Taste Holdings, which holds the licences in SA for Starbucks and Domino’s Pizza, said on Friday it planned to exit its food business after becoming the latest company to realise it had bitten off more than it could chew in trying to make a profit from US franchises in SA.
Taste will join Grand Parade Investments (GPI) in giving up on US franchises, with that group announcing in February it was disposing of Dunkin' Donuts and Baskin-Robbins to channel capital into Burger King.
Analysts said the disposal highlighted the pressure on food retailers amid a tepid domestic economy and the difficulties of getting new foreign chains off the ground in a market already full of local players.
Taste said on Friday its board had established it would need about R700m to expand its network of chains sufficiently to reach its profit targets, and intends to dispose of Starbucks, Domino’s, Maxi’s and The Fish & Chips Co.
To achieve positive cash flow, Starbucks would need to expand to between 150 and 200 cafes, while Domino’s would need between 220 and 280 restaurants, the company said. As of the company’s year to end-February, it had 12 Starbucks stores and 81 Domino’s Pizza outlets.
“After careful consideration, following months of operational reviews and canvassing potential partners and capital providers on this long-term objective, it has become evident that the capital investment required for this expansion strategy cannot be secured, given the current structure of the business and existing market conditions,” Taste said.
After the disposal, the company would become a luxury retail group consisting of NWJ, Arthur Kaplan and World’s Finest Watches.
Taste Holdings CEO Dylan Pienaar could not divulge if buyers were interested in pizza chain Dominoes, Maxi's and the Fish & Chips Co.
“We are in a very delicate stage in terms of a number of negotiations … so there is not lot more I can really add at this stage.”
He confirmed that nonexecutive director Adrian Maizey was involved in a consortium that was buying Starbucks.
While the rollout of Domino’s had used the infrastructure of Taste’s original Scooters chain, Starbucks had been a greenfields development, and the company had taken on too much, said Keith McLachlan of AlphaWealth.
“No matter how fantastic the brand, if you are starting in another country it is one store, then two stores. It is a very linear process and you need deep pockets and high levels of expertise,” said McLachlan.
Companies taking on new franchises from overseas faced a lot of risk and were entering a market already dominated by high-quality players, such as Famous Brands, he said.
Small Talk Daily’s Anthony Clark said Taste had neither the expertise nor money to bring in two international franchises simultaneously, estimating the value of the investment losses to be about R1.4bn.
McDonald’s had taken eight years to break even and it took GPI five years, and lot of money, for Burger King to break even, said Clark.
It made sense the company was selling one of its business divisions, as it did not have the capital to run both, while there were zero synergies between selling watches and coffee, said Michael Treherne, portfolio manager at Vestact Asset Management.
“For Taste to still be around in the long term, they desperately needed to find a way to cut their losses and debt burden. Selling the food division seems to be the way to do that,” he said.
In a separate announcement on Friday, Taste said it had entered into an agreement to dispose of its Starbucks franchise business for an aggregate consideration of R7m.
Taste’s share jumped 14.29% to 8c on Thursday, paring its 2019 loss to 20%.
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