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Starbucks and Domino's.
What do those brands have in common in the U.S.?
Not much. But in South Africa, they're run by the same parent company.
Taste Holdings.
And that company is struggling after opening 12 Starbucks in South Africa,
Taste announced in November 2014 that it would stop the rollout of new
stores. The company said Starbucks just wasn't making enough money to
continue opening new locations.
Taste also stopped opening new Domino's, which it said was the biggest
underperformer. Even though tastes began opening Starbucks stores again in
August 2019.
Its footprint is still far less than what the company expected when it
first entered the market.
In 2015, Taste that it's all the potential to open as many as 200 stores
there by 2020.
Instead as of 2019, Taste now has just 13 Starbucks locations in South
Africa. Taste hasn't had to close any stores yet.
But with its high operating costs and a big price tag most South Africans
can't afford,can Starbucks survive in South Africa?
Starbucks opened its first location in Seattle in 1971.
It quickly became a global brand with 30000 stores around the world.
But Africa is one continent where you won't find many Starbucks.
The brand is currently in just three African countries Morocco, Egypt and
South Africa. South Africa is the continent's second largest economy and
is now considered a point of entry to the African market for many global
brands. When apartheid ended in the 90s, foreign companies returned to the
country. South African consumers, who'd long been limited to local
players, were curious about these new international brands.
Starbucks expands to a new country in one of two ways through Starbucks
owned and operated stores, or by partnering with a local company to
license stores. In South Africa, Starbucks partnered with Taste Holdings
in 2015, giving the company an exclusive 25 year license to open Starbucks
stores. When Taste opened its first location in Johannesburg in April
2016, it was the first ever Starbucks in sub-Saharan Africa.
Lines of people eager to try its coffee snaked around the block when it
first opened in Rosebank, a shopping suburb of Johannesburg.
Local media reported that some people even waited overnight for their
Frappuccino fix.
But soon customer interest dropped as the novelty of Starbucks wore off to
slow the rate at which it opened new stores.
The company reported overall operating losses in the first half of fiscal
year 2018.
At Tastes Food Division, net losses mounted, widening 51 percent from
fiscal year 2017 to 2018.
Starbucks revenue in South Africa grew.
But in August 2018, he said it wasn't producing the required return on
investments to keep opening new stores.
Operating costs were also high for Starbucks in the first six months of
2013 due to the addition of eight new stores.
In fiscal year 2019, thanks in part to sales from two new stores,
Starbucks South Africa revenue increased 46 percent from the year prior to
108 million rand, or about $7 million.
But for the nine stores that have been open for at least a year, same
store sales declined by 19 percent.
Taste Holdings said the double digit drop in same store sales showed that
the honeymoon period for Starbucks in South Africa was over, despite the
fact that Starbucks products tend to be more expensive than its rivals in
South Africa. It's still ranked number four in the specialty coffee
market, which is valued at 77.6
dollars in South Africa.
Local coffee companies open in South Africa.
Long before Starbucks did, and analysts say some chains had already nailed
Starbucks casual European style.
You know, there was a or there is an established coffee culture and it's
not so easy just to come in and say, hey, you know, you know, we're the
new kids on the block and with better value proposition, I think, of a
Starbucks coming to South Africa.
You know, 20 years ago would have been very different.
But I think, you know, now a Starbucks coming to South Africa is
definitely a little bit of a sowhat factor.
Other international coffee jeans have tried and failed to expand in South
Africa. Northeast favorite Dunkin Brands open stores there in 2016.
But in February 2019, it's licensors said it would close all Dunkin Donuts
and Baskin Robbins there due to poor performance.
Krispy Kreme opened stores in 2015 with a much more modest goal than
Starbucks to open 31 restaurants by 2020.
McDonald's expanded to South Africa in 1995.
It has two hundred and eighty five restaurants in South Africa, compared
to 13 Starbucks.
In 2018 McDonald's said it would invest one hundred and five million
dollars in South Africa over the next five years.
Starbucks biggest problem in South Africa is how expensive its products
are. Starbucks in general and this is probably where the problem lies.
They are a bit more expensive than all other competition.
So, a cappuccino, you know, are from 15 to 25 percent more expensive than other chains.
So all just good coffee.
And that's the problem.
You know, you come with a premium and that's what people are attracted to.
That scene is your pricing is expensive.
You saw customers actually afford it.
Starbucks is aimed at middle and upper class consumers, a segment which is
small in South Africa.
The World Bank says South Africa has one of the highest inequality rates
in the world. From 2008 to 2015, a bout 20 percent of the population was
considered middle class, which is considerably smaller than in other
countries. The average salary in South Africa is about 1400 dollars a
month or about 17,000 dollars a year.
