A look into Taste’s Starbucks expansion

Taste Holdings (Taste) have announced their plans to grow their Starbucks stores by 41 more shops across Cape Town, Pretoria, Durban and Johannesburg. The retail franchisee and licensing giant, that recently launched the Starbucks brand in South Africa could reportedly be spending as much as R328 million on the expansion, stated Taste CEO Carlo Gonzaga.

There are currently four Starbucks stores in the country with one in Rosebank, two in Pretoria and one in Midrand. This according to Gonzaga is set to increase by as many as 13 stores come February 2018.

According to Taste, the cost of opening a shop costs between R5 million and R8 million.

By February 2020, Starbucks will be looking to increase their stores by between 30 and 45 shops.

To fund the planned expansion of its food business, Taste is looking to sell its luxury goods division, which includes Arthur Kaplan, Rolex, Cartier and Mont Blanc brands, and focus on its food business, Gonzaga explained.

But what does this mean for investors?

“The market cap of this stock remains less than R700m – a micro-cap stock that wouldn’t attract the attentions of many asset managers. Individuals might speculate on the share as a long-term recovery play but the company is experiencing tough times at the moment. Taste has been raising capital to fund future growth and expansion but has continued to lose money,” stated Craig Pheiffer, chief investment strategist for Absa Stockbrokers & Portfolio Management.  

Further, the sales of NWJ and Arthur Kaplan which would have generated much-needed capital have stalled.

“While the expansion of Starbucks and introduction of brands like Domino’s Pizza sounds great, Taste still has to show how it can generate a profit from these iconic brands. Until the ship shows signs of stabilising, the counter will remain highly speculative,” Pheiffer added.

Investing in any company is about understanding its valuation which in turn is driven by earnings expectations.

“Potential investors must take a view on the sector and how it would perform in the forecast economic environment and then address specifically how the company will manage the environment and drive earnings growth. Taste has taken a big bet on the success of Starbucks and investors need to decide whether or not that bet will pay off in the longer term for Taste (and shareholders) to see the return on its significant investment,” explained Pheiffer.

In addition to having to prove itself with regards to the pushing of these international brands, Taste Holdings is also under pressure from stiff market competition.

“Competitors in this space include all that vie for the consumer’s rand but on the JSE the “competition” comes from the likes of Grand Parade Investments which owns the long-term Master Franchise agreement for Burger King in South Africa and Famous Brands with its multitude of local restaurant brands (Mugg & Bean, Wimpy, Tasha’s, Europa, Steers, Mythos, Fego Caffe, Vovo Telo, Debonairs Pizza, Milky Lane). Famous Brands is a R16 billion market cap stock with a strong history of earnings and share price performance. Grand Parade has a market cap of R1,8bn but has numerous other assets in the gaming and hotel sectors which means it’s not strictly comparable,” added Pheiffer.

Still Taste management remain confident that this sunk investment will bear fruit over time as more stores are rolled out and the brand gains traction locally and reaches scale.

When asked if now was a good time to buy Taste shares, Pheiffer added: “Taste Holdings is too small for us to consider for our managed portfolios and we would prefer the likes of Famous Brands with its well-established track record in the QSR/Consumer Brands sector.”