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.

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