How Starbucks owner Taste Holdings plans to turn things around
Because of a shortage of funds Taste has stopped rolling out its Domino’s and Starbucks stores
Indigestion seems set to remain on the menu for troubled fast-food operator Taste Holdings.
Its food division hasn’t produced a profit since 2015, it has not been able find a buyer (for the price it wanted) for its jewellery operations and has had to be refinanced several times by its shareholders.
The group runs the US chain Domino’s Pizza and Starbucks coffee shops in SA, and though it still has high hopes for these chains, its cash constraints have led to it putting a freeze on rolling out more stores.
Its latest refinancing this year has boosted its coffers through a R398m rights offer — the money was used to pay off its R270m debt. But Taste also later got a commitment from its now majority shareholder, the Sean Riskowitz-backed Riskowitz Value Fund (RVF), to provide a R200m loan facility.
This is unlikely to be enough. At some stage, it will need to be refinanced once again.
"They are going to run out of money again," says Just One Lap founder Simon Brown.
The group has been burning through cash. It produced a negative R33.9m cash flow from operating activity for the half-year to end-August.
Though newbie CEO Tyrone Moodley says the RVF loan facility will be sufficient to support Taste over the medium term, he confirms that it will need further support over the longer term.
"Given the change in strategy and the potential that these international brands possess if executed according to their playbooks, management believes that the longer-term opportunity set would require further capital."
Any turnaround at Taste will not take place overnight. "The steps taken to identify the pain points and implement the solutions will only start to have a material effect on group profitability in the next financial year," Moodley says.
So, to summarise, Taste has stopped rolling out its Domino’s and Starbucks stores, it will take some time for its turnaround efforts to pay off and it will (at some stage) need another huge cash injection.
With all of this hanging over the group, what incentives are there for minority shareholders to hang on? With a share price hovering around 18c and RVF holding 66% of its shares, Brown thinks there’s a good chance RVF could at some stage delist the group.
Riskowitz and RVF didn’t respond to questions on whether there were plans to buy out minorities and to delist the group.
Riskowitz, who is also CEO of Conduit Capital and styles himself on value investor Warren Buffett, has built a reputation for taking holdings in unfashionable companies, like Taste, in the hope of turning them around.
Turning Taste around means he will have to depend on Moodley.
Moodley (32) is a former analyst at Sasfin Bank, and has been involved in various capacities at other Riskowitz-connected companies.
Predictably, Moodley is confident the group is on the right track.
Under him, Taste has brought in some new blood in Bruce Layzell, as the managing executive of Domino’s, and Dylan Pienaar as COO.
He says the group will probably make one more senior appointment.
Even though the group’s management has been beefed up, it has some way to go. Moodley says the group plans to start rolling out new stores only "in the next financial period".
He warns: "There are a number of non-negotiables that need to be in place prior to this to ensure the highest probability of a successful rollout."
In other words, the group has to sort out some of its operational issues before it even considers expanding.
One of the biggest is its centralised buying subsidiary Buon Gusto, the main reason for it incurring an operating loss of R87m.
Taste says the problems at Buon Gusto have led it to move from a centralised to a more decentralised model, which would have a more brand-specific focus.
This is quite different from the strategy employed by rivals such as Famous Brands, which still favour a centralised buying supply model to support franchise stores.
Taste’s move away from the franchise- stores model (it has bought out most of its franchisers) to a corporate-owned network is the reason it is moving to a centralised model, says Moodley.
"The vertical integrated model of a supply-chain company did not make sense for a business that had shifted from exclusively franchise based to a corporate-owned network."
Given what’s at stake, a lot is riding on Taste sorting out Buon Gusto.
If the company can’t get it right, it will have a lot more to worry about than serving Frappuccinos to SA’s brand-obsessed middle class.