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Starbucks has failed in South Africa so far but is set for a do over

Brian Browdie

Just three years ago, residents of the Rosebank neighborhood of Johannesburg were buzzing around the launch of the first Starbucks store in sub-Saharan Africa.

Even though the city has plenty of independent coffee shops and cafes and some local chains, the brand cachet of Starbucks brought with it a frisson of excitement and global modernity that some South Africans crave.

While it was never expected to be a mainstream brand in a country with 57% poverty and harsh inequality, Starbucks South Africa has still managed to perform worse than many watchers expected.

Taste Holdings, the Johannesburg-based company that franchised the Starbucks brand exclusively in South Africa, said it is selling all its food brands after concluding it can’t source the capital to make the coffee stores break even.

Taste, which operates 13 Starbucks outposts in Johannesburg, Pretoria and Durban, has concluded that it would need to spend $47 million and build as many as 190 more cafes in the country over the next seven to eight years—an investment Taste says it can’t afford.

Customers queue outside South Africa’s first Starbucks outlet in Johannesburg on opening day April 21, 2016.

Following a detailed review, “it has become evident that the capital investment required for this expansion strategy cannot be secured, given the current structure of the business and existing market conditions,” the company said in a statement.

A consortium of investors led by one of Taste’s independent directors has agreed to buy the South African rights to Starbucks for just $473,000. The group said in a statement it is “well-funded” and plans to “build Starbucks stores at pace.” It would need to be for any chance of success. By some estimates Taste invested nearly $100 million into its food businesses which includes the Domino’s Pizza brand.

Starbucks gained a foothold in South Africa in 2010 when it licensed its drinks for sale locally in parallel with the republic’s hosting the FIFA World Cup. Four years ago, the company announced that it would partner with Taste to build a stand-alone store in Johannesburg that became the first Starbucks location in sub-Saharan Africa.

Missing the mark

Taste, which also plans to part with the South African rights to the Domino’s Pizza chain, has struggled to operate Starbucks at scale. Though the company’s Starbucks stores narrowed their loss in the year that ended Feb. 28, same-store sales fell 19%, to $3.5 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,” Taste said in its latest annual report.

Last year, Taste, which also has a jewelry division (that it reportedly considering selling two years ago to focus on food) raised roughly $27 million to help fund the cost of building additional stores for both Starbucks and Domino’s that it said were needed for the food division to achieve profitability.

Taste also retooled the Starbucks rollout with steps that included the addition of a blonde roast in response to requests from customers for mellower coffee.

“Two-hundred stores is a big punt and they kind of maybe fell short,” says Jordan Weir, an equity trader at Citadel Investments in Johannesburg. “I think they just couldn’t get their franchise business down as to how to roll out and how to sustain them.”

As Taste itself underscored, the troubles at its coffee business partly reflect the challenges of the South African economy, which has not grown by more than 1.5% in any year of the company’s rollout.

Add to that competition among purveyors. Starbucks squares off locally against such homegrown chains as Vida e Café, which operates 305 stores nationwide, and Seattle Coffee Company, which started in the U.K. in 1993, arrived in Cape Town three years later, and now has more than 85 cafes countrywide. Starbucks’ stores reportedly cost more to set up and run than those of its competitors.

South Africa also has a wealth of independent roasters and cafes. “To a great degree, when [Taste] took on Starbucks, from the brand it built in America, the guys just assumed that the brand would influence the revenue stream coming in,” Weir notes.

Starbucks, which operates and licenses roughly 30,000 stores in 78 cities worldwide, says it remains committed to expanding its South African footprint.

“We’ve been encouraged by the enthusiasm we’ve seen for our brand in South Africa,” the company said in a statement, adding that the sale of the franchise “will provide the necessary capital to achieve our ambition of up to 200 stores.”

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