Taste loses its appetite
HARD SELL: WHO WOULD BE MAD ENOUGH TO BUY THESE ASSETS IN FIRE SALE?
Domino’s and Starbucks will need at least R700m – and even with that, positive free cash flow is seven to eight years away.
Perhaps more surprising than Taste Holdings announcing the sale of its Starbucks master franchise rights for South Africa, together with its 13 stores, is the price – R7 million. This is little more than the average cost of fitting out one of its stores and close to half of what it cost to build the launch store in Rosebank.
Make no mistake. This is a fire sale and all the food businesses must go.
The decision to licence Starbucks was always questionable. Not because South Africa doesn’t have a coffee culture, but because the strategy was flawed. First, it required a boatload of capital. The eye-watering rent made getting the stores to profitability harder than it needed to be. And once they were built, keeping them busy turned out to be rather difficult.
Inconvenience
Walk around any global city. There is a Starbucks on every second corner. These stores talk to convenience; they are not destinations in their own right.
Starbucks also suffered from the perception that its coffee is expensive.
The subscale business has been struggling. Last year, it generated R108 million in sales. The operating loss was R22.5 million.
The problem is clear when one excludes new stores. The nine stores that had been trading for more than a year only generated R51 million in turnover – on average, or under R500 000 a month.
The problem is even bigger at Domino’s Pizza.
System-wide sales for its 81 stores was R267 million, with an operating loss of R74 million.
The store network is not profitable on an earnings before interest, taxes, depreciation and amortisation level. One wonders if it ever was.
Franchisees have bailed
During the difficult rollout of Domino’s, Taste has lost tons of franchisees.
Getting their buy-in for the transition from the successful Scooters and St Elmo’s brands was hard. And as it became clear that Domino’s was struggling, Taste was forced to effectively buy up stores to prevent these from failing.
At the end of February, it owned 58 of the 81 stores – seven in every 10.
The rollout of Domino’s and Starbucks displayed a stunning naivety, helped along by an economy that simply isn’t growing.
Taste’s (Sean Riskowitz’s) plan required between 150 and 200 Starbucks outlets to get to positive free cash flow.
This wasn’t anything we didn’t know before; the plan was to get to around 150 stores – a number not plucked out of thin air.
These investors better have a few hundred million lying around.
Whoever is brave or mad enough to buy Domino’s is going to need to get this business to between 220 and 280 outlets. That’s three times its current footprint.
Taste says that, together, Domino’s and Starbucks will need at least R700 million – and even with that, positive free cash flow is seven to eight years away.
Hilton Tarrant works at YFM