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South Africa: Taste and Starbucks wake up and smell the coffee

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 12 November 2019 10:04

Customers queue for coffee outside South Africa's first Starbucks outlet in Johannesburg, South Africa April 21, 2016. REUTERS/TJ Strydom

Bigger isn’t always better. Taste Holdings, through wholly-owned Taste Food, is the operator of the Starbucks and Domino’s Pizza brands in South Africa, found out the hard way.

It is now trimming its portfolio by exiting its food business.

In an announcement on 31 October that didn’t shock the market, Taste said it had sold its Starbucks master franchise and the 14 outlets for R7 million ($471,000) to a consortium of shareholders that includes the Rand Group.

  • In 2014, Taste signed a 30-year, exclusive master licence agreement to develop the Domino’s brand in Southern Africa, with its primary base in South Africa. Part of this arrangement included rebranding Scooters Pizza stores into Domino’s outlets.
  • In 2015, Starbucks entered into an exclusive, 25-year R226m ($1.5m) agreement with Taste, which paved the way for the franchise of coffee shops to operate for the first time in Sub-Saharan Africa.

At the time, there was much enthusiasm and the market responded positively to the deal through the Taste share price.

  • In April 2016, Taste opened the first Starbucks store in the upmarket suburb Rosebank.

Three years later Taste is out, citing a change in strategic direction, “given that it has become evident capital investment required for the previous expansion strategy cannot be secured”, the company said in a note to the market.

The company’s share price declined by more than 90% and successive rights offers have not yielded the desired outcomes.

Too much, too soon

“The problem with Taste was they put too much on their plate in an environment that was slowing down,” says Casparus Treurnicht, an analyst at the Cape Town-based Gryphon Asset Management.

This was compounded by a combination of factors including: wrong timing, poor management, and a flawed implementation strategy, according to Treurnicht.

  • “If you see one thing is not working, why continue on the same path? And look where Taste are finding themselves now?” asks Treurnicht. “In a way, you can argue it is a form of FOMO [fear of missing out]. If competitors are doing things aggressively, you tend to follow.”

Victim of bad strategy

While the environment was in a consolidation phase, Taste implemented its rollouts too aggressively. This constituted not only a misreading of the market, but was also a sign of a bad strategy.

In the initial market statement announcing the Starbucks deal in 2015, the companies had said the transaction was partly underpinned by a need to tap into Africa’s growing middle class.

As the deal imploded and Taste battled under the weight of not meeting market expectations, some critics said the company misjudged South African coffee culture.

  • “I wouldn’t necessarily say it was a consumer culture that was misread. I think they overestimated the potential. Ambitious targets were made, and related capex meant they overspent,” explains Treurnicht.

This is the same old story of South African business over the past ten years, he says. Treurnicht points to all the mergers and acquisitions made by other corporates in the period.

Treurnicht’s final word on the Taste saga is that specific locations could accommodate a rollout for a niche store like Starbucks, which proved to be Taste’s undoing. “Eventually, ‘bigger’ proved to be wrong,” he says.

Going after that slice

Paul Whitburn, an analyst at Rozendal Partners in Cape Town, says in the Domino’s transaction, the key issue was Taste took over a struggling business from the original founder.

  • “They then tried to change the business from the Scooters brand to Domino’s, and shifted away from franchisee to corporate-owned stores; a corporate manager is never going to be as good as a franchisee operator,” says Whitburn.

The pizza market in South Africa is competitive, with the Famous Brands-owned Debonairs Pizza the dominant player. “Other competitors, such as Roman’s Pizza, are ruthless at the lower end,” according to Whitburn.

But that is not all:

  • Domino’s is priced more in the premium market in South Africa unlike the US.
  • The sites where it operates in South Africa are far from ideal.

This meant “the likelihood of turning around Domino’s, with all these moving parts in an economic recession, was always going to be difficult”, explains Whitburn.

  • “Owning a master franchise is difficult as the brand owner wants you to rollout more stores to generate revenue, which they take a percentage of. This is problematic for shareholders who cannot finance the business through the J curve,” says Whitburn.

Starbucks will stay

This may be the end of the road for the Taste-Starbucks union, but the coffee franchise will remain in South Africa under the ownership of the new shareholding consortium.

Rand Group owner Adrian Maizey, a non-executive director at Taste, told Business Times they plan on building more Starbucks stores in South Africa.

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