Starbucks Coffee Company is working closely with cash-strapped Taste Holdings to address problems the local company is facing in rolling out the coffee brand in SA.
Taste, which has the master licence agreement for Starbucks in SA, is facing a funding crisis and this week hosts a shareholders' meeting to raise funds yet again.
In response to questions on its agreement with Taste, the US-based company said: "We are working closely with Taste to review their plans for maintaining and growing a healthy store portfolio, ensuring those plans are disciplined, thoughtful and reflective of the external conditions shaping the local retail market."
The spokesperson added: "We are reviewing business growth plans with Taste, not the contract . We remain encouraged by the opportunity for our business in SA."
When asked what penalties Taste faced if it did not comply with the conditions of the agreement, the spokesperson said "other details of our business relationship with Taste Holdings are proprietary".
Taste CEO Tyrone Moodley and acting CFO Dylan Pienaar were not available to comment this week as they were on leave. On Friday Taste announced the appointment of Hannes van Eeden as CFO.
In November last year, Taste said it had decided to "pause the expansion of the Domino's and Starbucks network" to retain cash and "to review the store operating models ... and capital required to deliver an acceptable return on investment". Domino's was loss-making, and "whilst the Starbucks store network is profitable at an Ebitda level, it is not producing the required return on the store investments", Taste said.
When the plan to launch Starbucks was announced in 2015, Taste said it had identified "a conservative market opportunity of more than 150 outlets in SA today. We foresee this growing to more than 200 in five years."
In the first two years of the licence agreement, Taste opened 12 stores, in line with its plans, but since then expansion has stalled.
Independent analyst Anthony Clarke said this week that Taste - whose share price has fallen 96% in the past five years to 13c - is in trouble because it took on two major international brands at a time when it did not have the capacity to provide working capital and profitability to fund the expansion. "They simply ran out of money."
Taste will meet with shareholders on Friday to seek approval for a R132m rights issue. The company has already raised about R1bn from shareholders in the past few years.
Byron Lotter, a portfolio manager at Vestact Asset Management, which owns shares in Starbucks Coffee Company, said Starbucks and Domino's were well-performing brands globally - something which Taste hoped would translate in the local market.
Clarke said the trouble at Taste began when converting Scooter's Pizza and St Elmo's Pizza locations to Domino's as it cost more than the company had anticipated. They also faced a branding issue as South Africans were familiar with the two former brands and not with the US brand.
Asked about alternative financing, Lotter said: "The banks won't give them financing" as they were too small and not profitable.
However, the company did secure a R50m loan facility (which may be increased to R200m) from US-based Riskowitz Value Fund (RVF) in November 2018.
Clarke is confident Taste will receive the funding, especially from RVF which has a 66% stake. "RVF has no choice but to keep funding Taste, otherwise it will go bust. Until the underlying economy perks up and consumers start spending again, I don't see Taste recovering,"
Speculation is that if the rights issue goes ahead RVF is likely to increase its stake to above 90% as minority shareholders exit their positions, increasing the likelihood of Taste being delisted from the JSE.
Even with Taste's troubles, Clarke does not think Starbucks would rescind the licence agreement with Taste as it would likely face the same problems if it operated the stores itself - such as finding big enough sites, intense competitionand a departure from the Starbucks model of high-street stores. "In this country Starbucks is generally a destination location inside a mall."
There are clearly perils in taking on international brands in a small market like SA.
Taste has long had ambitions to license international brands. Six years ago, it had the option for Burger King in SA. But former CEO Carlo Gonzaga is believed to have turned down the deal as it required R500m working capital and a commitment to open 100 stores in five years.
Grand Parade Investments secured the licence and has opened about 80 stores since May 2013 with more than R800m spent. Burger King posted a loss of R29.7m in the year to 30 June 2018...