Personal Development

What Real Estate Investors Can Learn From the Near-Disaster at Starbucks

Expertise: Personal Development, Commercial Real Estate, Real Estate News & Commentary, Landlording & Rental Properties
90 Articles Written
Close up portrait of exhausted frustrated stressed handsome sad unhappy upset entrepreneur trying to take off uncomfortable blue tie formal wear isolated on gray background copy-space

Are you old enough to remember when coffee was just a hot drink for older people? I am.

I remember waking up to the wafting aroma of Folgers or Maxwell House from my dad’s new-fangled Mr. Coffee. Or if he was rushed, he boiled water in a pot and poured it in a mug with a tablespoon of Sanka instant coffee.

Yuck!

There was a day when coffee was just a drink. The phrase “let’s grab coffee” or the term “coffee shop” would have received blank stares from folks just one generation ago.

But Howard Schultz set out to change all of that.

When Schultz joined Starbucks in 1982, he soon made a trip to Italy, where he was impressed with the popularity of espresso bars in Milan. He convinced the team to open a coffee bar in Seattle in 1984, and the rest is history. They are now America’s fifth largest corporation, and the company, its shareholders, and customers lived happily ever after.

Well, that’s not exactly true.

In fact, Starbucks made some critical mistakes that caused many to predict that the company would meet its demise about now—by 2020.

Where Did Starbucks Get Off Track?

Two decades into their successful climb, Starbucks probably thought they could do anything. With over 7,000 stores and successful forays into over a dozen other countries, it’s likely that their ego had swollen larger than their bank account.

Was it corporate arrogance? Perhaps.

Starbucks decided they were bigger than “just coffee,” and they launched a recording company in 2003 with some great artists like Ray Charles. They actually landed a handful of Grammys a few years later.

In 2006, they launched their first movie, “Akeelah and the Bee.” This was their first step in opening an entertainment office near Hollywood.

Related: Are You Sabotaging Your Wealth-Building Potential by Doing Too Much?

The New York Times reported on April 30th: “With barely one movie under its belt, Starbucks is moving aggressively toward expanding its involvement in the entertainment business, seeking movies and books to promote in the hope of duplicating the success it has had with music.”

Academicians gushed over the Starbucks expansion. But cracks in the ice began to show up. Starbucks got distracted from what made them famous: making a great cup of coffee.

Within a few years, their distractions overtook them. By 2008, many consumers had abandoned Starbucks in favor of local shops, who were laser-focused on what they really wanted: a cup of coffee.

Top view of office desk with supplies and spilt coffee. Trouble and problem concept

Former CEO Howard Schultz wrote a private memo to current CEO Jim Donald about the company’s coming demise. It was leaked to the press. The carnage continued and Starbucks closed 977 stores, firing 18,000 employees.

Starbucks stock fell by over 80 percent from a high of $39.63 to $7.83. Many speculated that the brand wouldn’t last another decade.

Schultz returned to the helm. The company got refocused on you know what. They ditched music and movies and books. They rediscovered their focus. Starbucks closed 7,000-plus stores for one day in Spring 2008 to retrain baristas and push restart on the company.

Within five years, sales were up 58 percent over 2009 levels. Gross profits, which had fallen to 28 percent, were back to 55 percent. Starbucks shares are priced at $83 or so today, so a $100,000 investment in 2008 would be worth over $1 million today.

Starbucks had learned a critical lesson on the power of focus.

This lesson is critical for all of us—for Fortune 500 companies and real estate newbies.

Another Potential Disaster Averted

I spoke to a successful commercial building contractor named "James" on the West Coast last week. He makes a lot of money at his job, and he wanted to start converting that income to true wealth. James wanted to start acquiring assets that produce income.

Related: What Is Wealth (and How Can You Acquire It)? The Answer is Simple.

James started researching and getting his ducks in a row to acquire and manage the types of multifamily and other buildings he was an expert in constructing. He began relentlessly searching for deals. He spoke with lenders. He figured out property management. And he probably did 100 other things to start his acquisition ball rolling.