You know, I'd say probably a price bracket is between like 22 to 35 rand.
And that would be like a safe zone that can kind of say that's what most
people pay for a coffee or something.
Starbucks is well above that.
And so I think that for for the majority of people, that's like a great
once every now and then.
But it's not something they're going to purchase every day.
A small latte at Starbucks costs about 60 percent, more than the same item
at McDonald's. South African consumers were also strapped for cash when
Starbucks started expanding into the country.
South Africa entered a recession for the first time since 2009, and the
recession didn't just hit consumers.
The costs of doing business also went up.
Unfavorable exchange rates meant it was more expensive to buy the
equipment and supplies needed to run a Starbucks.
Taste also blamed higher fuel prices and increased taxes for its poor
financial results in the first half 2018.
That meant customers in South Africa weren't spending as much on
non-essentials like upscale coffee.
And remember, Domino's and Starbucks, South Africa Connection Taste
Holdings by Angelos were a huge problem for Starbucks.
The company has seen big losses and carried high debt, which became clear
when shares took a nosedive in 2017.
Taste chairman called 2018 one of the most trying and disappointing years
in tastes history.
While Starbucks stores are profitable, Taste just couldn't justify the
expense of opening any new ones.
Taste spent 10 million rand or just over 650 thousand dollars to open its
flagship store in Johannesburg.
Analysts say local competitors typically open stores for much less or just
about 100 thousand dollars per store.
Starbucks has the reputation of being a luxury brand, so customers
expected a lot. The cost of perks like free Wi-Fi, lots of beverage
options and large clean spaces with room to hang out added up.
Plenty of coffee chains in South Africa offer similar amenities.
But analysts say opening such expensive stores in a short time period puts
too big of a financial strain on taste.
If another more stable company had allowed Starbucks expansion in South
Africa, it may have gone differently.
If Starbucks was part of a bigger group, I don't think we would be having
this conversation. The local stores have opened already and the finance
issues will be easier to growing the brand.
Taste holdings refused requests for an interview for this story.
Starbucks spokesperson Reggie Borges has said in a statement that
Starbucks and Taste are optimistic about the brand's opportunity in South
Africa. Borges noted that taste opened its 13th Starbucks in 2019.
But that's still a ways off from its full market opportunity of up to 200
stores. There are a lot of forces where he and Starbucks in South Africa,
but taste seems confident it can succeed there.
Remember those lines around the block When Starbucks first opened?
Taste, it recognized Starbucks was in a honeymoon period.
Once stores have been open for a year, Taste got a realistic sense of how
much consumers would spend at Starbucks, and the numbers didn't look good.
With same store sales dropping 19 percent in fiscal year of 2019.
But Taste has a plan to get Starbucks back on track.
In 2018, Tastes went through a huge executive restructuring.
The company appointed new executives with experience operating global
brands in South Africa, including a new CEO and COO.
And if anything, the old management team might be being a bit
lax on their spending on new stores.
So if it cost them between 5 and 8 million rand stores or half a million
dollars per store. A lot of money considering its competitors
stores for about one and a half million.
. The new leadership team has been open with Starbucks about their
financial problems in South Africa.
Taste has even gotten positive feedback from Starbucks about its new
business model. Taste plans to keep building new stores in South Africa in
2020. It says it will.
Stores better suited to the local market.
That means stores will be smaller and more visible.
They'll also be concentrated in four major cities Johannesburg, Pretoria,
Durban and Cape Town.
And this time around, Taste will consider drive to store formats that
cater to the country's huge car culture.
Competitors have already capitalize on this trend by selling coffee at gas
stations or near office complexes.
But many of the Starbucks open now are in malls.
I think there's some things like, for example, not being in a mall I think
that's a great start. So location is important because at the end of the
day, like the South African driving terminal, to get coffee is probably
not an hardiness.
We drive every we like to walk some way is very like horrid intensifies.
Even if it's played by it's still a thing we'll drive up.
Taste got a huge cash injection from a multimillion dollar loan in 2018,
but the company says it will need more cash than that to keep opening
stores. Taste said it will open six new Starbucks in fiscal year 2020 and
in the long term, its goals are still high.
It wants to build 200 to 300 Starbucks in South Africa in 10 years.
Experts say Starbucks needs more revenue and lower operating costs to work
in South Africa. Can Starbucks South Africa survive or will it follow
Dunkin's path and become another casualty in the international coffee
wars?
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Why Starbucks Is Struggling In South Africa??

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