Starbucks had a strong launch in South Africa in 2016, but has since become an unprofitable venture for local brand owner Taste Holdings – forcing the group back to the drawing board on its plan to take the US coffee brand to the wider local market.
Taste says that its new plan includes rapid expansion and a new operating model – which includes a milder coffee bean to ensure that the taste of the coffee isn’t as strong and bitter as before.
In its annual report for the 2019 financial year, Taste said that an in-depth analysis of its international brands (Starbucks and Domino’s Pizza) showed that the operating models for these brands were not optimal, which required a rethink.
Prior to the 2019 financial year, Starbucks stores were not generating the levels of sales in line with investment cases. And a review of the operating model showed that the international Starbucks business model was not entirely suited to local market conditions and consumer preferences.
“In response to these findings, we paused the rollout of new stores to focus on re-aligning our operating model to one that more accurately reflects the South African market realities and ensured maximum productivity by our operating partners,” it said.
In 2019, system-wide sales in Starbucks increased by 46% to R108 million (2018: R75 million) as a result of two additional stores being added to the network in 2019, taking the total store count to 12.
However, same-store sales (9 stores) declined by 19% to R51 million (2018: R62 million) due to a combination of constrained consumer spending and the settling of revenues post the brand launch honeymoon period, which is typified by exaggerated revenues, the group noted.
“The combined stores network is currently profitable at an EBITDA level. The focus is to grow store profitability through new store openings and margin improvements, to the point where profit contributions exceed the cost of the brand’s support and admin infrastructure, referred to as above store costs.
“We have a revised capital model which caters for various store formats and have set a target of opening six new stores in the next financial year,” it said.
Taste’s new strategy with Starbucks involves setting up different types of outlets in targeted areas – while also fine-tuning the types of products it sells.
The group said as part of its new strategy it wants to establish Starbucks Café outlets to get sector dominance in Johannesburg, Cape Town, Pretoria and Durban. Here, it wants to open smaller, well-located stores with high visibility.
Most interesting, however, is that feedback from customers showed that South Africans generally don’t like the strong, bitter coffee that is widely used by the brand.
“Having noted significant customer feedback around the strength and bitterness of our coffees, we responded by adding a milder Blonde Roast to our range,” Taste said.
In response, the stores have been using a milder blonde roast, which has already proven to be more popular and is expected to continue to help draw in customers.
“We are confident that the more mellow flavour, with its greater local appeal, will go a long way towards attracting more customers. This confidence is borne out by the fact that, already, we are seeing more than 30% of our espresso-based beverages being made with this bean,” Taste said.
It also wants to continue offering free internet access to keep customers in the door. In 2020 it plans to include this as part of its rewards loyalty programme, which is already contributing 14% to total revenue.
Other avenues the group is looking at is new format stores, as well as the viability of Starbucks Drive-thrus.
What’s next for Starbucks in SA
In the coming financial year (2020) Taste said it wants to add six more Starbucks stores in South Africa, with the plan to focus on core economic centres, specifically Johannesburg, Cape Town, Durban and Pretoria.
Management wants to raise additional capital in order to grow quicker. The group estimates that it will require at least R570 million to fund the store network expansion (for both Starbucks and Domino’s).
The plan is to expand the Starbucks network to between 150 and 200 Starbucks, and within 7 – 8 years from the commencement of the plan, the businesses will be able to fund its network expansion from its own balance sheet and will no longer require capital injections.
Taste also says that the market potential over a 10-year period for Starbucks is between 200 to 300 cafés.
“A comprehensive market opportunity mapping process has revealed that there are approximately 200 good opportunities to open Starbucks stores in South Africa. While we will capitalise on these opportunities as they arise, our primary focus remains on fortressing our position in the four major centres in the coming year,” the group said.