Starbucks and Domino's. What do those brands have
in common in the U.S.? Not much. But in South Africa, they're
run by the same parent company. Taste Holdings. And that company is struggling after
opening 12 Starbucks in South Africa, Taste announced in November 2014 that it
would stop the rollout of new stores. The company said Starbucks just
wasn't making enough money to continue opening new locations. Taste also stopped opening new Domino's,
which it said was the biggest underperformer. Even though tastes began
opening Starbucks stores again in August 2019. Its footprint is still far less than
what the company expected when it first entered the market. In 2015, Taste that it's all the potential
to open as many as 200 stores there by 2020. Instead as of 2019, Taste now has
just 13 Starbucks locations in South Africa. Taste hasn't had to
close any stores yet. But with its high operating costs and
a big price tag most South Africans can't afford,can Starbucks survive
in South Africa? Starbucks opened its first location
in Seattle in 1971. It quickly became a global brand
with 30000 stores around the world. But Africa is one continent where
you won't find many Starbucks. The brand is currently in just
three African countries Morocco, Egypt and South Africa. South Africa is the
continent's second largest economy and is now considered a point of entry
to the African market for many global brands. When apartheid ended in the
90s, foreign companies returned to the country. South African consumers, who'd
long been limited to local players, were curious about
these new international brands. Starbucks expands to a new country in
one of two ways through Starbucks owned and operated stores, or by
partnering with a local company to license stores. In South Africa,
Starbucks partnered with Taste Holdings in 2015, giving the company an exclusive
25 year license to open Starbucks stores. When Taste opened its first
location in Johannesburg in April 2016, it was the first
ever Starbucks in sub-Saharan Africa. Lines of people eager to try its
coffee snaked around the block when it first opened in Rosebank, a
shopping suburb of Johannesburg. Local media reported that some people
even waited overnight for their Frappuccino fix. But soon customer interest dropped as the
novelty of Starbucks wore off to slow the rate at which
it opened new stores. The company reported overall operating losses
in the first half of fiscal year 2018. At Tastes Food Division, net losses
mounted, widening 51 percent from fiscal year 2017 to 2018. Starbucks revenue in
South Africa grew. But in August 2018, he said it
wasn't producing the required return on investments to keep
opening new stores. Operating costs were also high for Starbucks
in the first six months of 2013 due to the addition
of eight new stores. In fiscal year 2019, thanks in part
to sales from two new stores, Starbucks South Africa revenue increased 46
percent from the year prior to 108 million rand, or
about $7 million. But for the nine stores that have been
open for at least a year, same store sales declined by 19 percent. Taste Holdings said the double digit drop
in same store sales showed that the honeymoon period for Starbucks in
South Africa was over, despite the fact that Starbucks products tend to be
more expensive than its rivals in South Africa. It's still ranked number
four in the specialty coffee market, which is valued at 77.6 dollars in South Africa. Local coffee companies open
in South Africa. Long before Starbucks did, and analysts
say some chains had already nailed Starbucks casual European style. You know, there was a or there
is an established coffee culture and it's not so easy just to come in and
say, hey, you know, you know, we're the new kids on the block and with
better value proposition, I think, of a Starbucks coming to South Africa. You know, 20 years ago
would have been very different. But I think, you know, now a
Starbucks coming to South Africa is definitely a little bit
of a sowhat factor. Other international coffee jeans have tried
and failed to expand in South Africa. Northeast favorite Dunkin Brands
open stores there in 2016. But in February 2019, it's licensors said
it would close all Dunkin Donuts and Baskin Robbins there
due to poor performance. Krispy Kreme opened stores in 2015
with a much more modest golden Starbucks to open 31
restaurants by 2020. McDonald's expanded to South
Africa in 1995. It has two hundred and eighty
five restaurants in South Africa, compared to 13 Starbucks. In 2018 McDonald's said it would
invest one hundred and five million dollars in South Africa over
the next five years. Starbucks biggest problem in South Africa
is how expensive its products are. Starbucks in general and this
is probably where the problem lies. They are a bit more
expensive than all other competition. So, you know, upfront 15 to 25
percent more expensive than other chains. So all just good coffee. And that's the problem. You know, you come with a premium
and that's what people are attracted to. That scene is your
pricing is expensive. You saw customers actually afford it. Starbucks is aimed at middle and upper
class consumers, a segment which is small in South Africa. The World Bank says South Africa has
one of the highest inequality rates in the world. From 2008 to 2015, a
bout 20 percent of the population was considered middle class, which is
considerably smaller than in other countries. The average salary in South
Africa is about 1400 dollars a month or about 17,000 dollars a year. You know, I'd say probably a price bracket
is between like 22 to 35 rand. And that would be like a safe zone
that can kind of say that's what most people pay for a coffee or something. Starbucks is well above that. And so I think that for for the
majority of people, that's like a great once every now and then. But it's not something they're
going to purchase every day. A small latte at Starbucks costs about
60 percent, more than the same item at McDonald's. South African consumers were
also strapped for cash when Starbucks started expanding
into the country. South Africa entered a recession for the
first time since 2009, and the recession didn't just hit consumers. The costs of doing
business also went up. Unfavorable exchange rates meant it was
