Over the last couple of years, Taste Holdings has struggled with consistent and colossal losses. In its latest results for the financial year to end-February 2019, the local operators of Starbucks and Domino’s stores, among other brands, reported a 44% fall in full-year earnings before interest, tax, depreciation and amortisation (Ebitda), down from R150.59m in the previous financial year.
Group revenue took a 7% knock, falling to R959.5m, which was primarily driven by the 12% fall in revenue in its jewellery business. Taste has been battling a capital crunch and huge liquidity issues.
When finweek sat down with former chief operating officer and now new CEO Dyan Pienaar, and Tyrone Moodley, the former interim CEO, both admitted that when they first arrived at the company in Q1 2018, it was clear that the business was not working.
The company was tied up in a large bond structure that it was not able to service. Shareholders have been stepping in repeatedly, through a series of rights offers, and the business is now capitalised, with all long-term debt repaid.
“I think that was the first big move that started putting things back on track — to get rid of all debt, and we have not brought any more debt onto our balance sheet since then (2018),” said Pienaar. “So, we are a debt-free company, and everything is being financed through the capital.”
The duo’s optimism while heading up a clearly embattled business is testament to not worrying about what you can’t control, but rather directing energy to what you can create instead.
The focus has now been shifted to looking ten years into the future and trying to understand exactly what the Taste journey could look like. And then to realise the capital requirements for the business.
Taste embarked on yet another capital-raising mission, kickstarting 2019 with a rights issue of some 1.3bn shares at 10c, bringing the total amount raised through this rights issues over four years to almost R1bn (R226m at R3/share in 2015, R120m and R398m at R1.5 and 90c per share, respectively in 2017 and February 2019’s R132m).
The total amount of the series of rights issues has now surpassed market capitalisation (R266.5m at the time of writing). Portfolio manager at Vestact Asset Management, Michael Treherne, cautions that any further capital raising, say R100m for instance, would be very dilutive given the current market capitalisation and the low share price (which is among the biggest problems). He was also concerned that the stagnant local economy could hinder the turnaround and growth.
But Pienaar is upbeat on the newly raised capital – now being primarily diverted to the food division’s operation and expansion plans. “Off the back of the capital raise — we are going to start expanding. We are looking at opening six Starbucks cafés and ten Dominoes restaurants in the 2019/2020 financial year. To that extent we have already signed three leases for Starbucks,” he said.
There is a lot of interest from landlords, said Pienaar. “So, we are exceptionally optimistic about growth prospects.” The number of new stores has been purposefully kept low because Taste intends on building growth overtime. The company stood still last year to try and understand how it will be moving forward.
“We focused on the entire Taste group and then the luxury group (affected by constrained consumer spend). We had to relook the operating model. One of the big moves that we have made last year was to close down our manufacturing operations in the jewellery business.”
The sale of the jewellery business could help to fund the food business. But Pienaar said that “we have not entertained putting the jewellery business on the market again… we sorted out our debt issues.”
In the food business, Taste realised that there was not enough focus and that was “one of the reasons why Taste was not performing the way it was supposed to be performing”, according to Pienaar.
Taste is now focusing on operating and running restaurants after outsourcing the food division’s supply chain operations. It hopes this will lower delivery costs and eliminate the losses incurred from previous supply chain operations.
This is also part of the reason the Western Cape, and Cape Town specifically, is still without a Starbucks store and not getting one anytime soon. From a supply chain perspective, sending a lone truck with a fifth of store supplies to Cape Town everyday wouldn’t be viable cost-wise; the plan is to roll out several stores in the region to achieve an economy of scale. They learned this the hard way in Kwa-Zulu Natal (KZN).
“One of the things that we did not do correctly when we decided to go to KZN... We started with one store in KZN, now we have got two in Florida road but the intention with the six new stores this year is to increase the number of stores in that region a little bit more, as well as in Johannesburg,” said Moodley, who is back to serving as a non-executive director.
Now that Taste believes it has a strategy that it’s confident in, it’s begun rekindling expansions. Moodley foresees that the journey to profitability will take place over three years.