Starbucks SA’s growth plans
Rand Group aims to climb aboard SA’s espresso express
● The new owners of Starbucks SA are going big with plans to grow the business, aiming to have 75 stores in the next five years, which would give the business more muscle to negotiate with suppliers.
Starbucks SA has 17 stores, of which four were opened in the past week alone. Starbucks SA is now operated by the Rand Group, headed by Adrian Maizey. Taste Holdings sold its 13 Starbucks stores to Rand Group for R7m, which came with contingent liabilities and working capital requirements of about R300m.
Taste has also sold Maxi’s and The Fish & Chip Co — after the company calculated it would need at least R700m to generate a positive cash flow from these businesses. Since 2014, Taste Holdings has spent about R1.4bn, raised from shareholders to grow the group.
But rather than cut back, the plan for Starbucks now is to accelerate.
“We have no buying power because we don’t have scale,” said Maizey, an ex-South African who’s come back to run Starbucks and plans to obtain better prices from suppliers, operate smaller stores and on a different rental model.
The new owners plan to have fewer large flagship stores. Discussions are under way with landlords to reduce the large spaces of existing stores, and open up smaller outlets that are more accessible to consumers on foot or by car. They will continue to open stores in the key urban areas, including Johannesburg, Cape Town and Pretoria.
Maizey says the new wave of Starbucks shops will not only be more compact, but also cheaper to get going. Whereas the previous owner had to fork out about R6m for each of the first 13 outlets, the four shops added in the past week cost closer to R5m each. The goal is to get this to about R4m.
The new owners are looking to partner with property groups to find a different rental model that is partly based on turnover. At the same time they will close stores that are not economically viable, said Maizey, adding that no decisions had yet been made.
“We’ve got to get this business to scale. Right now we’re mall located and we should be able to walk outside and make it accessible for people. Starbucks is not a coffee company per se, it’s a people company that serves coffee.”
As for other fast-food brands that have not been successful in SA and in some cases have exited the country, such as Baskin-Robbins and Dunkin’ Donuts, he said that was possibly more a question of execution rather than brand problems.
He said what gets lost in the noise is that Starbucks competes on price for a straight cup of coffee, but stores offer something more than coffee and an experience. “We are a luxury brand.”
They plan to localise the menu. But it’s a challenge to find a local supplier that meets the high-quality standards for Starbucks food offerings.
Iain Evans, publisher of Coffee Magazine, said new coffee roasteries were opening in SA because the demand for quality coffee from the hospitality market was increasing. There was also the start of entry-level coffee services in townships and rural areas.
Starbucks had an impact on the market, said Evans. As one of the world’s most recognisable brands it brought attention to the sector, especially from the younger market. “It’s a mass-market, very accessible brand and their stores are identical to the stores overseas and that appeals to a lot of people.
“I can’t say if it’s been financially successful in a few short years in SA because stores like that take huge capex to begin with and you need to sell a huge volume of beverages to make that back.”
Sebastian Schneider, MD of the Motherland Coffee Company, said coffee in SA was a growing sector, particularly speciality coffee. “There is a growing market, and with this, growing competition as well.”
Motherland has been going for nine years, and when it started “chains were Vida, Seattle and a few boutique speciality coffee places. The market for coffee has grown immensely.” Motherland has 13 outlets, nine on the high street and the rest are corporate, plus one partner store in Cape Town’s CBD.
As for Starbucks, Schneider said the fanfare was bigger than the impact on the ground. “But they’ve done something in terms of ploughing new ground to folks who weren’t necessarily speciality coffee drinkers. They have to some degree grown it to a more commercial market where speciality coffee was previously more niched.”
Demand for coffee in SA continues to be dominated by instant coffee this year, according to research by Euromonitor International, a market research provider.
Rivoningo Hlope, research associate at Euromonitor, said this was supported by consumers’ changing lifestyles, particularly among the younger generation, which was increasingly opting for convenience to suit busy lives.
The local coffee market, according to Euromonitor, is worth $270m (R3.89bn) this year, up from $165m five years ago.