James introduced a whole new level of stress and pressure into his life. He got his eyes off his primary income source and was distracted with dozens of unfamiliar tasks. His stress and work hours went through the roof. And his income began to suffer.

frustrated-investor

That’s when he realized this was a mistake. He was entering a whole new business, and he’d have to suffer through a whole new learning curve—with all the risks of being a newbie in a highly overheated market.

This was not a risk he was willing to take. That is why we ended up on the phone.

We spoke about my theory that investors can make a lot more money with a lot less stress by focusing on what they're already good at and outsourcing the rest. By spending significant initial efforts to locate the best operator/syndicator, and investing heavily with them, investors can enjoy the historic returns, low risk, and staggering tax benefits of commercial real estate without quitting their day jobs. Or interrupting their retirement.

I really believe it is nearly impossible to focus on a high-paying job and successfully invest in real estate on the side. I mean, you could do it. But will you make as much money as you should? Will you find deals that allow you to minimize risk? Will you be able to enjoy your life in the process?

In a recent post, I told the story of the oral surgeon who was trying to build a 20-house portfolio to provide for his retirement. It was driving him crazy, and he admitted that he was ready to quit. And he was only on house No. 3!

I asked both of these men the same question I ask many investors:

Why are you working harder than you need to… to make less than you could?

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What Investors Can Learn From Starbucks’ Scare

If the near-disaster at Starbucks taught us anything, it taught us the importance of focus.

If you are a real estate investor and this is your full-time passion and livelihood, I encourage you to sharpen your focus there and ignore my warning.

But if you are making a great living as a professional, and you are generating enough cash to invest with someone who does this full-time, I hope that you, like me, choose to learn from Starbucks and the many others who have trod this path before.

I’ll leave you with two wise sayings from ancient sages:

  • He who chases two rabbits catches neither.
  • Where your treasure is, there your heart will also be.

So how have you learned to focus over the years? Or how has a lack of focus cost you time or money? Or… are you an exception to this rule and think I am out to lunch?

I’d love to hear from all of you below.

