Starbucks South Africa Rollout Plan Curbed by Funding Needs

Updated on
  • Taste plans to find way to free up cash in 4 weeks, CEO says
  • Company needs more Starbucks outlets to offset startup costs

South Africa's first Starbucks store, in Johannesburg.

Photographer: GIANLUIGI GUERCIA/AFP/Getty Images

Starbucks Corp. South Africa operator Taste Holdings Ltd. plans to finalize a way to free up cash over the next four weeks as the retailer looks to repay debt and continue the rollout of the U.S. coffee chain in the country.

The company needs a fresh approach to fundraising after abandoning the sale of its jewelry and high-end watch business earlier this year. On top of a looming 2019 deadline to repay 225 million rand ($17 million) of bond debt, Taste needs to keep opening Starbucks stores to offset initial start-up costs.

There are “a number of options, a mix of equity and debt, and I think we will resolve all that and finalize the valuation of the proposals in the next four weeks,” Chief Executive Officer Carlo Ferdinando Gonzaga said by phone.

Taste’s loss widened to 65.8 million rand in the six months through August from 34.4 million rand a year earlier, it said in a statement Thursday. It sees the food division, which includes Domino’s Pizza, Maxi’s burgers and The Fish & Chip Co., reaching cash break-even during the second half, but only if the South African consumer spending environment doesn’t worsen and the planned recapitalization goes ahead without a hitch.

Having secured the rights to Starbucks outlets in South Africa in July 2015, Johannesburg-based Taste has six of the stores and plans to open four more this year. The total of 10 is at the lower end of management estimates, the CEO said, as the company takes a conservative approach to openings amid the need to raise money.

‘Opening Problem’

While the individual Starbucks stores are profitable, “the challenge now is to grow those stores and to keep on opening in profitable locations to the point that there are enough to cover the overheads,” Gonzaga said. “So it’s less about a trading problem than it is about an opening store problem, which then has a capital requirement.” It costs Taste about 5 million rand to 6 million rand to open a store, the CEO said.

Food and clothing retailers and restaurant operators are struggling in South Africa as weak economic growth and unemployment at 28 percent have resulted in what Taste described as a “brutal and sustained decline in consumer spending.” Growth in final consumption by households more than halved to 0.8 percent in 2016 from a year earlier, according to central bank data.

The stock fell 3.2 percent to 90 rand by the close in Johannesburg, extending the year’s slump to 52 percent this year. That compares with a 5 percent drop in the 120-member FTSE/JSE Africa Fledgling Index index.

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