Domino’s falling

• South Africa
• Baskin Robbins, Domino's Pizza, Dunkin' Donuts, Grand Parade Investments, Scooters Pizza, Starbucks, Taste Holdings
• July 22, 2020

Illusions of grandeur. Hubris. These are fancy words for the root cause of much destruction of shareholder value across the JSE: corporate egos.

Once upon a time, Taste Holdings operated a business called Scooters Pizza. It was a home-grown brand that proved to be successful. At a time when JSE companies were being used as acquisition machines, it maybe even made sense to be listed.

Taste owned several other quick service restaurant brands, including Maxi’s, The Fish & Chip Co, Zebro’s chicken and St Elmo’s pizza, to this day one of my favourite old pizza brands because the quality was a cut above the rest.

Taste also owned NWJ Jewellery, offering a strange combination for investors of food and jewellery. No obvious synergies of course, but if both divisions performed well then does anyone care?

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None of this was good enough

CEO Carlo Gonzaga had far grander plans. This R1.3bn revenue business wasn’t good enough – he wanted a pizza with all the toppings.

For reasons I’ll never understand, Taste Holdings and Grand Parade Investments simultaneously decided that South Africans were desperate for more American brands. McDonald’s has obviously been an enormous success here, but that has been many years in the making.

McDonald’s also operates a very clever roadside strategy and already banked many of the strategic sites, leaving Famous Brands and the rest to slug it out in the food courts.

Let’s focus on Taste Holdings first, as they embarked on a crazy plan to kill off the Scooters brand.

Domino’s: all the MSG and additives, none of the profits

Taste proudly announced to the market that they had secured a 30-year master licence agreement to develop the Domino’s Pizza brand. Not only would Taste achieve this corporate miracle in South Africa, but they had the rights to do it in our neighbouring countries too.

They even secured the rights for Zambia and Malawi, subject to certain conditions. Like I said – illusions of grandeur.

The base principle was that Domino’s is a delivery-based pizza business, much like Scooters and to a lesser extent St Elmo’s. What Taste completely missed is that South Africans love South African brands, not American brands that force incredibly unhealthy food down your face.

McDonald’s and KFC are the exceptions to this, but they have invested in their brands for years in South Africa and have specific menu items for South African tastes.

Tapping into shareholders

Pizza orders weren’t great, but that didn’t stop Taste from ordering plenty of cash from shareholders. The company raised (and lost) nearly a billion Rand from shareholders over this disastrous period, taking the concept of using “other people’s money” to lofty new heights.

The trouble, you see, was that Domino’s required a certain standard of product and manufacturing from international master franchisees. Taste Holdings needed to build significant infrastructure to manufacture and distribute the pizzas and ingredients to the franchisees, who by the way were basically forced to change from Scooters or St Elmo’s to Domino’s.

Sadly, Taste shareholders weren’t the only people who lost money from this.

Taste earned revenue from supplying franchisees and also earned royalties on sales, but it was woefully inadequate to cover the cost of rolling out the Domino’s brand. The economies of scale simply weren’t there.

I’ll never truly understand how they got it so wrong. Surely there were intelligent people in the room, questioning the financial projections?

Wishing upon a Star and losing all the bucks

What do you do when you are rolling out a huge brand and losing money every day while doing so?

That’s right, you go double or quits!

Taste bought the Starbucks licence for South Africa for over R220m in 2015. It sold Starbucks to an ex-Taste director recently for all of R7m. You don’t need a calculator to work out how enjoyable that return was for shareholders.

Special mention to Grand Parade Investments (GPI)

It wouldn’t be fair to Taste to ignore the strategy that GPI followed. They decided to take on McDonald’s with Burger King, an inferior product (my opinion) which couldn’t possibly compete with the McDonald’s roadside footprint.

GPI didn’t even have experience in running quick service restaurants, so this was a bold move for the gaming business.

However, while GPI definitely destroyed shareholder value, it pales in comparison to Taste. GPI is currently negotiating a sale of Burger King for around R670m to a private equity firm, although the deal is in doubt due to Covid-19.

This returns much of the original investment, but that doesn’t take into account the return that should’ve been achieved on such a large sum over the period.

GPI also attempted to get Dunkin’ Donuts and Baskin-Robbins off the ground, which was about as appealing to shareholders as a mid-winter ice cream in Sutherland.

Domino’s doesn’t care

If you need further evidence of how foolish Taste’s strategy was, Domino’s international isn’t even saving the South African footprint. It’s so bad that they aren’t doing a single thing to defend the brand and perhaps fix the operations in South Africa.

They are quite happy to let it die, along with any hope of ever having a footprint here again.

The dominoes have truly fallen.

The future for Taste

The remaining 50 Domino’s restaurants are being auctioned off. This will bring to a close the unmitigated disaster that shareholders have watched with horror.

This leaves Taste with only its jewellery assets: NWJ and Arthur Kaplan, the latter of which it acquired in 2014 for R85m. There’s no real diversification here and quite frankly nowhere near enough scale to justify being listed.

Still, a new broom sweeps clean and perhaps so does a new name along with a new CEO. As of today, Taste Holdings was renamed to Luxe Holdings. There was nothing tasty in the food division long before the name change.

Cry, the beloved shareholder.