In an article published on the Metrópoles website, our lawyer, Dr. Camila Crespi, talks about how the crisis at SouthRock management company threatens the future of Starbucks in Brazil.

The request for judicial recovery presented to the São Paulo Court by the manager SouthRock Capital, operator of brands such as Starbucks, Subway, Eataly and Brazil Airport Restaurants, is the result of a crisis that has been dragging on since the beginning of the Covid-19 pandemic, in mid-2020, and has worsened in the following years.

As reported earlier by Metrópoles, SouthRock has estimated debts of R$1.8 billion, according to a document filed with the 1st Bankruptcy Court of São Paulo. According to the company, the measure aims to “financially protect its operations in Brazil, linked to strategic decisions to adjust its business model to the current economic reality”.

THE judicial recovery is a process that allows organizations to renegotiate their debts, avoiding the closure of activities, layoffs or non-payment of employees. Through this instrument, companies are no longer required to pay creditors for a period of time, but they must present a plan to settle their accounts and continue operating. In general terms, judicial recovery is an attempt to avoid bankruptcy.

In its request for judicial recovery, SouthRock reports that it suffered a drop of 95% in sales in 2020, 70% in 2021 and 30% in 2022. The manager claims that it was the victim of default by some of its business partners. Other difficulties mentioned are access to credit for working capital, in addition to the increase in prices of inputs for retail - which ended up harming the company's payment capacity.

SouthRock's business

SouthRock was founded in 2015 and operates in the food and beverage segment, having specialized in airport restaurant chains in Brazil. In 2018, the management company closed a licensing agreement with Starbucks and became the exclusive operator of the brand's restaurants in the country.
Last year, the company took over management of the Subway franchises, which were excluded from the bankruptcy filing. The company also operates with the Eataly and TGI Fridays brands.
In 2017, Brazil Airport Restaurants, another brand managed by SouthRock, opened its first stores in some of the busiest airports in the country – today, there are 25 points located in São Paulo, Rio, Brasília, Florianópolis and Belo Horizonte.

Company did not resist the pandemic

According to experts in judicial recovery interviewed by Metrópoles, the determining factor in SouthRock's downfall was the pandemic.
“This case fits within the expectation we had, since last year, that there would be many judicial recoveries due to the crisis caused by the pandemic. Social isolation led many companies to close stores. SouthRock saw a very sharp drop in sales at physical stores in 2021, which continued into 2022, precisely at the height of the pandemic and restrictions on movement, including at airports. They were unable to rebuild the cash flow of these last few years,” explains lawyer Camila Crespi, from Luchesi Advogados, a specialist in corporate restructuring.

“They, in fact, need judicial recovery to try to renegotiate with creditors. If they do not resort to this institution now, the debt tends to become unpayable,” he says.

Renato Scardoa, partner at S.DS Scardoa e Del Sole Advogados, says that the judicial recovery instrument is perfectly suited to SouthRock's case and could, in theory, prevent the company from going bankrupt. “As a rule, judicial recovery serves to rescue companies that are economically viable, that is, that have market appeal, but whose financial capacity can no longer meet their commitments to creditors or suppliers,” he notes.

“The SouthRock case seems to be quite peculiar. It was a company with potential, but based on an onerous relationship with Starbucks that could only be justified by its strong expansion. To expand, it needed to take out credit. The pandemic and post-pandemic period changed the consumer profile a little, shrinking the operation, and the sum of these factors led to the financial collapse,” explains the lawyer.

The Future of Starbucks

As the Metropolises reported this morning, SouthRock has lost the right to operate the Starbucks brand in the country. The termination of the contract was confirmed on Friday (27/10). The manager is trying to reverse this termination in court.

On October 13, Starbucks Coffee International sent a request to SouthRock and the group companies that operate the brand in Brazil to terminate the contract. The claim was that the operator had failed to pay certain obligations related to the license, such as royalties.

SouthRock told the court that the Starbucks operation is its largest asset, with a turnover of around R$50 million per year. Therefore, the company claims, it is an essential operation for the company.

“I believe the judge will grant this injunction to SouthRock, suspending the effects of the termination and establishing mediation between the parties. After all, the company operates the Starbucks brand in Brazil. Their business activity is the exploitation of the brand. If Starbucks terminates the contract and they are no longer authorized to operate in Brazil, it will become a regular coffee shop. It will no longer be Starbucks, it will completely lose its business configuration. Just like Eataly, which would become a regular market,” says Camila Crespi.

“The brand they operate is an essential activity for the company. If they are prevented from operating Starbucks, this completely undermines the operator’s own business activity,” concludes the lawyer.

Renato Scardoa shares the same assessment and understands that “the best path would be to maintain the licensing agreement by selling SouthRock”. “If this does not happen, in theory, Starbucks could license the brand to another player in the market and SouthRock would go bankrupt due to the loss of its reason for existing”, he says.

“The collapse of SouthRock could generate a perverse cascade effect for franchisees, suppliers, landlords and employees,” adds Scardoa.

The American company Starbucks began operations in Brazil at the end of 2006, through a joint venture with local investors. A joint venture is a business collaboration model that consists of the union of two or more companies with the objective of executing a project.

Initially, the company was controlled by Cafés Sereia do Brasil, which held 51% of the business. In 2010, the group in the United States announced the purchase of the rest of the operation, acquiring 100% of Starbucks Brasil Comércio de Cafés. Currently, there are 190 stores spread across the country.

In 2019, Starbucks expanded its initial operation, which was focused on São Paulo and Rio de Janeiro, and now also has a presence in Santa Catarina, Distrito Federal, Rio Grande do Sul, Paraná and Minas Gerais.

Until the termination of the contract, SouthRock was responsible for all stores as master licensee, without sub-franchising the units. When questioned by the reporter of Metropolises Regarding the number of Starbucks stores closed in the country, the manager did not reveal figures. The report found that more than 30 units closed their doors in recent months, both in large cities, such as São Paulo and Rio, and in small or medium-sized municipalities.

In a note sent to the Metropolises, SouthRock says it “continues to operate the Starbucks brand in Brazil and is committed to continuing to work closely with its business partners to develop the brands in its portfolio in Brazil.” “Alignments on licenses are part of the judicial recovery process and are carried out directly with these partners,” the company says.

Reproduction source: Metrópoles