South African firms bet on coffee and donuts despite slowdown

JOHANNESBURG — A fortnight after the first Starbucks in South Africa opened in a trendy Johannesburg district, queues still snaked onto the pavement, a sign of the craving for international brands despite an economic slowdown.

South African companies Taste Holdings and Grand Parade Investments are betting that demand for relative luxuries such as coffee to go and donuts from international chains will endure, even as disposable incomes are squeezed.

“It’s my first time,” said student Sheldon Sharma, 22, at the Starbucks in Johannesburg’s Rosebank district on Friday, a frappuccino in his hand. “I’m not saying I’ll be regular, but I’ll come back again when I’m in the area.”

Taste Holdings reckons South Africa can support as many as 150 Starbucks stores and it has opened a second in the new Mall of Africa, one of the largest in Africa’s most advanced economy.

Grand Parade, which has opened 65 Burger King outlets in South Africa, plans to open the first of 250 Dunkin’ Donuts stores across the country in Cape Town within two months. Queues snaked onto the street, too, when Krispy Kreme opened its first donut store in Johannesburg last year.

At first sight, the rush to launch international fast-food chains seems at odds with the prevailing macroeconomic backdrop.

Growth is set to be its weakest since 2009, interest rates have climbed two percentage points since 2014, food prices are on the rise after the worst drought in South Africa on record, and unemployment is hovering stubbornly around 25%.

And the lines of poor and elderly South Africans queueing each month for government-sponsored social grants at retailers such as Shoprite are far longer than those for a $2-flavored latte at Starbucks.

GRAB AND GO
But, analysts reckon there a couple of factors that could help the international fast-food brands survive, even if the overall retail sector is unlikely to grow anytime soon.

South Africans are flooding to cities, with Gauteng, the richest and most urbanized province that includes Johannesburg and Pretoria, becoming 30% more populous in a decade.

Analysts say urbanization goes hand-in-hand with a move to convenience as South Africans put in longer hours and forego home cooked meals to eat on their feet, while other cash-strapped consumers opt for takeaways over restaurant dining.

“The hectic urban lifestyle is driving the growth in fastfoods over the long term,” First National Bank retail sector Analyst John Loos said.

“For the sector as a whole, there is not much room for expansion with low growth and real disposable income going nowhere, but that is not to say a specific brand can’t do well,” he said.

Grab a bite when you can seems to be the plan for Grand Parade’s Dunkin’ Donuts stores. If they price similar to Krispy Kreme at 50 US cents a donut, they will be relatively cheap, but Grand Parade is also hoping to feed a new category of consumption, notwithstanding the economic challenges.

“We are not going for a flagship destination store, more for grab-and-go stores on every corner,” Grand Parade Chief Executive Alan Keet told Reuters. “Our growth and development targets were modelled for this economy.”

At Starbucks in Rosebank, engineering student Shaun van Zyl, who traveled 40 minutes from Pretoria to stand in line for his first Starbucks coffee, is planning to pick up a Krispy Kreme donut as well from the nearby outlet.

That is what Taste Holdings Chief Executive Carlo Gonzaga hopes will happen, that international brands will attract customers and make the cake bigger for everyone.

“Whenever Starbucks enters a country, it grows the coffee market in that country,” said Mr. Gonzaga. — Reuters