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Taste still bets its recovery on Starbucks and Domino’s Pizza

Shareholders continue to stomach more losses from the fast-food player, which expects to breakeven in the next 18 months.

Loss-making fast food specialist Taste Holdings is still pinning its hopes on the rollout of cash-guzzling global brands Starbucks and Domino’s Pizza for its long-overdue recovery.

Taste’s results for the six months to August 2017 were probably hard to swallow for long-suffering shareholders as it reported an after-tax loss that nearly doubled to R66 million (previously a loss of R34 million).

The blow gets worse. It reported a headline loss per share of 15.9 cents and operational cash flows were negative to the tune of R31 million.

The problematic division for Taste is the food business, which bloated its losses to R61.5 million from R53.2 million.

“Taste has been loss-making for a while. In previous periods they showed that on a core earnings basis they were slightly loss-making. But now they are properly loss-making,” said Jean Pierre Verster, portfolio manager at Fairtree Capital.

Even Taste’s luxury jewellery division, which has historically been a cash generator, joins the food business in delivering losses.

The jewellery division, comprising Arthur Kaplan, World’s Finest Watches, and NWJ, pulled in operating losses of R769 000 compared with profits of R21.7 million in the previous year.

Taste CEO Carlo Gonzaga blamed the “brutal and sustained” decline in consumer sentiment and spending for the poor results.

But market watchers have warned that Taste’s appetite for global brands is coming back to bite as it overcommitted capital in Starbucks and Domino’s while neglecting its lower-end domestic eateries including Maxi’s, The Fish & Chip Co and Zebro’s.

Starbucks and Domino’s are capital intensive to run as they are corporate owned (by Taste) while the domestic brands are owned by franchisees. Taste earns royalties from franchisees.

It costs R6 million to open a Starbucks outlet and biggest costs include market research, IT systems, establishing a supply chain network, employee costs and store infrastructure – compared with R1.8 million for Domino’s.

Gonzaga believes in the strategy of backing global brands, which are expected to be the growth vector for Taste. Gonzaga said 12 Starbucks and Domino’s outlets would be rolled out in 2018.

Fairtree Capital’s Verster said what might work in Taste’s favour is that upper-end consumers (mostly Starbucks and Domino’s patrons) are in a better financial position than those in the lower-end (mostly Maxi’s, The Fish & Chip Co and Zebro’s patrons).

Taste might breakeven in the next 18 months but this hinges on the state of consumers and if “things don’t go pear-shaped with them.”

Arguably a bigger concern is Taste’s weak balance sheet, which boasts debt of more than R250 million and cash on hand of R86.1 million.

“Our challenge now is to restructure our balance sheet to allow us to open stores next and get to a point where we don’t burn cash anymore,” said Gonzaga. Being vague, he said Taste has several proposals that would deleverage the business appropriately.

Another rights offer might be on the cards after it failed to sell its luxury jewellery business, in which the proceeds would fund the Starbucks and Domino’s expansion. This was Taste’s last resort to free up cash.

Read: Taste halts crucial sale of luxury jewellery business

“The timing of the sale was terrible as the last six months for the jewellery business was tough. The offers or expression of interest would have been far below their own assessment of their value,” said Verster.

In June, the company raised about R97 million in fresh capital through a rights offer. This means that the small-cap (R427.1 million) would have raised more than R600 million through share-for-cash placements and rights offers in three years. Verster questioned whether Taste’s future rights issues would be supported by its anchor shareholder Conduit Capital as the financial services counter is facing its own woes. “Taste has probably lost credibly in the eyes of shareholders.”

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down by 45% in a year! not good and going to get worse – much worse. I suppose this is why naspers and richemont appear to be the ONLY sa shares following world markets – but they are both on crazy pe’s

A while ago I tried Dominos for the first time and their pizza sucks. You can hardly compare
their pizza to any wood-fired pizza. It doesn’t offer anything more than a Debonairs oven made pizza. Just because something works in the USA or in other countries doesn’t mean it will work in SA. They are selling Starbucks iced coffees at R39.95 at the store whereas a can of Coke costs R10. It simply is 4 times the price for a product that South Africans don’t even know.
South Africans know ice tea, but not iced coffee and at that price they are not going to get to know it soon.

Seems like Starbucks chose the wrong partner in SA.

very good point about what works o/s does not always work in SA , and vice versa.
SA companies should stick to Africa, Shoprite is doing well, Tiger brands not so good.
When i visit Oz i constantly see SA companies failing- i asked an auditor originally from the UK who spent a few years in SA now living in Oz . he reckons Saffas do’nt do their homework and always underestimate the ”laid back Ozzies”. the list of SA companies failing there is long indeed.
Taste has got mission impossible in trying to sell a jewellery business- i was in that industry and only got out by selling at a huge discount. i experienced large jewellery companies going bang or shrinking to a fraction of what they were.
I f i was the ceo of Taste i would take whatever i am offered because it aint going to improve.
It has become a kak industry

It may have been better to take some SA brands to the USA.

With over R250M of debt on it’s balance sheet and barely making any money, another rights issue is inevitable.
This is a business that clearly bit off more than it can chew, many people had their doubts about the strategy being followed but they seemed determined to prove all the naysayers wrong.
Methinks It’s only a matter of time before shareholders start calling for Carlo Gonzaga’s head, watch this space.

I hope the high capital cost for store upgrades isn’t going to be a constant pain in future. Every six years or so, these stores are remodelled – and with imported equipment from franchisor, that might wipe out the profits. Can see starbucks and dominos succeeding long term in SA, but just can’t bring myself to buy taste shares.

Dominos pizza is supposed to taste better in recent years, but I think it is mediocre. Still, we live in a world of ratings and reviews. If product sucks in SA eyes, I suspect Taste will have licence to tweak product. Dominos experimenting with breakfast now, so that adds some potential.

Starbucks is just cool. Coffee not amazing, but really coffee brands more similar than different. In many starbucks in Oz, stores full, which is not the case for most other coffee shops. Starbucks has succeeded on good PR, but bad PR could also be their undoing.

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