After graduating with an engineering degree and then an MBA from Ohio State, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a...
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    Norwin Lanot
    Replied 7 months ago
    (F)ollow (O)ne (C)ourse (U)ntil (S)uccessful. Great insight. Thanks, Paul!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Norwin. I've never heard that before. Nice!
    Matt Rachow Investor
    Replied 7 months ago
    This may be slightly off point, but Starbucks should use some of their capital to create coffee cups that could be recycled. Would be a huge win-win for them and the environment.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Good idea. As long as it is not those yuckky gas station kind.
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied 7 months ago
    While reading this I thought, “Paul would like this article” and then I realized you wrote it :)
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Kevin. That's very kind of you. Hope you are well!
    Taylor L. Real Estate Syndicator from Richmond, VA
    Replied 7 months ago
    I did not know that history of Starbucks! That explains why their stock price has been so up-and-down over the years. Thank you for sharing. Shiny object syndrome is real and must not be indulged!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    It's so real! Thanks, Taylor and I hope all is well in Richmond!
    Adam Leitman Bailey Attorney from New York, NY
    Replied 7 months ago
    Great article!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Thank you, Adam. Kind of you to say!
    Abraham Cisse
    Replied 7 months ago
    completely agree sounds just like what I went through
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Abraham. I don't know many entrepreneurs who haven't. Now for applying those lessons... :-)
    Ruth Lyons Realtor from Highland, MD
    Replied 7 months ago
    Great article; thanks for posting. Too much can't be said about the importance of finding the right people to grow any business.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Ruth, Thanks for commenting. That is so true.
    Karen Young Investor from Greenville South Carolina and Lihue, HI
    Replied 7 months ago
    Maybe they should have considered selling semi-boneless ham :-0
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Karen! That is it! I wish they would have woken up to smell that coffee. :-)
    Joseph E. Investor from New City , New York
    Replied 7 months ago
    Very well said. Even if you are a full time RE investor you still need to stay focused on 1-2 RE niches. You can't do every type of investment type and be in every market. Do only what and where you can have your finger on the pulse.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Joseph, That is absolutely right. I speak to investors almost weekly who are struggling with this. Thanks.
    John J. Augustin from Plano, Texas
    Replied 7 months ago
    Thanks for the article. So I am an engineer that makew good money. If I am able to put together 15-20K a year aside to buy and hold an income property, wouldn't I make out betternon my own (equity, tax benefits, appreciation) rather then invest in a syndicate for a small share?
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    John, The tax benefits should be the same if you invest right. The issue is focus and being a pro vs. having this as a side gig. Typically, pros can make more money and build more wealth than someone doing this on the side. I spoke to a nuclear engineer this week who has built up a stable of about 20 rental homes on the side with the same goal you speak of. He just did the math and realized he is only making 2 to 3% annually on his equity. He was shocked and now plans to invest in a syndication. Also, you can read Brandon Turner's new info/videos on mobile home park investing where he makes this exact point. He said he worked so hard to make 15% ROI... and now he makes the same return and all he does is collect checks from his mailbox. Same tax benefits.
    Sherry Norman Wholesaler from Kenvil, New Jersey
    Replied 7 months ago
    Paul--Don't take this the wrong way, but doesn't your own bio belie the point you're trying to make? Engineering, management, staffing, real estate. They really aren't related fields. And someone might point out that the career trajectory of Steve Jobs took him to unrelated fields at which he ended up succeeding in a spectacular way (computers, movies/animation). Of course you can find some similarities from one of these fields to the other, and point out that the drive to success and ambitions to excellence in all endeavors is something successful entrepreneurs have in common. But they are all really dissimilar fields. It happens often enough that a person is able to succeed in a completely different field, that I can't quite believe it's a universal truth that a person should always "stick to your knitting".
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Sherry, Thanks for your insightful thoughts. Here is the difference... what I did was serially. I went from engineering to business to staffing to real estate. I don't do all of them at the same time. I don't do engineering by day and try to do real estate on the side. That is where I believe Starbucks failed. And I think so many real estate investors make the same mistake. Of course, there are always exceptions and some people can pull this off. But I think that even these same people would do even better if they would focus. Thanks again.
    Alejandro Estevez from Houston, TX
    Replied 7 months ago
    I agree with you 100%. But, how do you gauge when it's a good time to jump from wagon to another?
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Alejandro. That is tough. Really. It takes wisdom and a lot of good counsel. A mentor can help.
    Tem Nyasulu from Sandton, Gauteng
    Replied 7 months ago
    Love your articles Paul and this was another great one! Recently read a book by Jim Collins called How the Mighty Fall and this story of Starbucks speaks to the first two of the five stages of decline (stage 1 being "Hubris born of success" and stage 2 being "Undisciplined pursuit of more"). Things to remember in our business pursuits. Awesome article Paul!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Tem, Thanks! I love Jim Collins and I was not aware of this book. I will have to add it to my reading list. Good to Great is one of my favorites.
    Shiela Roberts Investor from Boulder, Colorado
    Replied 7 months ago
    This is one of my fav articles from BP and, you, specifically Paul. Thank you! I did not know, at one point, Starbucks got into movie making. What the what?! Anyway, sharing with my husband who is like your "James" example - makes great money as a software engineer and has a pretty good gig, flex hours, good benefits, etc. but he doesn't want to do that forever. We already own a few properties and we're trying to figure out what the best way is to get him out of having to work to support our family AND build a retirement plan. Feels like we are good on the latter but the jump for my husband out of software engineering is not as clear.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Shiela, Thanks for your kind comments! I would be glad to talk with you and your husband. I talk to people in this situation weekly, and I enjoy kicking around ideas. Best wishes!
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 7 months ago
    Starbucks movies... what we're they planning on charging $100/ticket?
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Hilarious! That's probably true, Andrew. But it speaks to the power of the brand they've created. :-)