Starbucks’ new franchisee in South Africa, Rand Capital Coffee, has unveiled plans to open an additional 8 new stores. The new stores will be in Cape Town, Stellenbosch, Johannesburg and Pretoria and are set to open in late 2020.
Rand Capital Coffee bought the Starbucks franchise for South Africa for R7m ($475k) from Taste Holdings in 2019. It currently has 16 Starbucks stores, predominantly in Gauteng, with one located in Durban. Five of the new stores will be in Cape Town: Canal Walk, Cavendish Square, Tyger Valley Shopping Centre, The V&A Waterfront and Camps Bay. The Starbucks launch into Cape Town was initially intended to happen in June, but was delayed by the COVID-19 pandemic.
In a news release on Monday 16th November, Shoprite revealed that two new Starbucks outlets in Stellenbosch and Rosebank (Johannesburg) would be sited within branches of Checkers, as part of Checkers FreshX format (designed to take the brand more upmarket and go head to head with Woolworths. It represents a major step change for the brand, and one which opens up the possibility of an accelerated growth path: In total, over 60 Checkers stores will be renovated into “FreshX concept” stores.
Starbucks has had a torrid time in South Africa, reflected in its fire sale price to Rand Capital Coffee. The first store opened in 2016, with plans to open 45 stores by 2020. As late as June 2019, then owner Taste Holdings talked of opening six new Starbucks and eventually targeting 150-200 stores in South Africa. At the same time it sold Starbucks, Taste Holdings also tried and failed to find a buyer for its Domino’s Pizza franchise. That franchise was subsequently liquidated.
Taste Holdings was not the only South African franchise holder hit problems: in February 2019, Grand Parade Investments (GPI), the operator for the Burger King in South Africa, revealed plans to close its Dunkin’ Donuts and Baskin Robbins franchises in the country, citing poor performance. The move follows activist investor pressure. GPI had been the franchise holder for both brands since late 2016.
We don’t think the problem that affected Taste Holdings when it owned the Starbucks franchise has necessarily gone away: the South African market is highly developed. Trendtype tracks 270 fast chains in South Africa and 33 coffee shop chains alone. There is already a successful US style chain in The Seattle Coffee Company, which was set up as a Starbucks-alike chain (in 1998 the UK network was sold to become Starbucks in the UK). South African chains already compete on a cut throat basis with one another.
The challenge is franchise fees. In order to compete a Starbucks franchisee has to sacrifice margin, go premium or outperform the competition operationally. In fairness, with these new outlets Rand Capital Coffee is targeting some of the most upmarket malls, and places where international tourists are more likely to gather (post COVID-19). But those sites come at a high price too.
The underlying challenge for Rand Capital Coffee is whether it can convince affluent South African consumers whether it’s worth switching from domestic cafe brands such as Mugg & Bean or tashas or Seattle Coffee Co to Starbucks. For that to happen, the Starbucks brand needs to find some appeal, particularly among the 20-35 year old women it sees as a target audience.
