Taste to sell Starbucks franchise as food business loses its flavour
Taste Holdings said that following detailed operational reviews and canvassing potential partners and capital providers, it had reached the conclusion that Taste should change its strategic direction and exit the food business.
“It has become evident that capital investment required for the previous expansion strategy cannot be secured, given the current structure of the business and existing market conditions. In line with the company's change in strategic direction, Taste food has entered into an agreement to dispose of the Starbucks business,” the group said.
The Starbucks business consists of 13 corporate-owned Starbucks stores situated in Johannesburg, Pretoria and Durban. Its other food business includes Domino's Pizza, Maxis and the Fish & Chip Co.
The strategy shift would allow Taste Holdings to focus on its luxury retail brands, which include NWJ, Arthur Kaplan and World's Finest Watches.
At the beginning of February, Taste Holdings indicated that it is the long-term objective of management for Starbucks and Domino’s to reach earnings before interest, tax, depreciation and amortisation (Ebitda) break-even across both brands within a 36- to 40-month period after the commencement of the expansion plan, and to attain positive free cash flows, after capital expenditure, across both brands within seven to eight years from the start of the plan.
However, its management said it estimated that the company would require at least R700million, including the amount raised in the current rights offer, to reach positive free cash flow, and the Starbucks network would have to expand to between 150 and 200 cafés and Domino’s to between 220 and 280 restaurants.
“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,” the group said.
Taste completed a R132m rights offer during the year to fund the expansion.
It was in discussions with various parties regarding the sale of all the remaining food assets.
Jordan Weir, a trader at Citadel, agreed that the disposal of its food division was the right choice strategically for the company.
“This division has particularly suffered in a tough economic climate, and the company additionally has not been able to secure enough capital for its expansion projects within the food space. However, it will be interesting to watch this situation unfold, as Taste Holdings is now turning its focus to its luxury goods division which, as per its last financial statements, seems to be battling as well,” Weir said.
In the year to the end of February, the food division’s Ebitda increased to R166.42m, up from R141.08m a year earlier.
Taste Holdings shares closed unchanged at 7c on the JSE on Friday.