Starbucks needs big hit of caffeine

Employees of Starbucks prepare coffee on the eve of the official opening of the first Starbucks shop in SA and Sub-Saharan Africa in Johannesburg on April 20 2016.
Employees of Starbucks prepare coffee on the eve of the official opening of the first Starbucks shop in SA and Sub-Saharan Africa in Johannesburg on April 20 2016.
Image: AFP

High operating costs and tight customer budgets have left US coffee giant Starbucks needing a caffeine hit after it abandoned ambitious expansion plans in SA – seen as a foothold for the continent.

Starbucks looked set to take the country by storm when the opening of its first store in Rosebank in Johannesburg in April 2016 attracted big crowds, who queued for hours to taste its famous coffee and enjoy the cafe experience.

“We thought they were going to run out of coffee before we could get a chance to taste it,” Irshaan Mohammed, who is still a loyal customer at the flagship store, said.

“We couldn’t believe how many people actually came.”

Mohammed, 23, said he loved “choosing ingredients and hanging out” at Starbucks, but “when it comes to my bill I always worry that I am paying too much”.

Local licensee Taste Holdings has opened 12 Starbucks cafes across Johannesburg, Pretoria and Durban. It had hoped to have 45 stores open by 2020 – with a peak target of 150 countrywide.

But further openings have now been ruled out as the company struggles to control operational costs and debt.

Taste in November announced it would “pause the expansion”, saying “while the Starbucks’ store network is profitable (before debt interest and tax), it is not producing the required return on the store investments”.

In its latest financial report, Taste said its food division’s operating costs increased by 7% in the six months to August, “largely as a result of the operating costs of Starbucks doubling since the comparative period due to the addition of eight stores”.

Vestact market analyst Michael Trehene said the Starbucks name was strong in SA, but “the current model is simply too expensive to operate”.

There is no Starbucks in the fashionable tourist hub of Cape Town, despite Taste announcing plans to open there as far back as November 2017.

“Places like Cape Town are affluent enough to sustain a few stores ... but the coffee is expensive, which makes it unaffordable for a large part of our population,” Trehene said.

Another market watcher, Casparus Treunicht, an equity analyst at Gryphon asset managers, said Starbucks was a tough challenge to make profitable in SA.

“Sure, it is a big brand, but what does it cost to give that product to your consumer?

“You have to import all your ingredients and materials.”

The company sources coffee from nine countries in Africa along with small-batch reserve coffees from around the world.

“For Starbucks to really make a profit they have to bring the costs down significantly, but at the same time you need scale and selling more units,” Treunicht said.

But cost-cutting is tricky at Starbucks, where prime store locations, branded products and fast Wi-Fi are internationally standardised – as well as having your name scribbled on your takeaway cup.

The SA coffee market is also competitive with the likes of Bean There, Father Coffee and many independent outfits targeting middle-class consumers in cities.

A small cup of Starbucks flat white costs R30, while a similar order at Father Coffee costs R22 and R26 at Vida e Caffé chain.

SA’s middle class has been under pressure from slow economic growth, while the country is one of the most economically unequal in the world with 27% of the population jobless.

Starbucks, which operates more than 22,000 cafes worldwide, has a presence in only two other African countries – Egypt and Morocco.

Taste’s entire food division, which includes Domino’s Pizza, has failed to make profit since 2015. It had to be refinanced by shareholders in February 2017 by R390m to pay off its debt.

It has also secured a R200m loan from its majority shareholder, the Riskowitz Value Fund, and may seek fresh refinancing in the near future.

But Taste says that after securing long-term funding, it hopes to reconsider its Starbucks plans. –AFP