmark 81, or a similar apartment in Vinhomes Central Park (Binh Thanh).