Starbucks rollout in South Africa hit by ‘brutal decline in consumer spending’

Taste Holdings, the operator of Starbucks in South Africa, says it plans to free up cash over the next month to repay debt and continue the rollout of the US coffee chain.

Bloomberg reported that on top of an impending 2019 deadline to repay R225 million of bond debt, Taste needs to keep opening Starbucks stores to offset initial start-up costs.

The group reported a 9% decline in revenue for the six months ended August 2017, to R483 million, while losses widened to R65.8 million, from R34.4 million before.

There are “a number of options, a mix of equity and debt, and I think we will resolve all that and finalize the valuation of the proposals in the next four weeks,” CEO Carlo Ferdinando Gonzaga told Bloomberg.

Having secured the rights to Starbucks outlets in South Africa in July 2015, Taste has six of the stores and plans to open four more this year. The total of 10 is at the lower end of management estimates, the CEO said, as the company takes a conservative approach to openings amid the need to raise money.

While the individual Starbucks stores are profitable, “the challenge now is to grow those stores and to keep on opening in profitable locations to the point that there are enough to cover the overheads,” Gonzaga said.

“So it’s less about a trading problem than it is about an opening store problem, which then has a capital requirement.” It costs Taste about R5 million rand to R6 million to open a store, the CEO said.

“An immediate consequence of the restrained consumer environment is lower short-term sales forecasts in our new-store investment cases. These in turn impact the number of potential locations that meet our 25% internal rate of return hurdle (“IRR”) reducing new store growth numbers to the lower end of our estimated ranges,” it said.

“Any operational gains made during the six months ended 31 August 2017  have been overshadowed by the brutal and sustained decline in consumer spending across almost all categories that the group trades in. The improvements in labour, margin and costs were not enough to counter the sales decline, especially in the first quarter of the current period,” Gonzaga said in a statement on Thursday.

Taste said earlier this month that Starbucks will make its long-awaited debut in Durban in November 2017.

The group said that it will open two new stores in eThekwini, the first of which will launch on Durban’s iconic Florida Road, with another being set up in the Gateway shopping centre.

Speaking to BusinessTech earlier this month, Gonzaga said that this will be followed by the launch of a store in Johannesburg in the Melrose Arch Precinct before the end of 2017.

He further confirmed that the chain was actively looking at suitable sites to open new stores, “looking to double our store footprint in 2018,” he said.

“This will include additional stores in Gauteng, KZN and the first Cape Town store,” he said.

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Starbucks rollout in South Africa hit by ‘brutal decline in consumer spending’