Serious indigestion

Taste CE and founder Carlo Gonzaga is elated, declaring the first two flagship Starbucks stores in SA a roaring success.

They were opened under an exclusive development agreement with the global coffee giant.

“Customer reaction has been way beyond our wildest expectations,” says Gonzaga.

“More than a month after opening the first store in Rosebank [Johannesburg] there are still queues outside in the middle of weekday afternoons.”

Gonzaga is thinking big on Starbucks.

“We see its market as capable of supporting 150-200 stores.”

But to establish a chain of company-owned Starbucks stores also means spending big bucks.

The 485 m² Rosebank store and the 300 m² store in Midrand’s new Mall of Africa set Taste back upwards of R10m each, says Gonzaga.

“Only about 10% of our stores will be flagship stores,” he says.

“The others will be what we term core stores of about 100 m² costing R3.5m-R4m each to establish.”

It puts the total cost of establishing a 200-store chain at somewhere north of R800m. But it won’t happen overnight.

“It is a big responsibility to bring a brand like Starbucks to SA,” says Gonzaga.

“We will open one more store in 2016 and more in 2017 but we do not want to rush things.”

Anthony Clark, a Vunani Securities analyst, has more than a few concerns.

“They admit they took on too much at once,” he says, referring to Domino’s Pizza, Taste’s other big global brand alliance venture. Getting Domino’s up and running in SA was certainly no small-change setup.

“It has involved big capex to establish its supply chain,” says Gonzaga.

The cost of converting Scooters Pizza and St Elmo’s pizza stores to Domino’s brand stores is also weighing on Taste.

On Taste’s plate are the likes of contributions to franchisees to convert their stores, project management fees and impairment of the Scooters and St Elmo’s brands and goodwill.

So far, 69 Scooters and St Elmo’s out of a total of 140 have been converted to Domino’s stores since the first Domino’s was opened in December 2014. The strategy called for the conversion of 100 stores by the end of Taste’s year to February 2016.

“Taste also concedes it overengineered its central kitchen,” says Clark. “They are well under capacity utilisation as the rollout of Domino’s has not gone as well as they wanted.”

Seemingly reflecting this, Taste has embarked on what Gonzaga terms an “aggressive” buy-out of St Elmo’s and Scooters franchisees.

The financial burden of Starbucks — which has entailed big spending on staff training, project management and marketing — and the Domino’s rollout shattered Taste’s results in its year to February.

At the taxed attributable profit level the group reported a R75.8m loss while adjusted core