Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
Taste Holdings – South Africa
Prepared by Maya Dadoo Gonzalez, George Foster and Rhett Morris
Taste Holdings is a vertically integrated franchiser with a strong brand focus. Started in 2000, its early success was highlighted by multiple awards. Taste started with a Scooters Pizza as its founding entity. It then broadened into wholesale and manufacturing as well as retail. Its two major areas of focus are food (with the Scooters Pizza, St Elmo’s Woodfired Pizza, Maxi’s, The Fish & Chip Co. and Buon Gusto Food Service brands) and jewellery (with the NWJ Jewellery, Latan, Kimmi Kay, Sterling, Soul and Tsar Collection brands). Its distribution of revenues is as follows: 43% is attributable to jewellery franchises and wholesale, 21% to jewellery retail, 18% to food manufacturing, 17% to food franchises and 1% to food retail. The branding aspect is viewed as a key differentiating factor and is supported by relatively large marketing funds within their segment. Over 95% of Taste’s revenue comes from South Africa. Its growth has been a combination of organic growth and acquisition. It was listed on the alternative exchange of the Johannesburg Stock Exchange (JSE) in 2006 and moved to the main board of the JSE in 2011.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
At the time, the supply chain was opaque and controlled by the franchiser. While today we do in fact have elements of vertical integration, in 2000 we, unlike almost all other franchisers, did not supply directly to franchisees. This removed the distrust between franchisee and franchiser, but more importantly, allowed us to price our product some 20% cheaper than the market leader, while still maintaining the same store-level gross margins as them.
We also implemented a marketing royalty that was the highest in the industry at the time, despite being the smallest player in the market. While the source of a large amount of robust debate with our growing franchise base, this marketing royalty has become widespread.
Lastly, we made a subtle but important change to our customer value proposition. We were the first delivery business in South Africa to ‘walk the talk’ with our delivery promise in that we offered our customer their order FREE on the spot if we were late. To date, 13 years later, no one else has been able to match this promise. In the first five years, we built the business on the delivery promise (‘if it’s late, it’s free’) and on our price advantage over the competitor.
Other than that, there wasn’t anything that we did that was marvellously new. I think sometimes entrepreneurs are told that the only way you can make an impact is if you are the next Google. I disagree with that.
My business plan back in 2000 didn’t look one bit like our business looks today. We made a conscious decision in 2004 to become diversified across product categories rather than focus on geography. So, instead of focusing on one brand across multiple geographies, we decided to focus on many brands in a geography we understand. That was our big strategic watershed around 2004. We took quite a close look at our business – what were the skills that we had in it at that time? And how could we apply them? What were we good at? What were we getting better at? Even today, people ask how we got into jewellery. Back then we asked ourselves what skills we thought we had in the business that we could apply to another sector and grow? We were not afraid. We got a lot of criticism for buying a jewellery business in 2008. But it has grown by about 50% since we bought it and it is now the second largest jewellery group by volume in the country. It took me a while to convince people that we knew anything about jewellery, but we had the same ideas about how we could add value to the business.
All ideas have evolved mainly based on whether we thought we could move into areas that other people were not looking at. We bought a fish and chip business last year – it services mainly low-income consumers. To date, none of the listed companies own any brands for low-income consumers. These stores are in the middle of townships and shack cities. Do we think we’ve got the skills to go into this? We think we do. And that became the whole idea behind what made us change our plans: we have got the skills.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Gonzaga: “In the first four years of building only the Scooters Pizza business, we were the fastest growing franchise company in the country. We were opening a new store every 23-30 days. Our biggest accelerator was being in an industry that had good tails – the pizza delivery business. A second accelerator was our partnership with Nando’s, one of our founding shareholders. Nando’s is a global chain. We had great credibility in the marketplace. That phase took us to 2004.
The second phase was from 2004 to 2008, when our growth slowed down. But the big change we had was that we were listed. Failure to get access to capital can be an important growth inhibitor in our set of businesses. When we bought Maxi’s, we were an unlisted private company. I think we ended up going to 17 institutions (for funding) and on the closing day of the transaction, we were still 1 million rand short. I asked for a 30-day extension. Listing on the JSE gave us a better platform to raise capital.
Several strategic decisions in 2008 were important growth accelerators. Acquisitions played a key role in building out this strategy. We made the strategic decision to integrate vertically as well as the strategic decision to enter an additional product focus. With our acquisition of St Elmo’s in 2008, we started on a vertical integration path in our food division. We are now involved in manufacturing – pizza toppings and all sorts of things for our food brands. In 2008, we bought NWJ Jewellery, which has subsequently led to us becoming the second largest jewellery chain in South Africa. Our philosophy is to combine acquisitions with organic growth. If we see that we can acquire a competitor in the market that we can add value to, then yes, we aim to acquire that company.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
- “Availability of accessible markets: Yes, the restaurant market was underdeveloped in 2000. Even today, 99% of our revenue comes from South Africa, despite having operations in other African countries.
- Availability of workforce/human capital: As explained below, there are advantages and disadvantages here.
- Availability of funding/finance: When raising capital, we were 1 million rand short and therefore decided to list on the JSE.
- Availability of mentors and advisers: Overall, if I want to credit one thing that enabled us to achieve the relative success we’ve had, it would be that in the past 13 years we have always had, and I have personally had, an enormously strong circle of advisers and mentors. For example, we have a board of directors with technically competent people on it.
- Favourable regulatory framework and infrastructure: There is a mixture here. As explained below, South Africa is well developed in certain areas but underdeveloped in others.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges?
