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Taste Holdings, the operator of Starbucks and Domino’s Pizza in South Africa, reported its interim financial results ended August 2018, showing a decline in revenue as it continues to restructure its business.
Revenue declined 3% to R470 million, from R483 million before, with an operating loss of R87 million.
The group reported a headline loss per share of 8.0 cents per share versus 15.9 cents per share previously.
Taste said that the first half of the 2019 financial year marked the beginning of a new dawn for the group. “Successive periods of unsatisfactory results forced us to ask and answer tough questions about our business,” it said.
“While this was not an easy environment to operate in, given the internal revisions and external economic headwinds, (we are) proud of the acceptance to change that our team has demonstrated.
“In the short six months that we have been on this new journey, we have managed to make some significant changes to the group that will provide a strong foundation for long-term sustainability and growth.”
In the previous financial year, Taste moved to split the business into two distinct verticals, namely food and luxury goods.
The Food Division includes Domino’s and Starbucks Coffee, as well as locally-owned brands including Maxi’s and The Fish and Chip Co.
Taste said its first critical decision was to pause the expansion of the Domino’s and Starbucks network.
“Firstly, to ensure that the cash which remained in the Group post the settlement of the debt facilities is sufficient to fund the expected current operating losses of the Group but secondly and more importantly, to afford us the opportunity to review the store operating models of both brands and capital required to deliver an acceptable return on investment.”
It noted that Domino’s existing corporate store network is producing operating losses – and while Starbucks’ network is profitable at an EBITDA level, it is not producing the required return on the store investments.
Taste said it has developed new store economic models, investment case metrics and market development strategies.
“Given the above progress we believe that once we have secured long term funding for the Group, we can enable the expansion of the brands’ networks,” it said.
Currently Starbucks has 12 stores in Gauteng and KZN, while Domino’s has 30 outlets in Gauteng, and 18 in the Western Cape. This compares to Famous Brands’ Debonairs Pizza which has almost 550 outlets countrywide.
Taste pointed out that the South African economy continued to retract during the period under review and the compounding effects of higher fuel charges, higher VAT and income taxes on the consumers’ disposable income and spending habits, had a negative impact on the financial results for this reporting period.
Earnings before interest, tax, depreciation and amortisation contracted 20% to a loss of R65.5 million. Domino’s was the most significant contributor to the group’s EBITDA loss for the period, predominantly due to losses from corporate stores.
Taste said that some of these losses are attributable to increased costs that it did not pass onto the consumer.
“We have identified several opportunities that will enable us to get Domino’s corporate store to EBITDA break-even as-soon-as-possible. The initiatives will focus on increasing order counts and reducing food costs. We have implemented many of these initiatives, and we are confident that the positive results will start flowing through in the second part the of the financial year,” it said.
The Food Division revenue increased by 13% to R319 million (2017: R282 million) with gross margins remaining constant despite not passing the VAT and fuel increases onto consumers.
The Food Divisions operating costs increased by 7% largely as a result of the operating costs of Starbucks doubling since the comparative period due to the addition of eight stores in the network and the expiration of a royalty concession granted to Taste by Domino’s International.
Taste said that the slowdown in the store rollout has allowed the Food Division to realign their respective brand strategies and focus on planning their growth initiatives for the next financial period.
Same-store sales in local-owned brands remained positive, albeit at 1% for the six months, while same-store sales for Domino’s increased to 2.8%.
Two further Starbucks stores were added in April 2018 and July 2018 which brings the total number of Starbucks stores to 12.
Although sales have increased in the Starbucks brand, there is pressure on the first four stores that can be measured on a same-store sales basis, it said.
Read: Top 20 fast food franchises that make the most money in South Africa
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