Taste looks to the long term with costly brand investments
THE price of a cup of coffee may be coming at a high cost for Taste Holdings as its agreements with big international brands are putting strain on its balance sheet.
Taste Holdings bought the franchise rights to US-based coffee house Starbucks for an undisclosed amount last year, and Taste said Starbucks had exceeded expectations since the first outlet was opened in April.
But the capital-intensive investment in the global franchise has put the group under strain. Taste Holdings’ reported loss for the six months to August rose by 16% to R34.4-million.
Byron Lotter, a portfolio manager at Vestact, said Starbucks’ brand strength would enable it to beat market expectations, but investors would have to be patient as they were not going to see rewards immediately.
“Like we’ve seen with Burger King and Grand Parade, the individual stores are successes but they [Taste Holdings] are using money from one store to open another, so we are not going to see the fruits for a while,” said Lotter.
Taste Holdings has borrowing and bank overdrafts of almost R300-million, but in its four months of trading the Starbucks brand managed to wring a combined revenue of R18-million from its Rosebank and Mall of Africa outlets and positive earnings before interest, tax, depreciation and amortisation.
“They don’t have the money to open up more aggressively than they are already doing and they have an exclusive agreement with Starbucks, so they have to do it themselves,” said Lotter.
In the period, operating losses increased by 32% to R41.2-million, while the headline loss per share came in at 9c, compared to 10.5c the previous year.
Despite this, Lotter said, Taste had learnt a lot from its relationships with its international brands, which include Domino’s Pizza and jewellery brands.
“The sort of foreign investments we are seeing from the luxury business is great because it shows that there is more appetite for the consumer.”
Taste Holdings CEO Carlo Gonzaga said this week that the group had been investing heavily in the growth of its international brands such as Starbucks and Domino’s, but its jewellery business, which includes brands such as NWJ, Arthur Kaplan and World’s Finest Watches, had been a core driver of the business.
“We’ve had this great performance because it grew 25% compared to the 15% growth last year [but] it’s a big base we are working off and we are certainly starting to see some weakness in consumer demand in the entry-level jewellery segment,” said Gonzaga.
“On the food side, we certainly have to work hard for our sales, but our Fish & Chip business has seen positive in-store sales of 5%.”
He said the group planned to open its first drive-through outlet for one of its food brands, which had great potential.
Despite the pressure big brands were putting on the business, Lotter said Taste was “the perfect buying opportunity” for investors. But, he added: “It’s definitely risky because of the uncertainty of whether they can implement their strategy successfully — and investors don’t like uncertainty.” NEW BREW: Customers at the official opening of South Africa’s first Starbucks store, in Johannesburg