Starbucks bailing on urban centers after minimum wage hikes?

A ubiquitous as Starbucks appears to be, their growth has begun slowing of late, and not just because of public-relations disasters like the one that took place in Philadelphia. Existing-store sales have been declining over the past several years and especially over the last two, Bloomberg reports, prompting CEO Kevin Johnson to start shutting down some stores while looking for greener pastures elsewhere. And guess what one key criterion for these closures might be?

Although business abroad has been booming and the chain has been opening more and more cafes, U.S. sales growth has stalled for the company that brought espresso to the masses. With about 14,000 stores domestically, Starbucks is now pumping the brakes on licensed and company-operated locations, with a renewed focus on rural and suburban areas—not over-caffeinated urban neighborhoods where locals already joke that the next Starbucks will open inside an existing store.

The closing stores are often in “major metro areas where increases in wage and occupancy and other regulatory requirements” are making them unprofitable, Johnson said. “Now, in a lot of ways, it’s middle America and the South that presents an opportunity.”

Emphasis mine. It’s not just the minimum-wage hikes that have created a profitability problem for Starbucks, but it’s apparently a large enough part of it to be worth mentioning. The reason why the suburban and exurban environments look a lot more attractive is that those areas largely don’t have local wage requirements, and land use is much less regulated.

To some extent, this would have been inevitable even without the regulatory pressure. The store-within-a-store joke is one that can be enjoyed by people outside urban neighborhoods, too. Starbucks’ ubiquity means that at some point their newer stores are merely intruding on the demand at their older stores and that their sales would get diluted as a result.

However, it’s not a coincidence that Johnson wants to look outside the dense population centers and their regulatory appetite in order to find lower-cost alternatives to their service. If they could automate their processes, as some fast-food chains have done in high-minimum-wage jurisdictions, they’d have already adopted those self-service kiosks. Instead, they will need to close stores — in this case, three times as many as they usually shut down in a year, meaning that jobs will disappear altogether — along with the tax revenues those sales bring to these over-regulating cities.  There’s a lesson to be learned there, but don’t expect the utopians in charge of most urban centers to get an education about it.

Update: My friend Erick Erickson skewers the story by noting that “150 Starbucks homeless shelters set to close,” but argues that the decline has more to do with social-justice-warrior posturing:

In March of 2015, Starbucks launched its “Race Together” program where its billionaire white liberal CEO decided its employees would talk about race in America and try to bring unity over an overpriced crap tasting latte. It has been downhill ever since for Starbucks.

There’s a correlation here, but I’m not sure it shows causation. The decline began a few years earlier; look at the plateau levels in 2010, 2012, and 2014, and note how they keep getting progressively lower, pun intended. The decline began accelerating after Schulz’ decision to serve up lectures to customers along with overpriced and overburnt coffee, but the most that can be said is that it may have exacerbated an already existing trend.