Bittersweet alliances for Chinese brands with foreign investors

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.