- “Availability of workforce/human capital: A lot of the African ecosystem isn’t really an ecosystem. Many African entrepreneurs are born out of necessity. What they’re really trying to do is generate enough to look after themselves, rather than looking for a solution to a problem that can be scaled. A major constraint in scaling is the limited skills of the workforce. There is a pretty low level of education. We’re constrained very much by access to skills. And you have to pay substantially to get them.
- Availability of mentors and advisers: We were fortunate. But in general in South Africa, there isn’t a big ecosystem around entrepreneurship. If you’re a young start-up entrepreneur, there aren’t many ways that you can get good advice, advisory boards, etc. Some companies provide financial training support, but they are not trying to build an entrepreneurial ecosystem.
- Favourable regulatory framework and infrastructure: South Africa is one of the hardest parts of the world in which to start a business. The framework doesn’t foster entrepreneurship. A key problem is the cost of running a business in South Africa. The worst thing I hear people say to me is that I want to start a business with two employees. This is impossible because you’ve got such a rigid structure. If you want to fire somebody you may as well give him the company.
- Because of inflated democracy, we are generating legislation at a rate that is largely unparalleled, but is not supportive of entrepreneurship. A small business has to navigate a minefield of legislation that is costly to live with. For example, we’ve got a consumer protection act that is too advanced for the way South Africa is as an economy, especially for the young companies aspiring to grow.
- Major universities being located nearby: Unfortunately, universities have not helped overcome the shortage of skills we face. We have, as a country, more and more people going to university, but many have not acquired the skills we require. We could get ourselves educated employees, but there is a good chance many will have poor financial management skills. So I would say the education system hasn’t helped most of us in business.”
Q5: Large companies can play an important role in the scaling up of early-stage companies with high growth aspirations. These roles can include being customers, suppliers, marketing partners, joint venture partners, and so on.
(a) Describe the key areas where interaction with larger companies helped promote your growth path.
Gonzaga: “The ecosystem of large entrepreneurs in terms of owner-run businesses in South Africa is quite big. There are already some quite substantial companies, maybe second generation. We received massive amounts of help from people who saw us as a young starter. And they knew we had quite a good reputation as reasonably honest guys. And we had support from Benchmark, the third largest retailer in Africa. Any time we said we’d like to come and see how you manage your business, they would put us in touch with their highest management. When we started, I went to many suppliers and said I have this cool idea – we want to take over the world, but we don’t have a store yet, though I would like my chief price and box price to be the same as the market leader, my competitor. We succeeded in likely 90% of our negotiations with suppliers in getting this pricing. In South Africa, some corporations are completely closed, while other competitors say yes, come and look at our business. Even competitors with three or four stores – we show them around our warehouses and show them how we work and contribute to building an ecosystem.
In South Africa, because of our history of sanctions and things like that, we’ve got quite a supportive culture as regards growing as businesses. It is very rare that we don’t have access to other businesses. A part of the motivation is that when I see someone doing well and I could help him or her, we very much try to as we don’t know what could happen one day.”
(b) Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
Gonzaga: “The quality of the domestic retail sector in South Africa has meant that some key international players that could have been major franchise competitors have struggled and hence played less of a role in limiting our growth. We have some of the best retailers on the planet. Any brand has got to bring their best fighting armour if they want to come here and they have to adapt their model to South Africa. Domino’s has come and gone. McDonald’s has only got 150 stores here.”
Q6: Your current revenue growth to date had been predominantly focused on your own domestic market. What are the major reasons for this major revenue focus to date on domestic markets?
Gonzaga: “Starting in South Africa, we have always been asked about expanding beyond our borders. In 2004, we made the strategic decision to stay in South Africa and grow the business through franchising. The strategy was to be diversified across product categories rather than geographies. Instead of focusing on one brand across multiple geographies, we choose to focus on many brands in the South African geography, which we understood very well. Currently 99% of our revenues come from South Africa. The areas we have expanded into are close geographically. We now have stores in Namibia, Botswana, Zimbabwe, Lesotho and Swaziland and are planning to open in two other countries in the course of this year: Mozambique and Zambia.”
Q7: What would you view as the greatest challenges in growing a sizable revenue presence in markets beyond your own domestic country or region? In deciding when and where to seek growth in international markets, what characteristics of a country’s ecosystem would be most important in attracting you to invest significant resources in that non-domestic country or region?
Gonzaga: “Three key factors we look at when deciding whether to enter a new geographic market are: (i) trademark protection; (ii) the financial system; and (iii) whether there is an existing or potential supply chain so that we can supply our stores with the products. Africa is an incredibly diverse region. One country can be reasonably modernized in terms of its financial ecosystem, and another may not even have a stock exchange. There are large differences in terms of tribes and religions. It is a very complex continent in which to operate. Strong market management and building infrastructure are essential to our business.
We don’t have a long checklist to assess emerging markets. Each one will likely be different from South Africa. You must go as you need to in each market. But without trademark protection, a strong financial system and the potential to have an effective and efficient supply chain, the low likelihood of successfully scaling in that market would make it unattractive to commit large resources.”
Q8: Building a company that aims to have sustainable high growth inevitably will have both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in your entrepreneurial journey.
Gonzaga: “One high moment was our success after entering the jewellery business in 2008. We received much criticism, but were able to prove the naysayers wrong. We have run out of money twice – like many entrepreneurs have – but it’s all part of the day-to-day stuff we have to deal with. I am unhappy when people we hire are not able to grow with the needs of the business. This happens often. The obsession some have with quarter-by-quarter profitability for a listed South African company does create problems. About a year ago, I realized that we had started to think about profit too often. Too many of our general management discussions were about how we were going to make the next half-year or quarter numbers. They were away from people, and away from the customer. That’s not why I ever go into business.”