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  • 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 goal than

  • 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, a cappuccino, you know, are from 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?

Starbucks and Domino's.

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Why Starbucks Is Struggling In South Africa??

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    day posted on 2020/03/22
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