Starbucks feels pinch as California Inland Empire ebbs

LOS ANGELES Wed Mar 25, 2009 6:54pm EDT

1 of 2. A Starbucks Coffee shop which closed its doors is seen in Riverside, California February 5, 2009.

Credit: Reuters/Mario Anzuoni

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LOS ANGELES (Reuters) - The housing bust has Starbucks Corp singing the blues about California's formerly fast-growing Inland Empire east of Los Angeles.

The coffee chain moved in -- and cashed in -- when high-density housing developments were springing up near highways and on hillsides in the area well east of California's famous coastal cities. Now that the party is over, Starbucks is pulling up stakes.

Starbucks' predicament offers a glimpse into fortunes of U.S. retailers, who are retrenching after easy credit fueled a consumer spending binge. As consumers snap wallets closed, operators from clothing chain Guess Inc to bankrupt department store Gottschalks Inc also are feeling the pinch.

In 2004, on the heels of unexpected success in red-hot real estate markets like the Inland Empire -- which claims some of the nation's highest percentages of children under the age of 20 and "aspirational" consumers aged 20 to 34 -- Starbucks predicted it could rival the size of hamburger chain McDonald's Corp.

Just a few years later, the Inland Empire is best known for its leading role in the housing bust.

It is home to Riverside County, which now boasts the eighth-highest foreclosure rate in the United States, with one in every 77 homes in foreclosure.

The area's unemployment rate topped California's January 10.1 percent jobless rate as construction, manufacturing and distribution companies floundered. That unemployment rate was the highest in a quarter century, and above the national average of 7.6 percent.

"The Inland Empire is one of the most acute economic areas in terms of the downturn, specifically because of the foreclosures. Starbucks, like every other retailer, has been hurt from that," Chief Executive Howard Schultz told Reuters in a recent interview.

When Starbucks announced last year that it was closing 600 U.S. stores, the Inland Empire was home to a quarter of the 88 California outlets on the hit list. And the final count could be even higher than that when Starbucks identifies an additional 200 U.S. cafes slated for closure.

LAND OF EXTREMES

After growing at one of the fastest rates during the boom, the area that encompasses both Riverside and San Bernardino counties is in the grips of one of the nation's most severe reversals.

"You take a place like the Inland Empire and everything is just more extreme," said Katie Schnidman, a real estate economist at Property & Portfolio Research Inc in Boston.

"What you've had for years and years now is a bizarre situation of really high cost of living -- relative to the rest of the U.S. -- and relatively low income. By necessity, it was sort of a smoke and mirrors game of people living on credit."

Stores that sell anything home-related were early casualties of the real estate-led downturn; and department stores like Gottschalks, which has six stores in the region, also are succumbing, Schnidman said.

Brand new shopping centers have vacancies and many older strip malls are feeling the pinch.

One Starbucks store slated for closure is located in a relatively remote Corona, California, shopping center built in 2006. The former site of a G by Guess store is already vacant, but other upscale stores remain. They include frozen yogurt chain Pinkberry, kitchenware store Sur La Table, Urban Outfitters Inc's clothing store Anthropologie and handbag seller Coach Inc. Nearby, a gate surrounds an eerily quiet planned community advertising homes starting in the $100,000s.

Guess is operating 52 fewer North American stores than a year ago, according to a recent regulatory filing. Coach has scaled back store expansion plans and is introducing more handbags in the $200 to $300 range, representing a price reduction of 10 percent to 15 percent.

Meanwhile, one of Starbucks' shuttered stores along a freeway, located in Baker, California, is missed by financial planner Robert Hesslink.

"When I'd go see my clients in Vegas, I'd swing through there. I was so disappointed," said Hesslink, who also wonders what the future holds for the Riverside store he frequents in a new shopping center built to cater to what is now a stalled housing development.

(Reporting by Lisa Baertlein, editing by Gerald E. McCormick)

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