Starbucks' expansion runs out of steam

High operating costs and tight customer budgets have left US coffee giant Starbucks needing a caffeine hit after it abandoned ambitious expansion plans in South Africa — seen as a foothold for the continent.

Starbucks looked set to take the country by storm when the opening of its first store in the Rosebank district of Johannesburg in April 2016 attracted big crowds who queued for hours to taste their famous coffee and enjoy the cafe experience.

“We thought they were going to run out of coffee before we could get a chance to taste it,” Irshaan Mohammed, who is still a loyal customer at the flagship store, told AFP.

“We couldn’t believe how many people had actually come here.”

Mohammed, 23, said he loved “choosing ingredients and hanging out” at Starbucks, but “when it comes to my bill I always worry that I am paying too much.”

Local licensee Taste Holdings has opened 12 Starbucks cafes across Johannesburg, Pretoria and Durban. It had hoped to have 45 stores open by 2020 — with a peak target of 150 countrywide.

But further openings have now been ruled out as the company struggles to control operational costs and debt.

Taste last month announced it would “pause the expansion”, saying “whilst the Starbucks’ store network is profitable (before debt interest and tax), it is not producing the required return on the store investments.”

In its latest financial report, Taste said its food divisions operating costs increased by seven percent in the six months to August, “largely as a result of the operating costs of Starbucks doubling since the comparative period due to the addition of eight stores”.