Cry­ing un­cle!

Is China’s crav­ing for Amer­i­can fast food start­ing to die down?

China Daily (USA) - - FRONT PAGE -

When it comes to China’s multi­bil­lion dol­lar fast food industry, Yum Brands Inc and McDon­ald’s Corp are liv­ing large, en­joy­ing a com­bined 38 per­cent share of the mar­ket in 2015.

Yum’s KFC res­tau­rant chain and the Golden Arches have long en­joyed a run of su­per­sized growth as con­sumers craved a taste of Amer­i­cana.

Now, as both these gi­ants eye spinoffs of their main­land op­er­a­tions, an­a­lysts are won­der­ing whether the glory days might be over.

There are signs that both com­pa­nies’ ab­so­lute dom­i­nance of a fast food industry they helped cre­ate is start­ing to slip away as con­sumers shift to health­ier op­tions and Chi­nese-style food chains — from huoguo (hot pot) to tang­bao (steamed buns)— pro­lif­er­ate.

These head­winds may ex­plain why in­vestor in­ter­est in Yum’s and McDon­ald’s China op­er­a­tions has been tepid, at least so far.

Yum’s plan to sell a mi­nor­ity stake to a Chi­nese part­ner seems on hold af­ter bid­ders ob­jected to the val­u­a­tion and terms, while McDon­ald’s has seen a few po­ten­tial bid­ders turned off by strin­gent deal con­di­tions.

Yumh as re­port­edly val­ued a 20 per­cent stake in its China busi­ness, which it plans to list as a sep­a­rate unit be­fore the year’s end, at $2 bil­lion. That’s the same price tag McDon­ald’s has re­port­edly put on its China fran­chise rights.

“There would def­i­nitely have been more buyer in­ter­est five years ago, but at that time they were do­ing so well that they couldn’t bear to sell,” said man­age­ment pro­fes­sor Li Wei­hua of the China Univer­sity of Po­lit­i­cal Science and Law, who has writ­ten over 30 books on fran­chise man­age­ment in China and cred­its KFC’s first store open­ing in 1987 as the start of the fran­chise industry in China. “With the bloom off the rose, if they don’t sell now, they would be worth even less five years later.”

For their part, both Yum and McDon­ald’s see prof­itable fu­tures for their China op­er­a­tions.

Yum’s fast-food op­er­a­tions in China, which also in­clude Pizza Hut, are still siz­able and span 7,200 out­lets. Yet, its to­tal share of the mar­ket has dropped sharply from 40 per­cent in 2012 to 23.9 per­cent last year.

Yum has raised its an­nual core op­er­at­ing profit growth fore­cast to at least 14 per­cent from the 10 per­cent at the be­gin­ning of the year based on China’s strong per­for­mance in the first half this year. It said it has a “mas­sive run­way for con­tin­ued growth.”

The share of McDon­ald’s, which has about 2,200 out­lets across China, has slid from a high of 16.5 per­cent in 2013 to 13.8 per­cent last year, ac­cord­ing to data from Euromon­i­tor In­ter­na­tional.

McDon­ald’s said that its same-store sales in its high­growth unit, which in­cludes China and Rus­sia, grew 1.6 per­cent in the lat­est quar­ter.

McDon­ald’s has at­tracted in­ter­est from suit­ors like Bei­jing Sanyuan Foods Co, San­power Group Co and Bei­jing Tourism Group, ac­cord­ing to peo­ple fa­mil­iar with the bid­ding. Both have rel­a­tively mod­est res­tau­rant fran­chises in their port­fo­lios.

Other more es­tab­lished res­tau­rant chains have not stepped forth. They in­clude Tai­wan prov­ince’s con­glom­er­ate Ting Hsin In­ter­na­tional Group, which has a 7.7 per­cent mar­ket share and con­trols the Di­cos fast-food chain, as well as Hua Lai Shi Cater­ing and Kungfu Cater­ing, whose mar­ket shares are 3 per­cent and 2.2 per­cent, re­spec­tively. China Re­sources Group, op­er­a­tor of Pa­cific Cof­fee, has also taken a pass.

Pa­cific Cof­fee has a dif­fer­ent fran­chise model from McDon­ald’s and Yum, and so it is hard to have op­er­a­tion syn­ergy if it buys the China busi­ness of the fast food brands, said Todd Li, its vice-pres­i­dent, in a phone in­ter­view on July 29.

At McDon­ald’s and Yum, fran­chisees act more like in­vestors and typ­i­cally take over prof­itable and es­tab­lished com­pany-owned out­lets. Pa­cific Cof­fee is look­ing for ex­pe­ri­enced fran­chisees to op­er­ate new­stores, Li said.

Po­ten­tial buy­ers may be re­luc­tant to spend bil­lions on es­tab­lished fast-food brands that are al­ready so fa­mil­iar with Chi­nese con­sumers. Yum’s KFC chain opened its first res­tau­rant near Tian'an­men Square in Bei­jing back in 1987.

“Com­pa­nies al­ready in this industry know that the brand might be big, but it’s out­moded in con­sumers’ minds. They would com­pare this to the amount of in­vest­ment re­quired of them,” said Hao Yongqiang, vice-di­rec­tor of the China Chain Store and Fran­chise As­so­ci­a­tion, which runs yearly ex­pos link­ing fast food brands to prospec­tive fran­chis­ers.

In an e-mail state­ment, McDon­ald’s de­clined to “spec­u­late fur­ther” on its ef­forts to sell off its fran­chise rights.

Shares of McDon­ald’s have dropped 0.5 per­cent this year, while Yum has risen 21 per­cent.

With the bloom off the rose, if they don’t sell now, they would be worth even less five years later.”

Li Wei­hua, pro­fes­sor at the China Univer­sity of Po­lit­i­cal Science and Law

JIANG DONG / CHINA DAILY

A girl holds a tray of Hello Kitty-themed food prod­ucts at a McDon­ald’s res­tau­rant in down­town Bei­jing.

CAO FUCHUAN / FOR CHINA DAILY

A group of stu­dents have meals at a KFC out­let in Luoyang, He­nan prov­ince.

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