Will Starbucks close? How much is the debt? See questions and answers about the brand crisis in Brazil

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SouthRock Capital, operator of the coffee shop chain in the country, filed for judicial recovery on October 31st. The court requested document examination, and the process is still ongoing. Facade of a Starbucks store, in the Vila Olímpia region, in São Paulo, on November 1, 2023. André Ribeiro/Estadão Conteúdo The company SouthRock Capital — operator of the Starbucks, Subway and Eataly brands in Brazil — filed for judicial recovery on October 31st, citing a series of financial problems. A day later, the São Paulo Court denied the request. Judge Leonardo Fernandes dos Santos, from the 1st Bankruptcy Court of São Paulo, pointed out a lack of information and requested an expert opinion on the documentation presented by the company. In his latest decision, on Tuesday (7), the judge partially anticipated the effects of the judicial recovery — which, in practice, temporarily protects part of the company’s assets. The recovery request, however, has not yet been accepted, and the process remains under analysis. Meanwhile, there are records of more than 40 Starbucks stores closing in the country. In total, the chain had 187 units in operation in Brazil. Now, there are 144 active. When contacted by g1, the company did not comment on the closed establishments. Understand, below, in nine questions and answers, the case of the Starbucks operator in Brazil: Why did SouthRock Capital file for judicial recovery? What is the company’s debt? What are the effects of a judicial recovery process? How many stores closed? What does the company say about the closure of the units? Did the company lose its Starbucks license? How much does SouthRock make per month from Starbucks stores? Was the license status decisive for the recovery request? Will Starbucks close in Brazil? 1. Why did SouthRock Capital file for bankruptcy protection? In the document presented to the Court, the company stated that it was facing an economic and financial crisis and listed a series of factors to justify the current situation and the request for recovery. Among them: the Brazilian economy; the Covid-19 pandemic, to which the company attributes the 95% drop in sales in 2020; still low sales in 2021 and 2022, which did not allow for the “full restoration of its cash flow”; and difficulties in obtaining working capital (i.e., resources for operating expenses) from financial institutions. According to the company, this entire scenario generated an “unprecedented crisis” and, although it tried to “recover”, the financial results of recent years were “high losses”. “Therefore, it is clear that the excess debt, the low profitability resulting from the closure of their restaurants (…) and the impossibility of obtaining new lines of credit compromised the applicants’ ability to [empresas do grupo SouthRock] honor their financial commitments as agreed”, says the document. 2. What is the company’s debt? The recovery request filed in court indicates that SouthRock has a total of R$ 1.8 billion in debt. The list was not disclosed of creditors. According to the document, 80% of the debt originates from “operations that were guaranteed by fiduciary assignments of receivables arising from the revenues of its restaurants”. This means that the majority of the company’s debts are linked to money (credit ) that it has to receive, but which is already committed as a guarantee of future payment to its creditors and suppliers. In the request for judicial recovery, the company’s lawyers also stated that the group made “huge investments and took on million-dollar debts to enable exploration ” of the Starbucks brand in Brazil. 3. What are the effects of a judicial recovery process? Judicial recovery serves to prevent a company in financial difficulty from closing its doors. It is a process by which the indebted company obtains a period of time to continue operating while negotiating with its creditors, under the mediation of the Court. Debts are frozen for 180 days, and the operation is maintained. It means, therefore, that the company stops paying amounts owed to creditors and suppliers for at least six months. When asking for more elements for evaluation, judge Leonardo Fernandes dos Santos, from the 1st Bankruptcy Court of São Paulo, mentioned the impacts of the process. “The simple granting of judicial recovery processing, in itself, automatically generates the suspension of all actions or executions against the debtor for a period of 180 days, among other important legal consequences”, he said, in a decision. 4. How many stores closed? At least 43 Starbucks stores have closed in Brazil since the bankruptcy filing. This is what data appears on the brand’s website and in the judicial recovery process. In the document, sent to the Court on October 31, SouthRock lists 187 Starbucks-owned stores in operation in the country. On the official map of the brand’s establishments, however, there are only 144 active establishments left, according to a consultation carried out by g1 until the last update of this report. Among the casualties is the iconic Alameda Santos store, close to Avenida Paulista, in São Paulo. There are also records of store closures in capitals such as Rio de Janeiro, Porto Alegre and Belo Horizonte. 