Starbucks local operator calls off expansion plan amid high operation costs

SOUTH AFRICA – Taste Holdings, the local licensee for Starbucks, has halted its ambitious expansion plans due to high operating costs and tight customer budgets, reports Business Day.

Taste Holdings has so far opened 12 Starbucks outlets across Johannesburg, Pretoria and Durban and had hoped to have 45 stores open by 2020 – with a peak target of 150 countrywide.

However, these plans have now been ruled out as the company struggles to control operational costs and debt.

South Africa’s middle-class has been under pressure from slow economic growth, while the country is one of the most economically unequal in the world with 27% of the population jobless.

Earlier on, taste announce that it would pause the expansion plan saying although the store network is profitable, it is not generating sufficient turn over compared to the investment.

It costs an estimated $350,000 to $550,000 to open each new store although new stores were not opened in the country’s tourist hub.

“Places like Cape Town are affluent enough to sustain a few stores but the coffee is expensive, which makes it unaffordable for a large part of our population,” Trehene an analyst.

The company sources coffee from nine countries in Africa along with small-batch reserve coffees from around the world resulting to increased costs.

However, cost-cutting has been considered challenging due to the prime locations Starbucks stores, branded products and the international standardisation.

The South African coffee market is also competitive with companies like Bean There, Father Coffee and many independent outfits targeting middle-class consumers in cities.

In its latest financial report, Holdings said that its food divisions operating costs increased by 7% largely associated with the operating costs of Starbucks’ double expansion.

Taste’s entire food division, which includes brands like Domino’s Pizza, has failed to make profit since 2015.

The firm has been to the tune of $27 million to pay off its debt has also secured a $14 million loan from its now majority shareholder, the Riskowitz Value Fund, and may seek fresh refinancing in the near future.

But Taste says it remains optimistic and hopes that after securing long-term funding, it will reconsider its Starbucks plans.

Starbucks, which operates more than 22,000 cafes worldwide, has a presence in only two other African countries – Egypt and Morocco.

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