CURSE OF THE MEGABRANDS

Taste’s pricey deal with Starbucks and Domino’s proves that you’re not guaranteed success just because you have superstar brands

Inside Taste Holdings’ low-key offices near Modderfontein, CEO Carlo Gonzaga is fond of pointing out, you’ll see R1 coins plastered on the walls. The point, says Gonzaga, is to ensure everyone at Taste focuses on “how to get to that R1 of profit”.

Getting to that magical R1, however, has never looked further away. For the six months to August, the fast food company clocked up a R73m loss — a gaping void for a company worth just R367m on the JSE.

It shouldn’t have been that way: Taste happens to be the custodian of the two largest global brands in SA today: coffee giant Starbucks (27,339 stores globally, 7,500 cups of coffee served every minute) and Domino’s Pizza (13,200 stores in 80 countries, delivering more than 1m pizzas every day).

It’s a thumping MBA lesson in how, just because you have superstar brands, you’re not guaranteed success. Until those headline deals, Taste had done just fine with low-key brands like Scooters Pizza, Maxi’s, the Fish & Chip Co and Zebro’s chicken.

While the Domino’s deal (clinched in April 2014) and Starbucks (July 2015) were indeed coups, they were both frighteningly expensive.

Taste hasn’t revealed the costs of the licences, but it is estimated that it will pay more than R70m to Starbucks during the 25-year deal, and R130m to Domino’s over its 30-year deal. But that’s only the entrance fee; over the past two years, it cost Taste R81m in “one-off costs” to start Domino’s, and R8.3m in “oneoff costs” for Starbucks, including R2.8m sending staff overseas to be trained.

So, that means Domino’s would have to sell nearly 1.4m medium-sized regina pizzas (retail: R59.99) just to pay those one-off costs. That’s a lot of dough.

That’s why, last week, Taste went back to shareholders for the fifth time in four years to raise R398m (issuing stock at 90c/share) to settle its crushing debt. This was “Plan B” — triggered after Taste couldn’t find any buyers for its jewellery arm, Arthur Kaplan.

Investors aren’t charmed. You can’t blame them, considering they’ve ploughed in R1,05bn over the past four years. In return, they’ve seen Taste’s food division make a loss since 2015 of R349.2m. And to cap it all, Taste’s share price has tumbled 61% in a year.

Anthony Clark, the outspoken analyst, is scathing about this new “desperate, bail-in, bail-out” bid to support Taste’s broken strategy, by issuing new shares.

“There is no need for any other shareholder to keep on throwing good money after bad . . . Taste has been eating too much of its own pizza. I think the dough has gone to its head,” he says. Rather, he says, buy a Domino’s pizza with that money — it may last longer.

It sounds apocalyptic. But Gonzaga says Starbucks and Domino’s aren’t at all worried that Taste may not have deep-enough pockets to keep opening stores.

“Not at all. They’re entirely comfortable with us and supportive,” he told the Financial Mail, from Durban, where he is launching Starbucks in the province.

“If the perception is that these global brands are only interested in building numbers, that’s wrong. They’re more interested in the quality of the business than hitting a number,” he says.

He says Starbucks and Domino’s have seen the sort of “tough macro environment we have right now in SA countless times in other countries”.

Perhaps, but they’d surely be keeping a close eye on what happens. Right now, Taste’s value on the JSE is R367m — less than the R398m it’s trying to raise to settle its R225m in debt, which is way more than a company of its size can handle.

Says Gonzaga: “Look, it’s no secret that we had an inappropriate amount of debt for a start-up business. Some of the things people have said are overdramatic, but the numbers are the numbers. We need to settle the debt.” Taste’s shareholders — the largest of whom is the enigmatic Sa-born but New York-based investor Sean Riskowitz — will have their fingers crossed Gonzaga’s company survives this patch, to reach a tipping point at which their outsize gamble starts paying off.

As Clark says: “Perhaps (Riskowitz) has to bail out Taste as the thought of (it) going into business rescue

. . . may be too horrific to contemplate.”

Taste may seem close to the precipice, but Gonzaga says he’s “comfortable” with where the company is.

“I’ve been doing this job for 17 years, and it hasn’t always been easy. Starting Scooters, or listing on the JSE, we’re used to stress. Do we like reading the negative opinions? No, it’s not nice to read, but it’s what we signed up for,” he says.

But having failed to sell the jewellery arm, it’s starting to look like he’s got very few dice left to roll.

Anthony Clark says investors should veto Taste’s rights issue, as the dough has gone to its head