Cash-strapped Starbucks owner still has a Taste for profit

A“brutal and sustained” drop in consumer spending has knocked Taste Holdings to a first-half operating loss of R 73.3m. The owner of Starbucks, Domino’s Pizza, NWJ and Arthur Kaplan says any operational gains have been overshadowed by consumers snapping their wallets shut. Taste is also trading under cautionary as it considers how to raise cash. Business Day asked CEO Carlo Gonzaga how the company was going to dig itself out of the hole in which it found itself.

There are two key bits of the puzzle we’ve got to solve, which we knew about at the beginning of the year [2017]. The one is that the food business is too highly geared, so we have to pay down our long-term debt, and we also need to get capital to grow the Starbucks and Domino’s stores. Restructuring our balance sheet is a necessity, which is not particularly new news, but that is the step number one. Step number two, which we are comfortable with, is that our Starbucks and Domino’s stores are profitable and rolling out more of those stores will get the food division firstly to a cash breakeven and, ultimately, to an operating profit status. So that is still the plan.

Your target is to be cash breakeven in the second half of 2018 in food. Will you have the capital to get to that state?

That’s the flavour of the cautionary that went out — we’ve got proposals that do solve that problem and we’re currently evaluating these. We will have more information about it for the market and shareholders in about four weeks.

Do you feel sympathetic towards shareholders who feel that Taste has burnt through cash?

We, of course, serve shareholders as well as other stakeholders. The journey we’re on was always going to get us to this point in terms of rolling out the brands. The bit we didn’t count on was the current economic decline and how that’s impacted business. Do we feel sympathetic? Of course we do, I’m a shareholder myself.

Has Taste been irresponsible with the cash raised from the market?

We certainly don’t believe that we have.

But it seems you’ve bitten off more than you can chew. Would you defend everything you’ve done in the last couple of years?

Looking at everything in hindsight is always a lot easier and I think along the way we made a number of decisions that, when viewed at the time, were rational decisions to make. If we could turn back the clock, we certainly had too much debt in the food business for what we were trying to do — I think we have already admitted we would have rolled out Domino’s stores slower. So, that we would take on the chin.

What is the outlook for luxury goods?

The luxury goods business is quite cyclical and that first quarter was pretty brutal. It’s come back in the last quarter but the things that drive that are still at play: consumer sentiment is quite up and down and will be until December. But the second half of the year in luxury goods is always better.

Are you obliged, under the master licence holder agreements you have, to open stores at a certain rate, irrespective of trading conditions?

Starbucks and Domino’s are … very supportive of what we are doing here and also cognisant of what SA is going through right now.

How are your conversations with shareholders?

It wouldn’t help for me to add more conjecture … when we finalise our (restructuring) options, then we’ll disclose all of the details.

But do they back you?

To date, certainly they have; we’ve got some anchor shareholders and we’ve all signed up for this together.

Would you undo the Arthur Kaplan deal, given how poorly jewellery is doing?

Not a chance. It’s a great business and a great asset in a market-leading position. No, we wouldn’t. When we bought Arthur Kaplan, we didn’t have Starbucks: we were one of many in the Starbucks queue, so we certainly had no idea we would get the Starbucks licence at that time.

You sold a couple of assets, such as the dough manufacturing facility for R28m. How does that affect operations?

Given that we now have licensed brands, manufacturing is no longer as profitable as it would have been in our hands. Strategically, there was a bit of a mismatch because we now have access to global supply chains. Tomato sauce is a good example: we import pizza sauce from Portugal – we still cannot have it made by any company in SA cheaper. Having got the Starbucks licence, with the range of food products it has, we also took the decision that we don’t want to complicate our lives in the early days of our Starbucks roll-out by trying to make 65 different line items.

So it’s quite a divergence from, say, the Famous Brands model …

Remember, we’ve got corporate stores so we can’t make a profit by selling to ourselves. All we can do is find the lowestprice manufacturer at the best quality. A distribution centre is just actually a cost centre. We’ll still distribute to all our stores but we don’t own a manufacturing facility. Where we find ourselves now is that we can invest that capital at far greater returns than investing in [such a] facility. We’re not in the property business.