Taste Holdings bails on food.
Big news on the JSE
Taste Holdings (Taste) has announced that it will be selling Starbucks and completely pulling out of the food business.
The food business consisted of Starbucks, Domino’s pizza, The fish &chip co and Maxi’s.
The is confusing since The fish & chip co and Maxi’s were stated as generating positive cash in the February 2019 circular to shareholders (item 2.9).
Starbucks though, was long coming.
Starbucks and Domino’s pizza have been losing a lot of money for the company.
Low sales and high operating costs had turned them into black holes.
As holder of the master franchise, Taste rolled out branches itself and did not not sub-license. Only 13 Starbucks branches have been opened up-to date.
The company has struggled to roll out stores due to capital constraints.
Opening a Starbucks store is not cheap:
The Rosebank outlet needed about R8 million to open its doors.
Strong competition has not helped either.
Seattle coffee, Vida e caffe and Mugg & Bean all have over 200 stores each around the country and are much cheaper to set-up and operate.
The 3 above-mentioned brands also allow external parties to franchise stores.
So how did all go wrong?
Taste Holdings financial woes can be traced starting with the acquisition of the Starbucks and Domino’s pizza master franchises.
14 July 2015:
Taste signs exclusive licence with Starbucks Coffee Company and Withdrawal of Cautionary Announcement:
Shareholders cheered for the acquisition of the famous worldwide brand.
The share price briefly went up by 20% after the announcement from 417 to 499 cents.
Times like these should call for meditation on Ben Graham’s sober words of warning published in 1949:
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
4 November 2019:
After 4 rights issues in the 4 years and R876 million raised throughout,
Which was used to pay-off debts and roll out Domino's pizza and Starbucks outlets,
The Starbucks license and 13 stores have been sold for R7 million.
Taste’s share price closed at 7 cents on 4 November 2019.
The rolling-out of Starbucks and Domino’s pizza outlets has been an expensive exercise.
For Taste to roll out outlets required large outlays of capital in short spaces of time which unfortunately they couldn't obtain.
Perhaps then…
There should have been questions (in 2015) to the board on how much the stores roll-out was going to cost:
how it were to be financed,
How many stores were required to reach profitability (just saying).
It is too late now and shareholders have paid the ultimate price.
The crown jewels are being passed on (Starbucks is gone already).
Domino’s pizza will follow along with the rest of them.
For Taste holdings:
Starbucks is another ‘investment gone wrong’ for hanging on South Africa’s mantelpieces along Tiger brands Dangote Flour Mills and Blue Label Telecom's Cell C adventures.
A look through the 2015 annual report CEO Carlo Gonzaga’s message may reveal clues as to how hungry management were for an acquisition without proper due diligence:
“We don’t think in terms of limits.
We’re just crazy enough to believe that if we can think it and dream it then it must be possible”
“Leading global brands such as Domino’s Pizza are a scarcity. They have delivered long-term and sustained shareholder value in other markets. Not to invest in an opportunity like the Domino’s Pizza one on the basis that it would require upfront investment without immediate revenue or profit, would be a disservice to those stakeholders that understand the value that global brands can create and who are long-term value seekers. We have always, and will continue to, invest in the long term and our Domino’s plan is evidence of this commitment to creating long-term sustainable value.”