more expensive to buy the equipment and supplies needed
to run a Starbucks. Taste also blamed higher fuel prices
and increased taxes for its poor financial results in the
first half 2018. That meant customers in South Africa
weren't spending as much on non-essentials like upscale coffee. And remember, Domino's and Starbucks,
South Africa Connection Taste Holdings by Angelos were a
huge problem for Starbucks. The company has seen big losses and
carried high debt, which became clear when shares took a nosedive in 2017. Taste chairman called 2018 one of
the most trying and disappointing years in tastes history. While Starbucks stores are profitable,
Taste just couldn't justify the expense of opening any new ones. Taste spent 10 million rand or just
over 650 thousand dollars to open its flagship store in Johannesburg. Analysts say local competitors typically open
stores for much less or just about 100 thousand dollars per store. Starbucks has the reputation of being
a luxury brand, so customers expected a lot. The cost of perks
like free Wi-Fi, lots of beverage options and large clean spaces with
room to hang out added up. Plenty of coffee chains in
South Africa offer similar amenities. But analysts say opening such expensive stores
in a short time period puts too big of a
financial strain on taste. If another more stable company had
allowed Starbucks expansion in South Africa, it may have gone differently. If Starbucks was part of a bigger group,
I don't think we would be having this conversation. The local stores have
opened already and the finance issues will be easier
to growing the brand. Taste holdings refused requests for
an interview for this story. Starbucks spokesperson Reggie Borges has
said in a statement that Starbucks and Taste are optimistic about
the brand's opportunity in South Africa. Borges noted that taste opened
its 13th Starbucks in 2019. But that's still a ways off from its
full market opportunity of up to 200 stores. There are a lot of forces
where he and Starbucks in South Africa, but taste seems confident
it can succeed there. Remember those lines around the
block When Starbucks first opened? Taste, it recognized Starbucks was
in a honeymoon period. Once stores have been open for a year,
Taste got a realistic sense of how much consumers would spend at Starbucks,
and the numbers didn't look good. With same store sales dropping 19
percent in fiscal year of 2019. But Taste has a plan to
get Starbucks back on track. In 2018, Tastes went through
a huge executive restructuring. The company appointed new executives
with experience operating global brands in South Africa, including
a new CEO and COO. And if anything, the old management
team might be being a bit lax on their spending on new stores. So if it cost them between 5 and
8 million rand stores or half a million dollars per store. A lot
of money considering its competitors stores for about one
and a half million. . The new leadership team has
been open with Starbucks about their financial problems in South Africa. Taste has even gotten positive feedback
from Starbucks about its new business model. Taste plans to keep building
new stores in South Africa in 2020. It says it will. Stores better suited to
the local market. That means stores will be
smaller and more visible. They'll also be concentrated in
four major cities Johannesburg, Pretoria, Durban and Cape Town. And this time around, Taste will
consider drive to store formats that cater to the country's
huge car culture. Competitors have already capitalize on this
trend by selling coffee at gas stations or near office complexes. But many of the Starbucks
open now are in malls. I think there's some things like, for example,
not being in a mall I think that's a great start. So location is
important because at the end of the day, like the South African driving
terminal, to get coffee is probably not an hardiness. We drive every we like to walk
some way is very like horrid intensifies. Even if it's played by it's
still a thing we'll drive up. Taste got a huge cash injection from
a multimillion dollar loan in 2018, but the company says it will need
more cash than that to keep opening stores. Taste said it will open six
new Starbucks in fiscal year 2020 and in the long term, its
goals are still high. It wants to build 200 to 300
Starbucks in South Africa in 10 years. Experts say Starbucks needs more revenue
and lower operating costs to work in South Africa. Can Starbucks South
Africa survive or will it follow Dunkin's path and become another
casualty in the international coffee wars?
in Cape Town CBD where I live
*there are 3 seatlle coffees, one directly outside, one opposite the road, and one 10 minutes walk away
*besides seattle, there are two other coffee shops directly outside where I live
*there are plenty of other coffee shops in the area, Truth, Deluxe, Bean There, Clarkes, etc etc etc- theres a lot of coffee shops in other words
so yeah, when I read the news of starbucks opening in SA a few years back, I did make a similar comment on a different forum, they simply have way too much competition here
also dunkin doughnuts were never going to survive selling doughnuts at R14 a pop
I don't think they made it in Australia either, maybe it's partly climate related. Nice sunny weather = less coffee consumption
If the video is accurate about the expansion plan, interesting. Good to see brands still looking at the market as viable.
But I think they’re wildly underestimating Vida and Seattle and how easy it will be to take market share. I also think they may be overestimating the local desire for take away coffee a bit - particularly a premium take away coffee.
Plus it’s just a terrible tasting coffee. The macdonalds of coffees
I've been curious about this topic for a while, this video explained it well.
Part of me finds it kind of sad that a foreign
companybrand wants to open 200-300 new stores. On the other hand it will obviously be beneficial gettingFDI andjob creation. Also that despite how negative many South Africans (including myself) can be about our economy, multinationals seem to be optimistic about making money here, this is not the only company doubling down on South African investments I've seen recently.It also makes me wonder how our local chains are reacting to this competition.