Bittersweet alliances for Chinese brands with foreign investors
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E-mail China Daily, February 22, 2016
As more and more successful consumer-facing Chinese brands get into the hands of foreign investors, a saga of mixed fortunes and bittersweet experiences is unfolding across the country.
The famous hot pot restaurant chain Little Sheep is a classic case study.
There was a time, not very long ago, when January-February, China's coldest period of the year, would see Chinese making a beeline for hot pot. And the ultimate winter dining experience for many was a visit to Little Sheep, whose Mongolian hot pot was the most popular item on its menu.
Little Sheep's success was legendary, until competition and a change in management put paid to its halcyon days.
Little Sheep was founded in 1999 in Baotou, Inner Mongolia autonomous region, North China. It was ranked second among the top 100 national catering enterprises in 2004, when its revenues from 721 hot pot outlets across China reached 4.33 billion yuan ($658 million).
Its main business was hot pot catering, condiment production and mutton processing. So adept was the company at them it coasted on its fame to a listing on the Hong Kong stock exchange in June 2008, the first Chinese hot pot restaurant to go public.
It was later taken over by Yum Brands Inc as the country's opening up to foreign investment in the 1980s and 1990s gathered momentum. In February 2012, Little Sheep was taken private by Yum Brands, becoming the first Chinese restaurant to get delisted.
Global giants such as Yum Brands brought with them strong financial backgrounds, rich marketing experiences and advanced management systems, which gave them an edge over Chinese companies, mostly State-owned enterprises, in buying successful local brands.
Once taken over by international majors, well-known Chinese brands experienced different development paths.
For instance, Yum Brands, the parent of KFC, Pizza Hut and Taco Bell, integrated logistics, staff training and the menu of Little Sheep. It also shut some of the franchise outlets of Little Sheep.
From the peak of 721 outlets, Little Sheep has shrunk to a 202-restaurant chain now. In recent years, customer flow has ebbed due to internal and external factors, said people familiar with the goings on by quoting the China Business News.
Intensifying competition from new hot pot chains such as Haidilao Hot Pot and Xiabu Xiabu meant Little Sheep has to struggle to survive.
Chen Peng, a 25-year-old white-collar worker in Beijing, said, "The last time I went to Little Sheep was around ten years ago, when I was still at middle school. Later, its outlet near my home closed, so I don't go there anymore.
"At that time, I used to find Little Sheep hot pot delicious. Now, there are more popular hot pot chains such as Haidilao Hot Pot that offer good service in Beijing."
Yet, old-timers acknowledge Little Sheep's hot pot recipe was unique, combining various nutritious ingredients that lent a delicious flavor to the soup, without consumers having to blend and dip any seasonings.
Tasty, healthful soup and fresh meat still are Little Sheep's core competence. But Yum Brands standardized Little Sheep's operations and menu, overlooking many details of Chinese food culture, it is said.
"Standardization is a two-edged sword. After the acquisition (by Yum), the original team (of Little Sheep) disbanded, and the new management team doesn't have deep understanding of Chinese food," Li Zhiqi, chairman of CBCT Future Marketing Consulting Group, said.
Li said restaurant chains need a large amount of capital at infancy. But there are two kinds of capitals. One, capital brought in by investors with a deep understanding of the sector who bet on long-term growth. Two, capital of investors who seek to cash out quickly.
Owing to intense competition in meat production, cross-sector capital was injected, which hurt the long-term growth of the sector, he said.
Such turn of events is not limited to the restaurant business.
In the fizzy drinks sector, Beibingyang (meaning: Arctic Ocean) orange soda was a time-honored brand, launched in 1936 from an old ice-making factory in Beijing.
Beibingyang dominated the Chinese market in the 1980s before it became a joint venture with US-based PepsiCo Inc in 1994. Pepsi halted production of Beibingyang soda that disappeared from the shelves of Chinese stores.
But, in 2011, Beibingyang dissolved its partnership with Pepsi and revived its best-selling orange soda.
Guo Honglei, assistant to the general manager of Beibingyang, said, "We are doing well now. Many stores cannot keep enough bottles in stock though."
Thankfully, not all takeovers by foreign investors destroy local brands.
In 1994, global fast moving consumer goods giant Unilever took over management of leading domestic toothpaste producer Zhong Hua.
Founded in 1954 in Shanghai, Zhong Hua had been a famous local brand. Unilever became a shareholder with an investment of $18 million.
Since 2001, the Anglo-Dutch company poured in cash to market the Zhong Hua brand. The toothpaste contributed an average annual sales revenue of 1 billion yuan to Unilever in recent years, according to Linkshop, a leading Chinese retailing information provider.
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