You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App
Join our mailing list to receive top business news every weekday morning.

Taste loses its appetite, will exit Starbucks and Domino’s

But who would be mad enough to buy these assets?
Too big to fly. Seattle Coffee Company and Vida e Caffè had the better strategy – small stores everywhere. Image: Daniel Acker, Bloomberg

Perhaps more surprising than Taste Holdings announcing the sale of its Starbucks master franchise rights for South Africa, together with its 13 stores, is the price – R7 million. This is little more than the average cost of fitting out one of its stores, and close to half of what it cost to build the launch store in Rosebank.

Read: Taste Holdings sells Starbucks stores

Make no mistake. This is a fire sale and all the food businesses must go.

The abrupt about-turn – deciding to exit food and focus on jewellery – was unexpected. Taste tried to offload the struggling NWJ and Arthur Kaplan ‘luxury retail’ operations little more than two years ago, but there weren’t any buyers.

And it doesn’t seem certain that the Sean Riskowitz entities, which together are the majority shareholder in Taste (with 66%), actually had much of a plan when they bought into and effectively bailed out this business last year. The spreadsheets may have indicated that there was lots of value here, but was there really?

Read: Taste Holdings’s earnings fall, needs another year before profitable

The decision to license Starbucks was always questionable. Not because South Africa doesn’t have a ‘coffee’ culture, but because the strategy of building out enormous stores in malls as destinations was flawed. First, it required a boatload of capital. The eyewatering rent made getting the stores to profitability harder than it needed to be. And once they were built, keeping them busy turned out to be rather difficult.

Inconvenience

Walk around any global city. There is a Starbucks on every second corner. These stores talk to convenience; they are not destinations in their own right.

Local rival, the cannily-named Seattle Coffee Company, figured this out. These stores are everywhere! A partnership with Caltex has helped, along with its clever approach to site selection (think office parks, schools, convenience centres). Vida e Caffè also clearly knows the game. And these Seattle and Vida stores are small. That’s the only way the economics makes sense.

Starbucks also suffered from the perception that its coffee is expensive, although the premium isn’t that significant when compared to rivals operating in the same segment.

Read: Taste Holdings appoints Dylan Pienaar as CEO

The subscale business has been struggling. Last year, it generated R108 million in sales. The operating loss was R22.5 million. The problem is clear when one excludes new stores. The nine stores that had been trading for more than a year only generated R51 million in turnover – on average, that’s less than R6 million per store (or under R500 000 a month).

The problem is even bigger at Domino’s Pizza. System-wide sales for its 81 stores was R267 million, with an operating loss of R74 million. The store network is not profitable on an earnings before interest, taxes, depreciation, and amortisation (Ebitda) level. One wonders if it ever was.

Franchisees have bailed

During the difficult rollout of Domino’s, Taste has lost tons of franchisees. Getting their buy-in for the transition from the successful Scooters and St Elmo’s brands was hard. And as it became clear that Domino’s was struggling, Taste was forced to effectively buy up stores to prevent these from failing. At the end of February, it owned 58 of the 81 stores – seven in every 10.

The way in which Yum! rolled out Pizza Hut is instructive. It blanketed Johannesburg and only then started expanding out from there. Burger King followed the same approach, with a more measured store rollout in Cape Town. Only then did it shift focus to other regions. This meant concentrated, regional marketing spend and clear economies of scale on support and overheads (logistics, head office functions).

By comparison, the rollout of Domino’s and Starbucks displayed a stunning naivety, ‘helped’ along by an economy that simply isn’t growing.

As more emerges, the identities of those involved in the consortium that has bought Starbucks will be fascinating.

Taste’s (Riskowitz’s) plan required between 150 and 200 Starbucks outlets to get to positive free cash flow. This wasn’t anything we didn’t know before; the plan all along was to get to around 150 stores – a number not plucked out of thin air. These investors better have a few hundred million lying around.

Whoever is brave or mad enough to buy Domino’s is going to need to get this business to between 220 and 280 outlets. That’s three times its current footprint.

Taste says that, together, Domino’s and Starbucks will need at least R700 million – and even with that, positive free cash flow is seven to eight years away.

You can be certain that more cunning operators (like Famous Brands) looked at the Domino’s and Starbucks opportunities. There’s a reason they passed.

Taste is likely to find interest for its Fish & Chip Co – at least this business is at scale. Maxi’s, at just 29 stores, is however barely a business. And given current market conditions, there just aren’t too many buyers about.

What we’ve seen, then, is an expensive lesson in the misallocation of capital. Shareholders have ploughed in over R1 billion to fund the rollouts of Domino’s Pizza and Starbucks. At least current management and Riskowitz have figured out when to stop throwing good money after bad.

* Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

 

Bitter taste for some

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   22

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

Starbucks ….London independents (usually little nooks in the wall, on most streets, barely space for two) hammer them on quality and service

Even “Jocob’s” instant coffee punches above Starbucks

Where Starbucks come ahead is “sugar induced” taste in every mug ….yuck

Jacobs is nasty. Amazing how SA fell for that cheap repurposed marketing.

Starbucks does not add sugar to coffee unless you pay extra for them to do it.

okay? Are you under the impression that I care about SB? Really?

Any shop-bought coffee is horrendously expensive and certainly a waste of money, even the stuff you can buy in a filling station. A coffee every second morning on your way to work is easily R300 per month, which in these uncertain times is an unjustifiable expense.

For you maybe. Not everyone is in your situation. Please speak for yourself and don’t drag us into your silver polo lifestyle.

Yes I am sure you’re far worse off there in your shack, eating runaways, troll. Have you taken your AIDS medication today yet?

Found a silver polo boy.

@Nothing. If you say Starbucks is great, accepted…maybe coffee tastes different for a troll??.

Where did I say anything about starbucks quality? Do you have a reading problem?

Good article about very pretentious and expensive coffee culture in SA driven from the top down. Just beats me how these alleged business men failed to see the obvious. Had Starbucks for first time last year in London and it was yuck and expensive.

Starbucks was NEVER going to attract “serious” cofee-holics. Their coffee is mediocre by comparison to most decent brews and they concentrate on producing sugar-laden, weirdly (American) “fad” named drinks – in a health-crazed country! Furthermore, the results of this apparent failure can be seen by them reaching out to Pick ‘n Pay and Spar stores to sell their products – BUT – the prices are pretty much higher than their competitors. I’m afraid that this is another of those American products that came to SA for another “quick-buck” and it’s, sadly for those who spent a fortune on trying to make a living from them, failing. I expect a few sales to be made from the supermarket stores, but, as an 8+ espressos daily drinker, who has acquired a taste for decent coffee, I don’t have much hope for any success for Starbucks in stores either. . .

South Africa? Health crazed? With a 30 % obesity rate and 70 % overweight, american food is the perfect match!

Thanks for the laugh.

Starbucks target market is obviously (given their price points) higher income LSM 10 customers, this demographic certainly is health concious

The 90% of the population that fall outside of LSM 10 is not in the position to pay R20 for a cup of coffee, for a fair bit of SA that is the absolute maximum what they spend on food for a day.

Unlike in the US where the rich don’t care about health at all and the poor can buy fancy coffee. Magical America! Please engage mind before keyboard.

It’s true that Starbucks provides convenience. There was a Starbucks on every corner on my daily cycle or walk to work. It was convenient, affordable and quick to get a Starbucks coffee. They had lots of sugary drinks on offer too. If you wanted better coffee then one had to turn to the local independents, at a price.

So, the strategy of the local Starbucks was unusual. My teenage daughter and her friends went to Starbucks as a destination, for coffee and selfies. But the fad passed and now it’s a once every six months thing.

The selling price for Starbucks is very low, even taking into account the challenges. It could management scoring a bargain…..

The bottom-end Pizza business is a cutthroat one., and it’s the same everywhere. You only make money by underpaying staff, using temporary workers, cutting costs with your ingredients and other dubious management techniques.. Take a look at the pizzas you can buy from these stores. They all look the same, in spite of naming and menu photos. That’s because 99% of the pizzas are the same.

I’ve always known Starbucks to be small coffee stall when I’ve seen it overseas. I was shocked at how massive the outlet at Mall of Africa is. No ways your making rent on that space selling coffee to a largely weekend market.

Great article – great to see some actual understanding and analysis of the numbers for a change

“Not because South Africa doesn’t have a ‘coffee’ culture, but because the strategy of building out enormous stores in malls as destinations was flawed.”

Hindsight is a wonderful thing Hilton,I can’t think of a clear reason to believe that the model wouldn’t work when looking at their Rosebank store for example that seems to be constantly packed. SAfricans like their malls and out fitting any retail store takes capital, how much does it cost to set up a Burger King or Pizza hut, cheap as chips? Perhaps the operational side never got there but the rationale doesn’t seem ludicrous. What is the Seattle Coffee business worth as a comparable or any other bench mark information to compare this to?

You mention Famous Brands passing and imply it’s because they thought it was a poor deal, what is this based on? As far as I can recall, Famous Brands are not exactly looking like the darlings of the market they used to be either. And their Mugg and Beans look like expensive set ups, how has that store growth looked?

What does the R7m actually mean from a cash point of view? You go on to mention R700m needed to get the business profitable, where does that come into play on the overall deal?

Nothing against Hilton but Moneyweb’s reporting has gone from insightful to click baity over the past few years. Nothing of value in this article. I don’t know the answers to any of my queries above but I would think that would be a starting point before putting out a popular opinion piece.

Too expensive and start up cost.look at the price of a muffin

if you are spending millions to pitch a coffee shop that sells R30 coffees then you have a serious problem.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: