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

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

4 min read
Paul Moore

Paul Moore is the managing partner of Wellings Capital, a private equity real estate firm.

Experience

After college, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They scaled and sold the company to a publicly traded firm five years later.

After reaching financial independence at the age of 33 and a brief “retirement,” Paul began investing in real estate in 2000 to protect and grow his own wealth. He completed over 85 real estate investments and exits, appeared on HGTV’s House Hunters, rehabbed and managed dozens of rental properties, built a number of new homes, developed a subdivision, and started two successful online real estate marketing firms.

Three successful commercial developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project in 2010, convinced him of the power of commercial real estate.

Press

Paul was a finalist for Ernst & Young’s Michigan Entrepreneur of the Year two years straight (1996 & 1997). Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and has a forthcoming book on self-storage investing. Paul also co-hosts a wealth-building podcast called How to Lose Money and he’s been a featured guest on 150+ podcasts, including episode #285 of the BiggerPockets Podcast.

Education

Paul earned a B.S. in Petroleum Engineering from Marietta College (Magna Cum Laude 1986) and an M.B.A. from The Ohio State University (Magna Cum Laude 1988). Paul is a licensed real estate broker in the state of Virginia.

Follow

WellingsCapital.com
Email [email protected]
LinkedIn
Twitter @PaulMooreInvest
How to Lose Money podcast

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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.

woman

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?

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.

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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.

Two decades into their successful climb, Starbucks probably thought they could do anything. But then, the company began making some critical mistakes that caused many to predict it would meet its demise. Here’s where they went wrong, how they got back on track, and what investors of all kinds can learn from it.