25 October 2016
China’s fast-food market continues to register double-digit growth. Photo: Bloomberg
China’s fast-food market continues to register double-digit growth. Photo: Bloomberg

Chinese companies put western fast-food chains on the menu

Alibaba’s financial affiliate Ant Financial has recently become a part owner of KFC in China.

State-owned Beijing Capital Agribusiness Group is reportedly looking to acquire McDonald’s outlets in China, including Hong Kong.

And Lenovo took over PizzaExpress two years ago.

It seems that western fast-food chains are looking for local partners in China in order to take a bite of the huge and potentially lucrative Chinese market.

Ant Financial and private equity firm Primavera will invest US$410 million and US$50 million, respectively, in Yum Brands China.

Beijing Capital Agribusiness Group is reportedly planning to join TPG and spend US$2 billion to US$3 billion to acquire McDonald’s outlets in China and Hong Kong.

Three other state-owned companies – CITIC Group, Beijing Tourism Group and Sanyuan Group – are also keen to acquire McDonald’s China unit.

Hony Capital Ltd., the Chinese private-equity firm of Lenovo Holdings, bought British restaurant chain PizzaExpress Ltd. for 900 million pounds (US$1.2 billion) in 2014.

China’s fast-food market continues to register double-digit growth.

KFC versus McDonald’s

McDonald’s has long lagged behind its rival KFC in the mainland market.

As of last year, KFC owns over 5,000 outlets in China, more than double the 2,200 shops owned by McDonald’s.

McDonald’s has had a strained relationship with its Chinese partners for years.

And that partially explains its poor performance in China.

In the early 1990s the US fast-food chain was asked to form a joint venture with Chinese partners as it started to expand into the mainland market.

McDonald’s teamed up with several state-owned enterprises in different regions, including Sanyuan Group and Beijing Tourism Group.

However, it insisted on implementing its US-style management in China, and it didn’t see eye to eye with its Chinese partners on menu, marketing and procurement.

Meanwhile, the fast-food business suffered from the growing number of health-conscious consumers as well as intensifying competition for restaurant space.

Given these considerations, it does make some sense for these western fast-food chains to welcome Chinese partners.

The McDonald’s, Yum Brands and PizzaExpress deals all involved private equity fund.

That means Chinese companies can buy into leading western fast-food chains without spending a fortune.

Chinese acquirers care more about potential synergy apart from the underlying business, and they intend to use leverage.

Ant Financial said it intends to promote its mobile payment business through KFC’s over 5,000 outlets across China and to gain access to big data of Chinese customers.

Beijing Capital Agribusiness Group and Sanyuan are both suppliers of farm produce.

They could enhance upstream and downstream synergies with McDonald’s, and leverage on the US brand to boost their image and sales.

Lenovo has similar strategic thinking in mobile payment and big data in acquiring PizzaExpress. It could help Hony Capital become a household name in the global market.

As such, all these deals could become win-win situations for both parties.

This article appeared in the Hong Kong Economic Journal on Sept. 6.

Translation by Julie Zhu

[Chinese version 中文版]

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