Starbucks' expansion runs out of steam in South Africa

The opening of South Africa's first Starbucks outlet in April 2016 attracted long queues and the coffee giant looked set to take the country by storm. Local licensee Taste Holdings has opened 12 Starbucks cafes so far. But further openings have now b
The opening of South Africa's first Starbucks outlet in April 2016 attracted long queues and the coffee giant looked set to take the country by storm. Local licensee Taste Holdings has opened 12 Starbucks cafes so far. But further openings have now been ruled out as it struggles to control operational costs and debt.PHOTO: AGENCE FRANCE-PRESSE

JOHANNESBURG • High operating costs and tight customer budgets have left United States coffee giant Starbucks needing a caffeine hit after it abandoned ambitious expansion plans in South Africa - seen as a foothold for the continent.

Starbucks looked set to take the country by storm when it opened its first store in the Rosebank district of Johannesburg in April 2016 and 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," Mr Irshaan Mohammed, who is still a loyal customer at the flagship store, told AFP.

"We couldn't believe how many people had actually come here."

Mr 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 last month announced it would "pause the expansion", saying that "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 per cent in the six months to August, "largely as a result of the operating costs... doubling since the comparative period due to the addition of eight stores".

Mr Michael Trehene, market analyst at Vestact, said that the Starbucks name was strong in South Africa but "the current model is simply too expensive to operate". It can cost up to US$550,000 (S$754,000) to open a new store.

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

"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," Mr Trehene added.

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

"Sure, it is a big brand, but what does it cost to give that product to your consumer?" he said. "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," said Mr Treunicht.

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

The South African coffee market also comprises players such as Bean There, Father Coffee and many independent outfits targeting the urban middle class.

A small cup of Starbucks flat white costs 30 rand (S$2.80), while a similar order at Father Coffee and at the Vida e Caffe chain costs 22 rand and 26 rand respectively.

South Africa'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 per cent 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 food division has failed to make a profit since 2015. It had to be refinanced by shareholders last February to the tune of US$27 million to pay off its debt.

It has also secured a US$14 million loan from its now majority shareholder, the Riskowitz Value Fund, and may seek fresh refinancing in the near future.

But Taste is optimistic and says that, after securing long-term funding, it hopes to reconsider its Starbucks plans. Now it needs to convince consumers.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on December 27, 2018, with the headline 'Starbucks' expansion runs out of steam in South Africa'. Print Edition | Subscribe