China a key des­ti­na­tion for US-based com­pa­nies

China Daily (Hong Kong) - - BUSINESS - By ZHANG YUWEI in New York yuweizhang@chi­nadai­lyusa.com

De­spite slower eco­nomic growth, China re­mains a key des­ti­na­tion for United States­based com­pa­nies.

US re­tail­ers that have en­tered the Chi­nese mar­ket with longterm plans, in par­tic­u­lar, are look­ing into fur­ther ex­pan­sion in the world’s sec­ond- largest econ­omy, ac­cord­ing to a re­cent re­port by ratings agency Stan­dard & Poor’s.

Among the 150 US re­tail­ers and restau­rant com­pa­nies rated by S&P that have op­er­a­tions in China, five were an­a­lyzed in the re­cent re­port in terms of their ex­po­sure to China and the strate­gic im­por­tance that they at­tach to the coun­try.

Three out of those five com­pa­nies — McDon­ald’s Corp, Starbucks Corp and Yum! Brands Inc — are restau­rant com­pa­nies. The other two are re­tailer Wal­Mart Stores Inc and cloth­ing chain Gap Inc.

He­lena Song, the New York­based di­rec­tor of S&P cor­po­rate and govern­ment ratings, said US re­tail­ers that ex­pand into China tend to be the “largest play­ers in their cat­e­gory”.

Re­fer­ring to the five sam­ple com­pa­nies in the study, Song noted that these com­pa­nies have al­ready pen­e­trated the do­mes­tic US mar­ket, have ex­pe­ri­ence in in­ter­na­tional ex­pan­sion projects, and boast strong global brands and solid cash flow to sup­port mean­ing­ful and longert­erm in­vest­ments.

“As the com­pa­nies es­tab­lish a base and ac­cu­mu­late more ex­pe­ri­ence in China, they de­velop more lo­cal op­er­a­tional knowl­edge and ex­per­tise,” said Song, who led the study.

Most US fast- food

As the com­pa­nies es­tab­lish a base and ac­cu­mu­late more ex­pe­ri­ence in China, they de­velop more lo­cal op­er­a­tional knowl­edge and ex­per­tise.” HE­LENA SONG DI­REC­TOR, S&P COR­PO­RATE AND GOVERN­MENT RATINGS

restau­rant com­pa­nies have shown a big ap­petite for China, with some en­ter­ing the na­tion as early as the 1980s. Yum! Brands, for ex­am­ple, en­tered the coun­try by open­ing a KFC in Bei­jing in 1987. Yum! Brands’ of­fi­cials have called China the “great­est restau­rant op­por­tu­nity of the 21st cen­tury”. And for good rea­son. Af­ter more than two decades in the coun­try, KFC is the largest fast- food chain in China with more than 4,400 restau­rants in some 850 cities across the na­tion. In 2012 alone, Yum! Brands’ Shang­hai-based China divi­sion opened nearly 900 new restau­rants in the coun­try and gen­er­ated more than $1 bil­lion in profit.

Song said that the US quick­ser­vice restau­rants’ suc­cess­ful ex­pan­sion in China re­flects their “strong brand name ap­peal, solid fi­nan­cial re­sources and ex­pe­ri­ence in de­vel­op­ing new in­ter­na­tional mar­kets”.

“More­over, they have helped change and shape how younger gen­er­a­tions eat, drink and live in mod­ern day China,” said Song, adding such ex­pan­sion will con­tinue as con­sumer spend­ing con­tin­ues to in­crease and as the taste pro­file of the Chi­nese con­tin­ues to evolve.

The past year may not have been a fruit­ful one for Yum! Brands, as the com­pany saw a de­cline of about 10 per­cent in its China earn­ings for the first three quar­ters be­cause of safety con­cerns over its poul­try sup­pli­ers.

In the study, S&P pre­dicted that the neg­a­tive trend for Yum! Brands in China will mod­er­ate in the com­ing year and store sales will “turn pos­i­tive” in 2014 be­cause of the com­pany’s com­mit­ment to lo­cal­iza­tion in menu ini­tia­tives and cus­tomer outreach.

As many econ­o­mists have pointed out, China’s slower GDP growth — cur­rently at 7.8 per­cent com­pared with its one-time dou­ble digit pace — is a good op­por­tu­nity for the coun­try to re­con­sider its growth model.

China, as many ex­perts sug­gest, needs to shift from an in­vest­ment-led econ­omy to­ward a con­sump­tion-driven model.

The S&P study pointed out that grow­ing do­mes­tic de­mand will likely ben­e­fit Western re­tail­ers with suc­cess­ful op­er­a­tions in the coun­try.

The ex­pan­sion of US re­tail­ers in key in­ter­na­tional mar­kets, such as China, is a sup­port­ing fac­tor for ratings, be­cause it strength­ens the com­pa­nies’ busi­ness-risk pro­file through greater scale and geo­graph­i­cal di­ver­sity, as well as bet­ter com­pet­i­tive ad­van­tages, op­er­at­ing ef­fi­ciency and prof­itabil­ity over time, the S&P re­port said.

The fu­ture of these re­tail­ers in China does face some chal­lenges, both among them­selves and among China’s do­mes­tic brands.

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