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US coffee giant Starbucks calls off expansion in South Africa

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Starbuck coffee
Starbuck coffee

US coffee giant Starbucks has abandoned its expansion plans in South Africa.

Starbucks coffee
Starbucks coffee

According to reports from South Africa, the move has been undertaken because of high operating costs and tight customer budgets.

At the time of the decision, Starbucks had opened up at least 13 stores in South Africa.

The first store was in the Rosebank district of Johannesburg in April 2016 and then went on to open 12 more cafes across Johannesburg, Pretoria, and Durban in collaboration with local licensee Taste Holdings.

Its plan was to open up 45 more stores by 2020 in areas including in the country’s fashionable tourist hub of Cape Town.

However, as the company struggles to control operational costs and its debts, it has decided to halt its plans to opening more outlets.

The company owners are quick to dismiss that their decision is because the company is unprofitable, saying Starbucks’ store network is actually profitable (before debt interest and tax), only that it is not producing the required return on the store investments.

Starbucks’ latest financial report states that its food divisions operating costs increased by seven percent in the six months to August, mainly as a result of the operating costs of Starbucks doubling since the comparative period due to the addition of eight stores.

Market analyst at Vestact, Michael Trehene, told AFP that while Starbucks is quite popular in South Africa, the coffee giant’s current business model is simply too expensive to operate. It costs an estimated $350,000 to $550,000 to open each new store.

“Places like Cape Town are affluent enough to sustain a few stores… (but) the coffee is expensive, which makes it unaffordable for a large part of our population,” Trehene added.

Starbucks is also facing stiff competition in the South African coffee market.

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