Taste Holdings has given up on Starbucks, the global coffee behemoth.

The waning Starbucks honeymoon period in South Africa leads to the sale of its licence.

Taste Holdings has given up on Starbucks in South Africa, saying it plans to sell the franchise rights it owns to manage and roll out the coffee conglomerate’s chains across the country for R7-million. 

The announcement by Taste on Friday doesn’t mean that Starbucks will shut its 13 stores in South Africa, a market in which the coffee conglomerate chose in 2016 as part of its expansion plan in sub-Saharan Africa. It means that Taste will sell the franchise rights to open Starbucks stores in South Africa to another company. 

In the sub-Saharan Africa region, Starbucks is only available in South Africa, Morocco, and Egypt. 

Taste will join South Africa-based Grand Parade in giving up on underperforming US franchises, with that group announcing in February it was disposing of Dunkin Donuts and Baskin-Robbins to channel capital into Burger King.

Taste, which also holds the licences in South Africa for US-based Dominos Pizza, said it planned to exit its food business after realising it could not raise enough capital to make the division profitable.

Taste said its board had established it would need about R700 million to expand its network of chains sufficiently to reach its profit targets, and intends to dispose of Starbucks, Domino’s, Maxi’s and The Fish & Chips Co.

“After careful consideration, following months of operational reviews and canvassing potential partners and capital providers on this long-term objective, it has become evident that the capital investment required for this expansion strategy cannot be secured, given the current structure of the business and existing market conditions,” Taste said.

To reach positive cash flow, Starbucks would need to expand to between 150 and 200 cafes, while Domino’s would need between 220 and 280 restaurants, the company said. Taste operates 13 Starbucks stores and more than 80 Domino’s Pizza outlets.

Portfolio manager at Vestact Michael Treherne said a potential buyer of the Starbucks franchise rights would probably have “much deeper pockets, allowing them to pay down the big debt pile and raise cheap funding to open more stores.”

After the disposal of Starbucks, Domino’s, Maxi’s and The Fish & Chips Co, Taste would become a luxury retail group consisting of NWJ, Arthur Kaplan and World’s Finest Watches.

A Johannesburg-based analyst said it made sense for Taste to exit its food business division as it didn’t have the money to run it and the company’s strategy became confusing because it sold coffee, fish, and chips alongside luxury watches. 

Taste saw its total losses rise by about a third to R318.4 million in the year to end-February 2019.

Revenue dipped below the R1 billion mark in the year to end-February 2019, falling 7 percent to R959.5 million. Sales from the luxury goods business, which houses the NWJ and Arthur Kaplan brands, fell 12 percent while food sales edged 1 percent lower.

Where it went wrong with Starbucks

The troubled group, which is under new management, said its woes stem from poor decision-making in the past — including a strategy that saw it take on more ventures than it could handle at one time. One of the ventures was Starbucks. 

After Taste opened the first Starbucks South Africa store in Rosebank, Johannesburg in 2016, it had an ambitious target to roll out between 150 and 200 coffee chains across the country by 2020.

It also hoped that within seven to eight years, the Starbucks businesses would be able to fund its network expansion from its balance sheet and no longer require capital injections.

But the novelty factor of Starbucks’ arrival in South Africa, which initially translated into higher coffee sales, fizzled out. Before the 2019 financial year, Starbucks stores were not generating the levels of sales in line with investment cases. 

Taste also realised that rolling out Starbucks stores is expensive. Its Starbucks licence is a 25-year licence, which requires Taste to pay royalties to Starbucks US to the tune of R2.5 million a year. 

Other costs associated with opening a Starbucks store include license fees, marketing research, IT systems, employment costs of a dedicated Starbucks team and store infrastructure. At 2018 prices, it cost between R5 million to R8 million to set up a new Starbucks store in South Africa, the company said. 

Whereas, Hitesh Patel, the strategic director of Vida e Caffè, has estimated that the average cost of setting up one Vida e Caffè store is only around R1.5 million.

Another salient issue for why Starbucks is not a hit with consumers is its premium pricing for artisanal coffee. In November 2018, Business Insider South Africa compared the pricing of Starbucks coffee beverages with local chains Vida e Caffè and Seattle Coffee Company (see below). 

Source: Business Insider. 

Also, South Africa’s coffee market is saturated with dominant players. According to research firm Euromonitor International, South Africa’s specialty coffee market was valued at $77.6 million in 2018. McCafé (McDonald's) was ranked as the number one player in South Africa’s coffee market, followed by Vida e Caffè, Seattle Coffee Company and then Starbucks.