Is this the beginning of end for Starbucks?

Tuesday 2nd July 2013

Restaurant Brands New Zealand, which is counting on new burger chain Carl's Jr to drive future earnings growth, is closing unprofitable stores at its worst-performing Starbucks unit ahead of a possible sale next year.

The fast-food operator closed six Starbucks stores last financial year and may shutter a further five outlets as leases come up for renewal, leaving 22 profitable cafes in the group, chairman Ted van Arkel said in an interview.

"We are tidying up, we are working at reducing the number of stores and when we are ready we will put it on the market," van Arkel said. "In the meantime, we are getting some inquiries but there is nothing firm on the table."

Restaurant Brands acquired the local franchise rights for 50 cafes from Seattle-based Starbucks in 1998. Since then, rival operators such as Esquires Coffee Houses, The Coffee Club and Gloria Jean's Coffees have entered the market, boosting competition and denting Starbucks' sales.

In the last financial year, Starbucks sales dropped 5.1 percent to $25.1 million as the chain was hit by store closures and price cuts. In Restaurant Brands' other units, KFC sales increased 0.3 percent to $237 million, while Pizza Hut sales gained 5.3 percent to $47.9 million and Carl's Jr added $1.9 million of new revenue to the group.

New Zealand coffee culture is "very sophisticated", van Arkel told the company's annual meeting of shareholders in Wellington on Friday. "As New Zealanders, we have matured in our coffee tastes. It is hard going to go up against the local competitors."

After exiting unprofitable stores, Restaurant Brands would be "reasonably happy" if it could hold its current turnover for Starbucks in the future, van Arkel said today.

He agreed with the value of $10 million to $20 million for Starbucks, as estimated by chief executive Russel Creedy in May 2010. At that time, Creedy said the company had had buyer interest in the chain but a sale was stymied by the global financial crisis as borrowing became tight.

"If someone came along at the right price then we would consider having a dialogue with them about a possible sale," van Arkel said. "It's not on the market. We are in the process of continuing to tidy up the portfolio at this stage. By the end of this calendar year we would be in a much better position to make up our mind as to whether we want to stay with the business or whether we want to sell."

Much of the current interest was in individual stores but Restaurant Brands would only sell the chain as a group, he said. A potential purchaser of the franchise would have to meet the approval of Starbucks in Seattle, he said.

Interest in the stores had come from New Zealand rather than overseas, van Arkel said. He declined to say whether any approaches had been for the entire chain and how many parties had approached the company.

The company's shares rose 1.1 percent to $2.82 today and have gained 5.7 percent this year. The stock is rated a 'hold' based on three analysts polled by Reuters with a median price target of $3.23.

BusinessDesk.co.nz

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