The numbers behind the sale of Starbucks in South Africa

Listed management group Taste Holdings, announced earlier in November that it was abandoning its food business, starting with the sale of 13 Starbucks stores to a consortium for R7 million.

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 company said it was also in discussions around the sale of Domino’s and its two other food businesses, restaurant chain Maxi’s and The Fish & Chips Co.

Starbucks sale

In a statement published on Friday (29 November), Taste Holdings said it has obtained a fairness opinion from an independent expert, Bridge Capital Advisors, relating to its disposal of Starbucks.

It said that the lease obligations for 12 stores in operation amounts to approximately R43.9 million, or R3.66 million per store. Starbucks is located in affluent areas including Mall of Africa, Sandton City and in Rosebank, among others.

It said that the future capital obligations pursuant to the license agreement with Starbucks is estimated to be R350 million, in order to meet the minimum store build obligations; and the capital required to fund the Starbucks Business’ on-going and deteriorating operating losses.

The audited loss after tax attributable to the Starbucks Business for the period ended February 2019, was R25.6 million, Taste said.

The value of the net assets comprising the Starbucks Business as at 28 February 2019, being the date of the last audited annual financial statements of Taste, was R64.1 million.

The majority of the aforementioned net assets consists of Starbucks proprietary shop fittings and equipment, Taste said.

Starbucks in South Africa

Starbucks had a strong launch in South Africa in 2016, but had since become an unprofitable venture for Taste – 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.

Read: Taste sells Starbucks South Africa – for R7 million

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The numbers behind the sale of Starbucks in South Africa