Fast-food giants eye Chinese dining
0 
YUM! Brands Inc's proposed bid for China's Little Sheep Group Co, the operator of a hot-pot chain in China, is the latest sign that foreign companies are stepping up their forays into China's fast-food restaurant sector.
Overseas fast-food chains have expanded operations in China at a rapid pace in recent years, reaching a point where it's become harder to make inroads. Buying into Chinese food chains is giving them a new growth channel amid furious market competition and domestic rivals who are expanding.
Yum, which runs KFC and Pizza Hut restaurants, said at the end of April that it wants to buy the remaining stake it doesn't already own in Little Sheep. Yum bought a 20 percent stake in Little Sheep in 2009 for HK$493 million (US$63 million) and increased the shareholding to 27.17 percent last year.
Louisville, Kentucky-based Yum said the takeover is under consideration and subject to regulatory approvals. The Canadian daily Globe and Mail reported that the proposed bid has been filed with relevant government agencies in China. No details have been made public.
Zhang Gang, chairman of Hong Kong-listed Little Sheep, holds a 2.41 percent stake, or 24 million shares, and Possible Way International Ltd, a Hong Kong-based company, owns a 29.86 percent stake.
"The deal, if it goes ahead, will enable Yum to expand from fast food to traditional Chinese dining, which is the biggest sector and with the most potential in China," said Joy Huang, a Euromonitor International Shanghai analyst.
Yum has said China, where it operates under its flagship brands KFC and Pizza Hut, is its most important market. It's a highly competitive one, with multinational rivals like McDonald's Corp and Burger King clamoring for more customers.
China accounted for 54 percent of Yum's overall profit of US$264 million in the first quarter of this year. Yum's revenue in China increased 18 percent to 32.5 billion yuan (US$5 billion) last year, but its market share in the fast-food segment slipped to 39.9 percent from 40.3 percent in 2009, according to Euromonitor.
The rapid expansion of international fast-food chains in China is pushing up real estate rental costs and squeezing the earnings of individual outlets. Keeping up service standards and a base of trained workers also has challenged fast-food managers.
"Yum has to seek growth in new areas," Euromonitor's Huang said.
"A stronger presence in Chinese-style food service would help solidify its market position and increase market share."
Baotou, Inner Mongolia-based Little Sheep operates 179 self-owned restaurants and 274 franchised outlets throughout the Chinese mainland, according to its 2010 annual report. Its net income rose 21 percent last year. The company plans to open 40 outlets this year.
Food service chains have been buoyed by rising disposable income in China over the past three years. China's restaurant sector reported revenues of 1.76 trillion yuan last year, up 18 percent year on year, according to the National Statistics Bureau.
Yum, which runs 3,200 KFC and 500 Pizza Hut restaurants in China, earlier said it plans to open 500 new stores every year over the next three years in the country. McDonald's plans to have 2,000 restaurants across the nation by 2013, up from its existing 1,300 outlets.
In 2004, Philippine fast-food giant Jollibee Co entered the Chinese market by acquiring 85 percent of Yonghe King, a Chinese fast-food restaurant that specializes in noodles.
Jollibee completed its takeover of Yonghe King by acquiring the remaining 15 percent stake for US$6 million in 2007. According to its plans, Yonghe King outlets will increase to 700 over the next five years, up from the current 200.
Though foreign fast-food chains are accelerating expansion in China, traditional Chinese dining still dominates the market. According to Euromonitor, revenue at Chinese-style food service chain rose 16 percent to 78 billion yuan last year.
In order to appeal to local consumers, Yum fused its KFC model with Chinese dining patterns in a chain of fast-food outlets called East Dawning, launched in 2004. It now operates 20 of the restaurants in China.
Lin Yue, chief analyst at Lingyan Consulting Co, said merely adding Chinese-style food, like fried shrimp, to menus isn't enough if Yum wants to carve a bigger market presence.
"Both Yum and Little Sheep compete for prime locations and business opportunities in second-tier cities," Lin said. "Compared with foreign companies, domestic food chains are better at offering distinctive menus that appeal to consumers, and they obviously know the market better."
Go to Forum >>0 Comments