5. What does the company say about the store closures? When contacted by g1, SouthRock did not comment on the closure of the establishments. He only said that “Starbucks units that are still in operation can be found on the website.” 6. Did the company lose its Starbucks license? SouthRock reported, in its bankruptcy filing, that Starbucks headquarters in the United States sent a “termination notice” on October 13th, through which “the immediate termination of the ‘Starbucks license agreements’ was declared.” . The cafeteria operator in Brazil, however, said it did not recognize the notification as valid, as “it was not carried out in compliance with current legislation”. He also stated that he will adopt “all appropriate measures and judicial measures in the appropriate time and manner.” “By not considering the notification received as the appropriate and necessary instrument for the effective termination of the Starbucks License Agreements, the Claimants [empresas do grupo SouthRock] they also understand that any effects arising from it do not exist – a matter that, it should be noted, must be dealt with by interested parties through appropriate procedural channels”, wrote the company’s lawyers. The licensing agreement and the start of operations of the coffee shop chain by SouthRock in the country took place in 2018. The value of the deal was not revealed at the time. In addition to the exclusive right to operate the stores, SouthRock started paying Starbucks licensing fees on sales — part of the agreement that would be resulting in the current obstacles. 7. Regarding Does SouthRock make monthly revenues from Starbucks stores? The company reported that it has gross monthly revenues of R$50 million from Starbucks stores, an amount that represents a “hugely significant portion” of its consolidated cash flow. According to SouthRock, The operation of Starbucks units “consists of one of its greatest assets.” 8. Was the license status decisive for the recovery request? The document presented to the Court indicates that it was. The company stated that, with the end of licensing, “there was no alternative other than to present this application”. In the piece, the company also argued that, without the protection of judicial recovery, it will experience “the real strangulation of its cash flow.” And he cited “the danger of harm.” “If the Claimants [empresas do grupo SouthRock] are prevented from operating Starbucks stores, their cash flow will be drastically and suddenly reduced, precisely during the most serious crisis experienced in its history, jeopardizing all the negotiations that had been carried out until then with its other creditors.” 9. Starbucks will close in Brazil? The company did not speak openly about the issue. Expert analysis, however, is that it is very unlikely that the brand will close its doors in the country. Brenno Mussolin Nogueira, insolvency specialist at Rayes & Fagundes Advogados, highlights that there is There are at least three ways for Starbucks to continue with its stores open: agreeing a contract with SouthRock, based on an improvement in the company’s situation; breaking with the current operator and closing a new license agreement with another company; Starbucks itself American company to take over the brand’s operations in Brazil. For him, the last option is the most likely, since the coffee shop has already “fallen into favor” with the Brazilian public. “Upon realizing that the country has welcomed the brand, Starbucks can decide to come with your own company. Our bet, therefore, is that it continues in Brazil. The only question is whether SouthRock continues, whether there is already another company in negotiation or whether it takes over the operations itself”, he says. According to the lawyer, it is difficult to predict the outcome of the request to break the contract between Starbucks and the operator of the company in Brazil. The process will depend on contractual details that have not been made public. A crucial point, points out the expert, is knowing whether the contract is linked to Brazilian or North American legislation, which have distinctions. “If it is by legislation Brazilian brand, it is very possible that, initially, the use of the brand will continue with SouthRock. If it is the North American one, it will come into greater conflict in relation to the laws”, he says. For Brenno Nogueira, if the contract is anchored in United States legislation, it is likely that the request to break the current license will be accepted. “The Starbucks also has the possibility of filing a lawsuit in Brazil saying that SouthRock is operating improperly with its brand. But this still needs to be deliberated so that we can have a better vision of what could happen”, he concludes. When contacted, the North American Starbucks said that it is aware of SouthRock’s “business restructuring” and that it will not comment on internal discussions about licensing of partners.

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