Starbucks is struggling in South Africa - here's why

Business Insider SA
Sources: Seattle Coffee Co. (Online), Vida e Caffe (Sandton) & Starbucks (Melrose Arch)/Table: Business Insider SA.
  • South Africa won't get any more Starbucks outlets, its local licence holder announced this week.  
  • Taste Holdings is not seeing a sufficient return on its investment in the US coffee brand.
  • The brand's high premium pricing and massive store set-up costs are contributing to its struggles.

Local licence holder for Starbucks in South Africa, Taste Holdings, has halted any plans to open more outlets of the US coffee chain as it struggles to make ends meet.

Taste, which also owns the jeweller Arthur Kaplan and Domino's Pizza, suffered operating losses of R87 million in the six months to end-August, with sales down 3%.

The group said that while the store network of twelve Starbucks outlets is profitable at a sales level, it's not producing the required return on its investment.

Setting up a new Starbucks store in South Africa costs between R5 million to R8 million, the group previously said. This is very expensive, says Simon Brown, founder and director of investment website Brown estimates that the actual cost could now be higher than previously stated - perhaps even reaching R20 million. 

Hitesh Patel, director of new business at Starbucks competitor Vida e Caffè, says the average cost of setting up one of its stores is only around R1.5 million.

That is less than a third of the minimum cost of a new Starbucks outlet.

See also: Starbucks just opened its 11th store in SA – with ‘the fastest WiFi of any retailer’

Taste has a 25-year licence deal to operate Starbucks stores in SA - and has to pay royalties to the US brand, which are proving to be costly, says Michael Treherne, retail analyst at the fund manager Vestact. 

Due to the royalties and expensive store set-up costs, Treherne says Starbucks South Africa has had to resort to premium pricing - which is not a good strategy during a recession. 

How Starbucks' prices compare competitors Seattle Coffee Co. and Vida e Caffe:

Sources: Seattle Coffee Co. (Online), Vida e Caffe (Sandton) & Starbucks (Melrose Arch)/Table: Business Insider SA.

The difference between food prices is more pronounced. We could find a muffin at a Vida outlet in Johannesburg for under R20, while the cheapest muffin at Starbucks was R32.

Uncompetitive prices presumably contributed to weak sales and profitability, which would dissuade Taste from opening more Starbucks outlets. But the other main reason is that it can't afford to.

In fact, the company is strapped for cash. "Building new Starbucks stores costs money that they [Taste Holdings] just don't have," says Treherne. The group had to issue new shares earlier this year to get almost R400 million to help settle some of its debts. 

Taste's struggles mean that Cape Town remains without a Starbucks store - so far the brand is only available in Gauteng and KwaZulu-Natal.

Now read: We tasted 5 Starbucks drinks – and the results were bittersweet

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