After nearly three years in South Africa, it looks like the Starbucks franchise may have reached the end of the road as franchisee Taste Holdings abandons expansion plans.
Starbucks entered South Africa in April 2016. Franchisee Taste Holdings, owner of the The Fish & Chip Co., Zebro’s and Maxi’s franchises and the Domino’s Pizza franchisee in South Africa, planned to open 45 stores open by 2020, with a target of 150 nationally. Those plans are now in serious doubt as the company struggles to find funds to expand. Its food division hasn’t generated a profit since 2015.
In December 2018 its share price took a kicking, falling 18.75% after the company announced another rights issue. It was the fourth time the company had been back to investors for funds in just three years. Its share price has fallen from a peak of 500c in mid 2015 to just 16c in January 2019. Taste has a 25-year exclusive agreement to operate Starbucks in South Africa and has opened 11 stores. It operates 62 Domino’s stores, while the remaining 20 or so are independently operated.
The lack of funds also affects the expansion of Domino’s Pizza, which has sought to establish itself against strong local rivals including Debonairs and Roman’s Pizza and the similar-sized franchises of Pizza Perfect and Panarottis.
Starbucks has stores in Johannesburg, Pretoria and Durban but faces much larger local rivals including Mugg & Bean (more than 200 stores in 50 towns/cities in South Africa alone), Seattle Coffee Company (169 outlets in South Africa) and Vida e Caffè. Seattle Coffee Company’s founders, Alley and Scott Svenson, modelled the business on Starbucks. Founded in 1993, the UK branches were sold to Starbucks in 1998. To add to Starbucks’ problems, Dunkin’ Donuts, opened its first store in South Africa in October 2016 (although the brands don’t yet compete directly as Dunkin’s Donuts is only in the Western Cape for now). In October 2018 Dunkin’ Donuts dropped the “Donuts” from its brand in South Africa, in a bid to broaden its appeal.
The South Africa fast food, casual dining and coffee shop sector is the most sophisticated and dynamic in Africa. Trendtype tracks 294 chains (two or more outlets) operating in South Africa alone, although many franchises have operations in other countries in Southern Africa. It is intensely competitive, and intensively price competitive.
Starbucks itself is not badly priced – its coffees compare favourably on price with Mugg & Bean and the Seattle Coffee Company and are cheaper than the premium coffee chain, Fego. Its problem is that there is a Starbucks-alike chain already operating, and a long list of direct and indirect competitors (which includes a long list of cafe chains offering sandwiches, pastries etc, as well as fast food chains such as McDonald’s and Wimpy that also serve coffee). Starbucks is a late entrant in a reasonably mature market and has struggled to establish a compelling reason in terms of convenience, product, innovation, price or service for why consumers should switch.
The question is, where does Starbucks go in South Africa?
It looks unlikely in the short to mid term that Taste Holdings will be able to deliver the expansion strategy Starbucks needs, because investors aren’t stepping up. Even if Taste Holdings can engineer a turnaround, it’s not clear it would choose to put its investment into Starbucks, rather than Domino’s Pizza.
Acquisition remains an option. Seattle Coffee Company is the obvious target. The company once had more than 200 stores. It now has 169 and is not immune to the threat of shrinkage posed by a squeeze on consumer incomes in South Africa and the relentless pressure on fast food operators to manage costs and innovate.
More widely though, Starbucks has yet to establish itself in Africa. The brand is only present in three countries (South Africa, Egypt and Morocco) and has only 55 outlets in total – about the same number it has in central London. In Trendtype’s Fast Food and Casual Dining Tracker, Starbucks ranks #42 by number of outlets in Africa. It is ranked #4 in the US, by contrast.
Trendtype’s analysis is that Starbucks needs a more focused Africa strategy. There is plenty of headroom for growth in the coffee shop market, with local trailblazers such as Java House delivering impressive, focused expansion. In particular, we are seeing significant growth in shopping mall and hotel construction across Africa, providing a good fit for a Starbucks style coffee shop chain.