BigMac­may go cold as Yum­snags Alibaba deal

Both US com­pa­nies re­al­ize lo­cal part­ners and fran­chis­ing are the way for­ward

China Daily (USA) - - BUSINESS - By BLOOMBERG

KFC’s part­ner­ship with an Alibaba af­fil­i­ate puts the pres­sure on the Golden Arches in China more than ever.

By al­ly­ing with a backer of the coun­try’s top food de­liv­ery web­site, KFC owner Yum! Brands Inc has taken a step to­ward solv­ing the dilemma of slow­ing growth in its big­gest mar­ket out­side the United States. It’s a deal that McDonald’s Corp, the Big Mac maker that is also in the throes of sell­ing its China busi­ness, will do well to match.

Yum and McDonald’s are among a clutch of West­ern brands that have re­al­ized they need a Chi­nese part­ner to stay on top of shift­ing con­sumer tastes in the na­tion. The price of not get­ting that strat­egy right has meant re­treat in re­cent years for brands from Tesco and B&Q to Best Buy.

For McDonald’s and Yum, both of whom have been hurt by food-safety scan­dals in China, the chal­lenge is not only to im­prove their rep­u­ta­tion but also to stay on top of a move to­ward health­ier foods, cap­i­tal­ize on con­sump­tion growth in smaller cities where they have lit­tle pres­ence, and most im­por­tantly, join the Chi­nese rush to per­form ever more daily tasks online.

Yum’s fast-food op­er­a­tions in China, which also in­clude Pizza Hut, span 7,200 out­lets. Yet its share of the mar­ket has dropped from close to 40 per­cent in 2012 to 23.9 per­cent last year, while McDonald’s has slid from a high of 16.5 per­cent in 2013 to 13.8 per­cent, ac­cord­ing to data from Euromon­i­tor In­ter­na­tional. McDonald’s has about 2,200 out­lets in the coun­try.

Sell­ing a piece of the China busi­ness to pri­vate-eq­uity firm Pri­mav­era Cap­i­tal and Alibaba’s Ant Fi­nan­cial will move Yumup the path of online rel­e­vance faster than its US com­peti­tor. Ant is the owner of China’s top pay­ments plat­form and holds a stake in­food­de­liv­ery web­site Eleme, key pieces of the jig­saw needed to help Yumap­peal to cus­tomers who want to or­der and pay for food through their mo­bile phones.

In Pri­mav­era, Yum also gets one of the coun­try’s top deal­mak­ers: Founder Fred Hu is the for­mer Gold­man Sachs chair­man in charge of the firm China and will serve as chair­man of YumChina, which will be spun off from the par­ent into a sep­a­rate com­pany next month.

Ad­mit­tedly, Pri­mav­era and Ant will buy only a small mi­nor­ity stake in Yum China — less than 6 per­cent ini­tially. Still, that em­pha­sizes the dif­fi­culty forMcDon­ald’s, which is seek­ing a buyer for the whole busi­ness.

Un­like Yum, McDonald’s has no plans for a list­ing of its China op­er­a­tions. In com­mon with its ri­val, though, the com­pany has re­al­ized that lo­cal part­ners and fran­chis­ing are the way for­ward. Most McDonald’s restau­rants in the Chi­nese main­land, Hong Kong

Yum’s share of the mar­ket in China last year McDonald’s share of the mar­ket in China last year

and South Korea are di­rectly owned by the com­pany. The chain aims even­tu­ally to have 95 per­cent of restau­rants in Asia un­der lo­cal own­er­ship, it said in­March.

The co­nun­drum for McDonald’s is that hand­ing over the reins to lo­cal part­ners may risk its brand, al­ready dented by a 2014 food-safety scare. The com­pany has im­posed strin­gent deal con­di­tions such as a three-year ban on se­nior man­age­ment changes, it was re­ported in­May— though this has had the ef­fect of de­ter­ring bid­ders.

McDonald’s has at­tracted only a fewChi­nese suit­ors and none has the online heft that Ant brings. The in­ter­ested par­ties (their pri­vate eq­uity part­ners aside) aren’t known for ei­ther online con­sumer ex­per­tise or re­tail ex­po­sure. The ros­ter so far in­cludes bad­loan man­ager China Cinda As­set Man­age­ment and dairy pro­ducer Bei­jing Sanyuan Foods. Sanyuan’s largest share­holder is State-owned Bei­jing Cap­i­tal Agribusi­ness Group, which runs some McDonald’s restau­rants in Bei­jing. Chi­nese State con­glom­er­ate Citic Group, which has only a mod­est re­tail pres­ence, is also in the run­ning.

There’s lit­tle dan­ger McDonald’s would ever have to re­treat from China. The chain has been chalk­ing up gains in same-store sales this year, after sev­eral quar­ters of de­clines. It re­mains China’s sec­ond­most­fast-food brand, ac­cord­ing to Euromon­i­tor.

BLOOMBERG

A pedes­trian walks past an ad­ver­tise­ment for McDonald’s Corp in the Fu­tian dis­trict of Shen­zhen.

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