Taste Holdings, the South African franchisee for Domino’s Pizza, is auctioning off its Domino’s Pizza stores having failed to find a buyer. It means the contents of 50 stores will be sold, along with three food preparation facilities – another international fast food franchise that has failed to succeed in South Africa.
The contents of each outlet will be sold complete or in a combination of lots. It is the dismantling of a whole franchise, notable for the lack of a buyer. In November 2019 we noted that Taste Holdings had sold its 13 Starbucks stores in the country for just R7m ($475,000) and was selling its Domino’s Pizza franchise and its The Fish & Chips Co and Maxi’s QSR brands. These sales were part of a strategic exit from the foodservice sector.
In March, Taste Holdings announced it would close the subsidiary that holds the franchise for Domino’s Pizza in South Africa. The company had to write off intercompany loans to the value of R450m ($27.3m) as a result of the closure.
The failure to sell the Domino’s Pizza franchise is another sign of how intense competition is in South Africa’s QSR market: Domino’s Pizza was the #5 player in South Africa. Ahead of it, domestic players Debonairs Pizza, Roman’s Pizza, Pizza Perfect and Panarottis. Behind it, Pizza Hut, Col’Cacchio, Pizza del Forno, Andiccio24 and Mimmo’s, plus a long tail of very small chains.
One of the major challenges in South Africa is the additional costs of premium franchises either making QSR offers too expensive (e.g. Starbucks) and/or eating into a franchise’s profitability while it tries to scale. Some premium franchises have succeeded, notably McDonald’s and KFC. McDonald’s opened its first restaurant in South Africa in November 1995, while KFC entered in 1971.
Rival Burger King only opened its first outlet in 2013 and has struggled to grow the business. In February 2020, Grand Parade Investments (GPI), Burger King’s master franchise holder in South Africa, sold a majority stake in the Burger King franchise to private equity firm ECP Africa Fund for R697m ($46.1m) – or just $500,000 per outlet. In February 2019 GPI closed its struggling Dunkin’ Donuts and Baskin Robbins franchises in the country, citing poor performance. Pizza Hut returned to South Africa in 2014 after a six year absence. It remains a small player in South Africa with just 40 outlets.
The clear pattern in South Africa is that premium international brands struggle to compete with high quality domestic South African players. In the South African pizza market, there are players across the price spectrum, from low price (Pizza Perfect), to mid price (Debonairs Pizza) and upmarket (Col’Cacchio). In effect, the challenge for international franchises is to either offer something new in the proposition to consumers or to help franchisees achieve higher operational excellence than competitors. In practice, leading South African QSR operators are world class, and also well geared to South African budgets and to lower levels of consumer spending. Debonairs Pizza, owned by Famous Brands, operates across sub Saharan Africa and is the largest pizza chain in Africa. It operates across 15 countries and has more than twice as many stores in Africa as the next largest brand, Pizza Hut.
Outside South Africa, the pattern is very different: Pizza Hut operates in 19 countries and is a pioneer brand, positioning itself as an aspirational, premium destination. So too, Domino’s has had more success – it is well established in Nigeria and the leading pizza chain there.