U.S. fast food restaurant multinationals McDonald’s and Yum! Brands (parent company of KFC, Pizza Hut, and Taco Bell) have announced the sale of their operative rights in China and Hongkong.
Both quick restaurant giants are losing market share in China basically because of the country’s rising income levels and increased local competition. Some food scandals have no way helped both US fast food giants as well. At las negative sentiment, protests and boycott against some well known US brands triggered in some Chinese regions by an international court ruling on claims regarding the South China Sea, have negatively affected Yum! Brands sales -specifically at KFC and Pizza Hut- latest Summer.
The market share of Yum! Brands (the parent company of KFC, Pizza Hut, and Taco Bell) has seen a reduction in in China from a 38.8% in 2010 to 23.9% in 2015.
McDonald’s market share of fast food restaurants in China has declined in the same time period from the 15.1% to the 13.8%.
A 2014 survey by Millward Brown, showed that less than a 25% of Chinese people described Pizza Hut as a “desirable brand,” compared to the 39% in 2012.
The fact that local restaurants increase their locations and reduce prices becoming true competitors of the US giants adds as another driver for US. chains share loss. Just picking one example, the Taiwan-owned fried-chicken chain Dico’s launched 948 restaurants within the Great Wall between 2011 and 2013. The chain was operating more than 2,000 stores across China in 2015.
Despite the market share loss, Chinese operatios are a good business both for Yum! and McDonald’s.
Yum! currently operates around 5,000 KFCs and 3,000 Pizza Huts in China. the Chinese outlets account for over half of the US multinational’s global revenue and profit.
McDonald’s operates 2,200 locations in China. The Chinese restaurants contribute with a 5% of the company’s global revenue.
McDonald’s reported 2ndQ comparable sales increased 1.6% in the high growth segment, led by positive comparable sales performance in China and Russia, along with solid performance across various other markets.
The multinational declared an operating income rise at 25% (32% in constant currencies) fuelled by improved results in China. There are still no official figures for the 3rQ in McDonald’s China.
Yum! registered same store sales down 1% in 3rdQ 2016, despite system sales up 3%, GAAP operating profit increase at 7% and that core operating profit went up 14%. The China Division added 7 new units to the system.
Are US quick service giants leaving China?
Yum! Brands announced the spin off projected for its business in China will be effective on 31st October. The multrinational has also unveiled the enter of two investors in the capital equity of Yum! Brands China, once dettached from the group also by 31st November 2016.
McDonald’s is also said to be selling its restaurants within the Great Wall for $3Bn. Following Reuters and Fortune as of last September, the US multinational has already received final bids from Carlyle investment fund teamed with the Chinese state holding Citic and TPG associated with Wumart, the Chinese mini-market operator.
There’s just few information on the terms of the bids for McDonald’s restaurants in China. As relates to Yum! Brands the US multinational will keep a participation in Yum! Brands China.
More than leaving China, both US quick restaurant giants seem to be interested in becoming actual Chinese companies to regain the love of Chinese consumers. Taking the example of Yum! the enter of Ant Financial in the capital equity of Yum! China brings as well a “mobile first” revamp.
Primavera’s Fred Hu to Become Yum! China’s Non-Executive Chairman
Yum! Brands announced that it has entered into agreements with Primavera Capital Group, a China-based global private equity firm, and Ant Financial Services Group, one of the world’s leading online and mobile financial services providers that operates the widely used Alipay mobile payments platform, to invest a total of $460 million in Yum China, concurrent with the completion of Yum! China’s spinoff from Yum! Brands.
Founder of Primavera Dr. Fred Hu will become Yum China’s Non-Executive Chairman.
$410 million by Primavera and $50 million by Ant Financial
Under the terms of the agreements, Primavera and Ant Financial will invest $410 million and $50 million, respectively, in Yum China. The final number of shares issued to Primavera and Ant Financial will be subject to a post closing adjustment such that the effective price will be equal to an 8% discount to the volume-weighted average trading price of Yum China’s equity value during the period commencing 31 days and ending 60 days following completion of the spinoff (subject to a collar mechanism limiting the minimum and maximum shares to be issued).
Primavera and Ant Financial will also receive two tranches of warrants to acquire shares of Yum China common stock reflecting approximately 2% equity ownership interest (in the aggregate) in each tranche to be exercisable in the five-year period following the issuance of those warrants, with strike prices correlating to equity values of $12 Bn and $15 Bn.
More than leaving China, a new stage for increased growth, says Yum!’s Micky Pant
“Primavera and Ant Financial both have deep insights into the rapid urbanization and digital transformation which is driving the evolution of China’s economy, and we are excited about their investment into Yum China,” said Micky Pant, Chief Executive Officer of Yum! China. “The investment is a clear endorsement of our business strategy and growth potential, and their diverse experience and relationships will be extremely beneficial. Dr. Hu’s extensive market insights and experience scaling businesses in China will be invaluable as we move to expand the footprint of our brands. In addition, Yum China is already the leading restaurant company for cashless payment systems in China, and we expect Ant Financial can provide further unique insights to help us better connect with consumers through mobile technology.”
“We have long admired the Yum China business and are looking forward to collaborating with the Board and management to realize the company’s full potential,” said Dr. Hu of Primavera. “Yum China is an established leader in the retail and restaurant industry which we believe is poised for continued strong growth and unit expansion as cities across China invest in new transportation hubs, shopping malls and other physical and electronic infrastructure that will support consumption. I look forward to leading the Board of Directors of Yum China in its new and exciting chapter as an independent company.”
“Through this collaboration, we aim to help Yum China provide world-class mobile payment services for tens of millions of customers across its brands. These services include hassle-free Alipay for customers to help shorten queues at the cashier as well as membership solutions for Yum China designed to help manage their customer relations and promotions,” said Eric Jing, President of Ant Financial Services Group. “Leveraging our Big Data capabilities, KFC and Pizza Hut witnessed promising marketing results through their promotion on multiple Ant Financial platforms. We look forward to further collaborating with Yum China in the future.”
Image over the headline.- Dico’s restaurant at Diamond City (Shanghai -China-). Image by WhisperToMe. Photo licesed under Creative Commons. To watch the original work, click here
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