Starbucks SA still brewing big plans for post-Covid growth
● Starbucks in SA is still targeting the launch of 75 outlets in the country within six years, despite the disruption of the Covid-19 pandemic.
Adrian Maizey, who heads Rand Group, the company that bought Starbucks’ assets in SA from JSE-listed Taste Holdings in December, said the key to success with the Starbucks model is to “build scale”, so over the long term the plan is to ramp up the development of new stores across the country.
But, he said, it is important when pursuing the rollout in a post-Covid world to sign rental agreements linked to turnover growth rather than the fixed escalating contracts that are the norm.
Speaking from Los Angeles where he is based, South Africa-born Maizey said turnover-linked rental agreements, in which the landlord receives the rent on a sliding scale depending on how well the retailer does, were a “win-win” for landlords and tenants, especially when economies and consumers are facing strain.
“The business model for malls has to change for the landlords. I cannot commit to the same rate I had before because my costs have gone up. If we remain on the same terms we were on before, it’s not a viable business for us and it’s not a viable business for them.”
Maizey said if property owners were adamant about pursuing fixed rental agreements with escalating rates regardless of the trading environment, they would fail along with their tenants.
This would simply pave the way for new property owners to come who would be more prepared to negotiate.
Maizey, who was a shareholder in Taste and sat on its board prior to making an offer for Starbucks’ South African assets, said that when he questioned the average 7.5% annual escalation rates he was told this was the norm.
“When you sell that to a foreign investor they look at you and ask why in the world would you ever agree to an annual escalation rate of 7.5% when your prices are not increasing at 7.5%. You are guaranteeing the performance of the store will deteriorate over time.”
Maizey said that on the existing leases for Starbucks outlets in SA, the group is negotiating with landlords for a rental reprieve for the months it has been unable to trade, with some property owners willing to negotiate for deferrals, while others were not.
One advantage the group has in SA is that it is “small enough” to negotiate better terms on leases and will be held back less by legacy agreements in the future.
“If I had 200 stores all based on fixed rentals, that is a massive problem, like it is for our competitors. How do they negotiate 200 leases?”
He said that even if he can’t get better terms for the 16 existing agreements, he can negotiate on a clean slate for new stores to secure more favourable rates. Landlords are also likely to be more amenable to rental agreements favouring tenants as they try to mop up vacancies in their property portfolios.
Maizey said the local outlets were in good shape going into lockdown as the 13 original stores acquired were all profitable.
The problem was “the above store costs” associated with Taste’s listing that were “so high they ate all the profits from the stores”.
Maizey said Rand Group had taken out 25% of the overhead costs within a month of running the business.
In the three months leading up to March, the group closed one outlet and opened four, bringing the total number of stores to 16.
“If you look at those first three months we owned the business, we far outperformed the investment model.”
He said the operating costs required to run the Starbucks business were actually lower than the initial due diligence had shown.
“The operating expenses include how many people you have at headquarters and how many people you have in store. Starbucks here was set up for a platform that had 75 stores, except you only had 16 stores. It was like trying to build the platform for Rome before Rome is there.”
Maizey said Rand Group and its financial backers, which includes friends he has known for 30 years, paid R7m for the physical assets, but this included liabilities.
Taking this into account, the amount ultimately paid for the Starbucks assets in SA was north of R30m.
He said it was difficult to predict how the months ahead would play out.
“I don’t know when we will be allowed to open and sell coffee. The president [Cyril Ramaphosa] said we can go to level 3 and you can “grab and go”, but does that allow us to really open our stores?
“I don’t know. I’m still trying to figure that out. There is too much uncertainty about what the regulations are and whether there will be enough traffic to make economic sense.”
Maizey said there had been zero business for the group since March 27 when the lockdown began, and in the two weeks leading up to it trading had been constrained. As a result, sales for March were 60% of what they ordinarily would have been.