How Significant Is The South African Market For Starbucks?

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Starbucks Corporation‘s (NASDAQ:SBUX)   first store in South Africa opened this month to an overwhelming response, with long queues even a week after opening and net sales surpassing expectations. In its recent shareholder’s meeting, the company’s CEO commented that “this market is larger than expected” and the company has an ambitious long term target to open 150 stores in the region of which 12-15 stores will open in the next couple of years. This is not a very significant number, given that the company already operates nearly 22,000 outlets in 71 countries worldwide.  Still, the encouraging consumer response, despite a sluggish economy, is an indicator of the company’s popularity in the region. Starbucks is looking to tap into the growing urban population in South Africa, a polulace that now commands higher disposable income and is increasingly attracted to American fast food chains.  Also, as the country attracts more foreign tourists and becomes the access point to other emerging markets in the region, Starbucks’ success in South Africa can drive its expansion in the region and provide a boost to its revenues in the long term.

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South Africa Holds A Long Term Growth Potential

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The South African economy is currently reeling under pressure, with the expected GDP growth in 2016 forecast to be  0.6 to 1.0%.  That said, as people move to cities to find work and better education, a growing urban population  is driving the revenue of fast food chains. Euromonitor estimates that fast food joints in South Africa will grow by $3.7 billion between 2015 and 2019. Starbucks saw better than expected sales for its first outlet in Johannesburg and the coffee culture in South Africa should ensure a steady revenue stream for the company from the country, albeit a thin stream within the company’s global revenues. However, there could be a couple of other advantages of establishing itself in this market. First, South Africa will serve as a gateway to the company to expand into other emerging countries in the region such as Nigeria, which hold long term growth potential. Second, tourism is increasing in South Africa, the government has relaxed visa restrictions and its currency has weakenied. Foreign tourists will this be attracted to their familiar coffee joint. In January 2016, one million tourists arrived in South Africa, which was 15% higher than the number in the same month last year. As Starbucks expands to more countries in the world, its loyal customers will have the comfort of getting their favourite coffee on any continent they travel to.

However we believe the growth and expansion in the African continent will be a long term goal for Starbucks.  Given the small initial footptint, South Africa will not prove to be a very significant market for the company near term.  Expansion in the African continent has proved difficult for several foreign retailers such as Dominos Pizza and Walmart, given the slow economic growth and uncertain political environment. In December last year, South Africa’s finance minister was replaced twice in a four day period which led to a significant decline in its currency against the dollar. High inflation due to weak currency led to a decrease in spending on luxury goods of foreign brands.

The expansion into South Africa might not be very significant in terms of revenue growth for Starbucks in the short term. However, we believe as the region witnesses growth in the long term, it will drive the company’s revenues and facilitate its expansion in the continent.

 

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