Starbucks shines in Taste group’s dim galaxy
But US coffee chain’s bucks fail to halt share plunge
US-BASED coffee group Starbucks may be the saving grace of quick-service restaurant group Taste Holdings, as the group struggles to find its feet after spending on the roll-out of its international brands.
Taste, which owns the licensing rights to the Starbucks brand in Southern Africa, has had its share price falling 26.4% since the opening of the first Starbucks store in April last year. And since the group opened its first Domino’s Pizza in October 2014, its share price has shed 35.14%.
In its annual report, Taste Holdings reported that operating profit was down 66% to R19.8-million and core earnings before interest, tax, depreciation and amortisation were down 35% to R47.3-million in the year to end-February 2016.
At the time of the report, Taste Holdings CEO Carlo Gonzaga attributed the loss to the expansion of Starbucks and Domino’s Pizza brands in South Africa.
But this week, Vunani Securities small- to mid-cap analyst Anthony Clark said the losses were a result of the group taking on too much, too fast.
“Everyone thinks Taste is doing well because of Starbucks . . . but they only have three stores. Three stores making a few million rand is not going to bail out an entire company. The bulk of their business remains Domino’s Pizzas, which is not doing as well as they expected because of the delays of store roll-out,” said Clark.
At the end of 2016, Taste directly owned 26 Domino’s THE BUCK STOPS HERE: Carlo Gonzaga, CEO of Taste Holdings, the company which brought Starbucks to the country, is seen at the Rosebank store at the launch of the Starbucks Rewards programme stores. It had planned to expand to about 40 outlets by the end of 2016, by opening new stores and converting the Scooters and St Elmo’s brands to Domino’s.
The group also has 48 franchise stores.
For the 2017 financial year, capital expenditure of R68.6-million has been approved for new Starbucks and Domino’s outlets, as well as new jewellery stores under the NWJ and Arthur Kaplan brands and revamps of existing stores for all of Taste’s seven brands. This expenditure will be funded from current reserves and facilities.
The group has incurred additional debt of R122-million, but R328-million in additional equity was raised during the year to finance both Domino’s and Starbucks projects, as well as corporate stores in the luxury goods division.
Speaking at the launch of the Starbucks Rewards programme on Wednesday, Gonzaga denied that Domino’s was not performing as well as expected.
“We think Domino’s is an exciting business. We’ve had a great year last year, but it’s a greenfields business and what a lot of people don’t immediately see is that the ability to bring Starbucks was partly because we had Domino’s.” He said Domino’s was a value-add business to the Starbucks brand as Taste had established an e-commerce business in 18 months.
“So if we had to launch Starbucks Rewards from scratch without having that team in place, we would have never got off the ground.
“We accept that [criticism of Domino’s performance] in the short-term view that the analysts have. But that’s not my job. My job is to build long-term shareholder value for a business that is sustainable for all stakeholders, partners, suppliers and shareholders.”
Nolwandle Mthombeni, an equity analyst at Mergence Investment Managers, said Taste had not been investible for the past three years. “Taste got the rights to change the name of St Elmo’s brand to Domino’s, and they spent a lot on capex and they also invested in the Starbucks brand, so they were burning cash quite a lot.
“But as investors, we sit on the sidelines and wait until management speak on the plans they have. They haven’t been allocating capital very well.”
Mthombeni said stakeholders needed comfort from management in terms of long-term plans, but if they were not addressing the problems investors had, then it obviously was not a problem for them.
“There are many companies that talk to investors and say that this is the five-year plan” and were effective in telling investors when they expected to break even, she said.
Clark said Taste had spent more than half a billion rands of shareholders’ money since it took on Domino’s and Starbucks but had not produced a cent of profit. “They try and distract us from what is really going on. They’ve been loss-making for years, they are selling a dream of making money, and that dream has yet to turn into a reality. How much loss on the investment will you have to
They are selling a dream of making money, and that dream has yet to turn into a reality My job is to build long-term shareholder value for a business that is sustainable
make? Given the company’s market value — it’s only about R800-million — he has spent 60% of his market value investing [in] his businesses, which are not making effect,” said Clark.
But it seems that Gonzaga plans further expansion. When asked about further licensing agreements with international brands, he said: “We are always looking and we’ve got the benefit that for anybody wanting to come here, they are all calling us . . . so bringing in a new brand now would even be more profitable because I don’t need to build my distribution centre or my senior leadership team.”
But for a company whose share price over the past five years has lost about 13%, it’ll have to do more to convince investors.
“This is a start-up business for us and we accept that when you go through any start-up business you are going to make losses,” Gonzaga said.
“It’s not easy doing this in a listed environment. There are a lot of critics. But we don’t mind that because our job is longterm value creation.”
The group’s brands also include the Fish & Chip Co, Maxi’s and Zebro’s Chicken.