As expansion stalls, Starbucks outlets are sold for cut-rate prices in South Africa

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At the opening of the first Starbucks café in sub-Saharan Africa three years ago, the company’s then-chairman, Howard Schultz, hailed the “growing middle class” of Africa and predicted the continent would become a “significant market” for the coffee chain.

His local licence holder, Taste Holdings Ltd., quickly spent more than US$5-million to set up a dozen Starbucks outlets in Johannesburg and other South African cities, and Mr. Schultz talked of opening 150 to 200 more. Customers queued up in long lines for the novelty of trying the iconic U.S. brand.

But today, the dream has turned sour. The long queues are gone. The expansion has slowed to a crawl as the economy slumps. And now Taste Holdings is abandoning the chain, unloading its 13 Starbucks cafés to a shareholder group for a bargain-basement price of just US$465,000. On average, the sale price is about US$36,000 an outlet, less than one-tenth of the cost of opening them.

Starbucks says that it still expects the new owners to continue with the long-term expansion plan, which had been suspended last year. But the cut-price sale is a sign of the complex challenges of the African market, even at a time when investors have been intrigued by the rising consumer class in most African countries.

Foreign investors, including Starbucks, often choose South Africa as their entry point for the African market, since it is the most industrialized and stable large economy on the continent, with relatively good infrastructure, a reliable legal system and a significant middle class. South Africa’s fast-food sector has attracted a range of U.S. companies: McDonald’s, Burger King, KFC, Domino’s Pizza and most recently Krispy Kreme and Dunkin’ Donuts.

Many South Africans, fascinated by the sight of the famous American coffee giant, crowded into long queues to place their orders at the first Starbucks outlet in Johannesburg in 2016. But after the novelty wore off, Starbucks has been hampered by a weak economy, a slump in consumer spending, fierce local competition and a perception that its products are high-priced by local standards.

Another South African company, Grand Parade Investments, announced last February that it was shutting down its loss-making Dunkin’ Donuts and Baskin-Robbins outlets after a failed three-year experiment with the two U.S. food brands. It opted to focus on expanding its Burger King outlets instead.

After five years of stagnant economic growth and frequent electricity shortages, South African consumers have been tightening their belts. Unemployment remains high and the government has been plagued by corruption, mismanagement and soaring debts. Economic growth is forecast at just 0.5 per cent this year.

Moody’s, the only major credit-rating agency that still rates South Africa as investment grade, announced on Friday that it is revising its outlook from “stable” to “negative,” leaving the country on the brink of junk status.

Taste Holdings, announcing the sale of its Starbucks business on Friday, said it could not afford the heavy cost of expanding the coffee chain.

It estimated that it would need to raise at least US$45-million in capital to attain a positive cash flow at its two food operations: Starbucks and Domino’s Pizza. It would need to expand to 150 to 200 Starbucks cafés, while tripling the 81 restaurants in its Domino’s chain, and this could take several more years, it said.

“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 company said, announcing its decision to exit the food business entirely.

The new owners of the Starbucks outlets are a consortium that includes Adrian Maizey, a non-executive director of Taste Holdings.

Starbucks, in a statement quoted by Reuters, said the sale would provide the necessary capital to help achieve its goal of having up to 200 outlets in South Africa.

The company has been relatively slow to enter the African market, after focusing on Asia and Europe for most of its international expansion.

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