03:34 am
24 October 2016

Starbucks comes to South Africa

Starbucks Corp. is joining a flood of international food and retail chains into South Africa as they look to generate demand continent-wide for their products among the region’s growing consumer class.

The Seattle-based coffee chain on Tuesday said it has licensed South African management group Taste Holdings Ltd. to open the first sub-Saharan Starbucks in Johannesburg next year, with more locations in South Africa to come.

Starbucks sources much of its coffee from African countries like Rwanda and Uganda, but has just a handful of stores on the continent in Cairo and Casablanca, Morocco.

“The coffee market here is vibrant and growing fast—we want to be part of that growth,” Kris Engskov, president of Starbucks for Europe, the Middle East and Africa, said in a statement on Tuesday.
Taste is also the franchisee for 45 Domino’s Pizza restaurants that have opened in South Africa since late last year. Rival Pizza Hut returned to South Africa in 2014 after a six-year absence, and clothing retailers like Gap Inc. and Zara, owned by Spain’s Inditex SA, also recently opened their first retail outlets on the African continent in Johannesburg.

Swedish retailer Hennes & Mauritz AB plans to open its first H&M store in South Africa later this year, and Krispy Kreme Doughnuts Inc. said in May that it plans to open 31 outlets in South Africa within five years.

“A lot of these guys are using South Africa as a test market for Africa in general because of the relative ease of doing business here,” said Meryl Pick, an analyst at Old Mutual Equities.

Africa was home to six of the world’s fastest-growing economies last year, the World Bank said, and the International Monetary Fund said the region’s growth of about 4.5% this year would only be surpassed by developing Asia, which includes emerging giants China and India.

But last week the IMF said malaise in South Africa is weighing on the continent’s growth. Frequent blackouts and labor turmoil have pulled both business and consumer confidence to near 15-year lows. The government says growth might not reach 2% this year, nowhere near enough to dent a decade-high unemployment level of 26%.

Carlo Gonzaga, Taste’s chief executive, said there are still plenty of South Africans with a hunger for Domino’s pizza and Starbucks lattes. For one thing, he said his generator-backed outlets profit when the electricity fails and people can’t cook in their darkened homes.

“Our sales go up if there’s no power,” Mr. Gonzaga said. “The retail space in South Africa is actually doing reasonably well.”

Still, South Africa’s coffee scene is relatively saturated, with sales growth slowing in recent years. Several brands, including Seattle Coffee Co. and Mugg & Bean, a coffee-themed franchise restaurant owned by South Africa’s Famous Brands Ltd., are already well-established.

“We will fiercely protect the market share which our existing brand repertoire has within the South Africa and Africa food service landscape,” said Kevin Hedderwick, group chief executive of Famous Brands, a fast-food casual dining franchiser with more than 2,500 restaurants.

To help win over South African coffee fans, Taste plans to serve the same Starbucks drinks that made the chain a juggernaut in the U.S. and other markets, along with items tailored for local palates such as rooibos tea, which is made from South Africa’s indigenous fynbos vegetation.

But Starbucks won’t lower its prices to weather the weak economy here, Mr. Gonzaga said: “We think that Starbucks pricing will compete very well with current local premium pricing.”