Franchising is key for Yum! in China - Jeffrey Towson

Jeffrey Towson

Yum! China has been spun-off and needs a solid strategy to grow in China. Franchising is such a key strategy, writes Beida business professor Jeffrey Towson on his weblog. " This is exactly what 3G Capital has done since acquiring Burger King."

Jeffrey Towson:

Most of the China outlets are owned. Franchising new outlets would accelerate growth. While Yum’s +7,000 China outlets is a lot, it is not overwhelming for China. You could have a lot more. Franchising would get you there faster. 

But franchising decreases operational control. That has big implications in general. And this is a particular concern in a country rife with food safety issues. 

Another idea is to just franchise the existing outlets. That would really move the needle financially. It would free up a lot of capital, get the employees off the payroll and spike the return on equity. 

Note: This is exactly what 3G Capital has done since acquiring Burger King. They shifted the existing units to franchises and have more than doubled their earnings in a few years. However, I believe the China Burger King franchise is still under a master franchise agreement with Cartesian Capital in New York. So this is mostly a non-China story. Anyways, I wouldn’t be surprised if the activists bring up ... franchising repeatedly.

More at Jeffrey Towson's weblog.

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McDonald´s also sells its China operation - Ben Cavender

Ben Cavender

In line with expectations, McDonald´s has sold a controlling stake of its China and Hong Kong operation to private investors, after competitor Yum did the same last year. With the new financial resources, the China operation can improve fast, says Shanghai-based retail analyst Ben Cavender to Bloomberg.

Bloomberg:

Oak Brook, Illinois-based McDonald’s and rival Yum China Holdings Inc., which owns the KFC and Pizza Hut brands in the mainland, are combating rising domestic competition as they fight to retain middle-class Chinese consumers who increasingly demand high-quality and healthier dining options. The fast-food giant is also looking at further deals in markets such as South Korea, Japan and Southeast Asia as it streamlines its sprawling global operations. 

“Citic and Carlyle’s resources will allow McDonald’s to expand rapidly and refurbish old restaurants, which is expensive to do,” said Ben Cavender, a Shanghai-based analyst at China Market Research Group. “Given that McDonald’s lags behind KFC in terms of store count in China, we can expect them to expand aggressively and invest heavily.” 

Yum China Holdings and Starbucks Corp. plan to add about double the number of stores -- as many as 3,000 in China -- over the same period. 

Under the deal, Chinese state-backed conglomerate Citic and Citic Capital Partners will jointly take a 52 percent stake, while Carlyle will hold 28 percent. 

While Citic and Carlyle are paying a “substantial price,” for 20-year franchise rights, the food and beverage chains are “cash machines,” Cavender said. In contrast, Yum China licensed the KFC and Pizza Hut brands from Yum! Brands Inc. for 50 years, with automatic renewals that could make it possibly indefinite.

More in Bloomberg.

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China spin-offs can add much value to share-holders - Shaun Rein

Shaun Rein

Yum spinning off its China operation attracted most attention, but the model of selling a well-established China operation is a model that can generate a lot of value, at least for the share-holders, says business analyst Shaun Rein in Bloomberg.

Bloomberg:

Yum China has issued 386 million shares at $24.36, which puts its valuation at around $9 billion, according to New Jersey-based research firm Edge Consulting Group. 

“When their China operations get so big and are clearly catering just to the China market, splitting off could unlock a lot of value for shareholders,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “If I were an activist hedge fund investor, I would be looking at carving out brands within large conglomerates that are China plays.” 

Doing so allows Yum’s management of the China business to tailor its operations and products more swiftly to changing local conditions, such as the menu preferences of diners in different parts of the country, mobile-based payments systems, hiring and other factors. It also helps tap Chinese investors willing to pay high premiums for a stake of an international brand’s China operations. Yum sold a combined $460 million stake in its Chinese business to Primavera Capital Group and an Alibaba Group Holding affiliate, Ant Financial Services Group, in September. 

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein. 

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” said Rein. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”

More in Bloomberg.

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Why Yum, Starbucks are lagging in China - Shaun Rein

Shaun Rein

Getting traction among China´s picky consumers is one thing, keeping it up is another. Larger foreign firms like Yum and Starbucks have been slow in picking up consumer trends in China, says business analyst Shaun Rein to Bloomberg, for example in their adoption of fintech developments.

Bloomberg:

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein. 

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” said Rein. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”... 

Starbucks stores in China still do not accept Alipay or Wechat, only Apple Pay, a decision which costs them 5 to 10 percent of sales, estimates China Market Research Group’s Rein. 

Starbucks launched its own mobile payment system in China in July, allowing customers to pay with pre-loaded Starbucks Gift Cards via their mobile devices, according to the company. 

As China’s consumer market continues to grow, more overseas companies may consider following Yum down the path of segregation.

More in Bloomberg.

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Yum: selling fast food in a contrary market - James Roy

James Roy

Yum, with brands like Pizzahut and KFC, had a hard time because of food scandals. But worse is, says retail analyst James Roy to Bloomberg, is that increasingly heath-conscious consumers do not want their food anymore.

Bloomberg:

“They’ve made progress in China but that’s really from hitting rock bottom a couple of years ago after their food safety scandal,” said James Roy, a senior analyst at China Market Research Group. “They face a larger issue in the market with Chinese consumers becoming more health-conscious and moving away from fast food.”

More in Bloomberg.

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Getting your brand right in China is tough - Tom Doctoroff

Tom Doctoroff by Fantake via Flickr

Foreign brands in China have seen huge successes and massive failures. Tom Doctoroff gives in Gulf News his take on the difficulties of building a brand in this booming economy. Gulf News:

After setbacks for brands such as Home Depot, Best Buy and Barbie, which have closed stores or withdrawn after failing to win over Chinese consumers, the lessons of Huai Hai Road are germane.
"Anybody who comes into this market and thinks they can just plant their brand and let it grow will be sadly mistaken," Tom Doctoroff, north Asia chief executive of JWT, the advertising agency, said.
"Any [foreign] business model needs to be brought into alignment with Chinese cultural and consumer imperatives."
He points to Pizza Hut, Starbucks and Haagen-Dazs as the gold standard for foreign brand success in China. They took products alien to Chinese tastes and made them popular.
Pizza Hut and KFC, both owned by Yum Brands, localised their menu.
But adjusting to local tastes is not just about food, Doctoroff says. Pizza Hut, Starbucks and Haagen-Dazs all focused on eat-in, rather than carry-out, in China. "Barbie just got plonked down in China."
Even luxury goods companies have had to adapt their model, he says. The Chinese market for luxury goods is "broad and shallow".

More in Gulf News.

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