Listed management group Taste Holdings says it has entered into an agreement to sell the Starbucks master franchise licence for South Africa for R7 million.
The group announced the sale as it cautioned shareholders to trade carefully in its shares while the details are ironed out, and the financial impact of the transaction is made known.
The licence is being sold to an unknown company (simply called ‘K2019548958’ in the announcement), pending various approvals and financial conditions met.
The move comes following a strategy shift by the group to exit the food business in South Africa.
Taste said that it would require at least R700 million to reach positive free cash flow and that the Starbucks network will need to expand to between 150 and 200 cafés and Domino’s to between 220 and 280 restaurants.
“The company has, following detailed operational reviews and canvassing potential partners and capital providers, reached the conclusion that Taste should change its strategic direction and exit the food business,” it said.
“It has become evident that capital investment required for the previous expansion strategy cannot be secured, given the current structure of the business and existing market conditions. In line with the company’s change in strategic direction, Taste Food has entered into the agreement to dispose of the Starbucks business.”
It is currently anticipated that the closing date for the transaction will occur on 2 December 2019.
Taste currently has a portfolio of food brands – including Starbucks, Domino’s Pizza, Maxis and the Fish & Chip Co – and luxury goods brands, including jewellers Arthur Kaplan, NJW and World’s Finest Watches.
The decision by Taste to exit the food business means that its other food brands are also possibly up for sale.
Starbucks in South Africa
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.
The Starbucks licence is a 25-year licence which requires the holder to pay royalties to Starbucks US to the tune of R2.5 million a year. The group pays around R4 million a year for the Domino’s licence.
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.
Taste’s initial plan was to expand the Starbucks network to between 150 and 200 Starbucks, and hoped that within 7 – 8 years from the commencement of the plan, the businesses would be able to fund its network expansion from its own balance sheet and no longer require capital injections.
The group said that the market potential over a 10-year period for Starbucks is between 200 to 300 cafés.