McDonald's, Yum seek suitors in China

A girl holds a tray of Hello Kitty-themed food products at a McDonald's restaurant in downtown Beijing. JIANG DONG/CHINA DAILY

Change looms on multibillion dollar fast-food industry as Chinese craving for a taste of Americana cools down gradually

When it comes to China's multibillion dollar fast food industry, Yum Brands Inc and McDonald's Corp are living large, enjoying a combined 38 percent share of the market in 2015.

Yum's KFC restaurant chain and the Golden Arches have long enjoyed a run of super-sized growth as consumers craved a taste of Americana.

Now, as both these giants eye spinoffs of their mainland operations, analysts are wondering whether the glory days might be over.

There are signs that both companies' absolute dominance of a fast food industry they helped create is starting to slip away as consumers shift to healthier options and Chinese-style food chains－from huoguo (hot pot) to tangbao (steamed buns)－proliferate.

These headwinds may explain why investor interest in Yum's and McDonald's China operations has been tepid, at least so far.

Yum's plan to sell a minority stake to a Chinese partner seems on hold after bidders objected to the valuation and terms, while McDonald's has seen a few potential bidders turned off by stringent deal conditions.

Yum has reportedly valued a 20 percent stake in its China business, which it plans to list as a separate unit before the year's end, at $2 billion. That's the same price tag McDonald's has reportedly put on its China franchise rights.

"There would definitely have been more buyer interest five years ago, but at that time they were doing so well that they couldn't bear to sell," said management professor Li Weihua of the China University of Political Science and Law, who has written over 30 books on franchise management in China and credits KFC's first store opening in 1987 as the start of the franchise industry in China. "With the bloom off the rose, if they don't sell now, they would be worth even less five years later."

For their part, both Yum and McDonald's see profitable futures for their China operations.

Yum's fast-food operations in China, which also include Pizza Hut, are still sizable and span 7,200 outlets. Yet, its total share of the market has dropped sharply from 40 percent in 2012 to 23.9 percent last year.

Yum has raised its annual core operating profit growth forecast to at least 14 percent from the 10 percent at the beginning of the year based on China's strong performance in the first half this year. It said it has a "massive runway for continued growth."

The share of McDonald's, which has about 2,200 outlets across China, has slid from a high of 16.5 percent in 2013 to 13.8 percent last year, according to data from Euromonitor International.

McDonald's said that its same-store sales in its high-growth unit, which includes China and Russia, grew 1.6 percent in the latest quarter.

A group of students have meals at a KFC outlet in Luoyang, Henan province. CAO FUCHUAN/FOR CHINA DAILY

McDonald's has attracted interest from suitors like Beijing Sanyuan Foods Co, Sanpower Group Co and Beijing Tourism Group, according to people familiar with the bidding. Both have relatively modest restaurant franchises in their portfolios.

Other more established restaurant chains have not stepped forth. They include Taiwan province's conglomerate Ting Hsin International Group, which has a 7.7 percent market share and controls the Dicos fast-food chain, as well as Hua Lai Shi Catering and Kungfu Catering, whose market shares are 3 percent and 2.2 percent, respectively. China Resources Group, operator of Pacific Coffee, has also taken a pass.

Pacific Coffee has a different franchise model from McDonald's and Yum, and so it is hard to have operation synergy if it buys the China business of the fast food brands, said Todd Li, its vice-president, in a phone interview on July 29.

At McDonald's and Yum, franchisees act more like investors and typically take over profitable and established company-owned outlets. Pacific Coffee is looking for experienced franchisees to operate new stores, Li said.

Potential buyers may be reluctant to spend billions on established fast-food brands that are already so familiar with Chinese consumers. Yum's KFC chain opened its first restaurant near Tian'anmen Square in Beijing back in 1987.

"Companies already in this industry know that the brand might be big, but it's outmoded in consumers' minds. They would compare this to the amount of investment required of them," said Hao Yongqiang, vice-director of the China Chain Store and Franchise Association, which runs yearly expos linking fast food brands to prospective franchisers.

In an e-mail statement, McDonald's declined to "speculate further" on its efforts to sell off its franchise rights.

Shares of McDonald's have dropped 0.5 percent this year, while Yum has risen 21 percent.

Bloomberg