Starbucks is fighting in South Africa

New Starbucks store in Sandton City, Johannesburg. (Photo by Timothy Rangongo, Business Insider SA)

• South Africa will no longer have Starbucks outlets, said its local licensee this week.
• Taste Holdings does not see a sufficient return on investment in the American coffee brand.
• The high price of the brand and the Starbucks coffee are expensive compared to its competitors – because of the high royalties that it has to pay.

The holder of the local Starbucks license in South Africa, Taste Holdings, has put an end to any plans to open more outlets of the American coffee chain while she strives to join both ends.

Taste, which also owns jewelers Arthur Kaplan and Domino's Pizza, recorded an operating loss of 87 million rand during the six months ended August, with a 3% drop in sales.

The group said that while the sales network of twelve Starbucks outlets is profitable at the sales level, it does not generate the required return on investment.

The installation of a new Starbucks store in South Africa costs between 5 and 8 million rand, the group said. It's very expensive, says Simon Brown, founder and director of the JustOneLap.com investment website. Brown estimates that the actual cost could now be higher than expected, or even reach 20 million rand.

Hitesh Patel, director of new business at Starbucks competitor Vida e Caffè, said the average cost of setting up one of her stores is only 1.5 million rand.

This represents less than a third of the minimum cost of a new Starbucks outlet.

See also: Starbucks has opened its eleventh store in South Africa – with "the fastest WiFi of any retailer"

Taste has signed a 25-year license to operate Starbucks stores in South Africa – and has to pay royalties to the US brand, which are expensive, said Michael Treherne, a retail badyst at Vestact.

According to Treherne, Starbucks South Africa had to resort to higher prices because of fees and expensive store layout costs, which is not good at all during a recession.

How do Starbucks prices compare competitors Seattle & Co and Vida e Caffe:

Sources: Seattle & Co (online), Vida e Caffe (Sandton) and Starbucks (Melrose Arch) / Tableau: Business Insider SA.

The difference between food prices is more pronounced. We were able to find a muffin at a Vida e Caffe store in Johannesburg for less than 20 rand, while the cheapest muffin in a Starbucks was 32 rand.

Non-competitive prices likely contributed to weak sales and profitability, which would have deterred Taste from opening more Starbucks outlets. But the other main reason is that he can not afford.

In fact, the business is running out of money. "Building new Starbucks stores costs money that they [Taste Holdings] That's just not the case, "said Treherne, who had to issue new shares earlier this year to get close to R400 million to settle some of his debts.

Taste's struggles mean that Cape Town still has no Starbucks store – with outlets only in Gauteng and KwaZulu-Natal.

Now read: We tasted 5 Starbucks drinks – and the results were sour-sweet

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