Yum! Brands

Has Yum Worked Out How Fast-Food Firms Can Crack China? — Bloomberg

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Global consumer companies trying to find a business model for China’s burgeoning domestic market will be watching closely as one of the oldest Western brands in the country starts a new strategy.

Yum! Brands Inc., which opened its first KFC restaurant in China in 1987 and also operates Pizza Hut outlets, has been losing market share thanks to a food-safety scare, changing tastes, increasing local competition and a host of other challenges that foreign companies face in China. It carved out its China operations into a separate company, Yum China Holdings Inc., which begins trading today in New York.

Ring-fencing the business, the largest independent restaurant company in China with 7,000 outlets and more than $900 million cash on hand, offers Yum a number of advantages in dealing with a fast-changing market. Yum’s example could provide a road map for other global consumer brands in the world’s most populous nation.

Yum China has issued 386 million shares at $24.36, which puts its valuation at around $9 billion, according to New Jersey-based research firm Edge Consulting Group LLC. The stock rose about 2 percent to $24.85 as of 9:59 a.m. in New York, while Yum Brands gained 0.7 percent to $62.49.

“When their China operations get so big and are clearly catering just to the China market, splitting off could unlock a lot of value for shareholders,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “If I were an activist hedge fund investor, I would be looking at carving out brands within large conglomerates that are China plays.”

Doing so allows Yum’s management of the China business to tailor its operations and products more swiftly to changing local conditions, such as the menu preferences of diners in different parts of the country, mobile-based payments systems, hiring and other factors.

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It also helps tap Chinese investors willing to pay high premiums for a stake of an international brand’s China operations. Yum sold a combined $460 million stake in its Chinese business to Primavera Capital Group and an Alibaba Group Holding Ltd. affiliate, Ant Financial Services Group, in September.

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein.

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” Rein said. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”

Localization of offerings at KFC and Pizza Hut outlets in China will be an important component of the firm’s strategy for the country, Yum China Chief Executive Officer Micky Pant said at a briefing Tuesday in Shanghai. The company plans to increase investment in new outlets across its brands and does not plan to raise more capital, he said.

An activist hedge fund investor upset with the company’s handling of its China business is how Yum China came into being.

After a food-safety scandal in 2014 and cheaper local competition torpedoed Yum’s sales and profit in China, Corvex Management founder Keith Meister in mid-2015 urged the company to split off its Chinese operations — which contribute about half the group sales — saying that the move could generate an additional $16 a share in value for the Louisville, Kentucky-based company.

Yum’s total share of China’s market for fast-food chains dropped to 30 percent last year, from 40 percent in 2012, according to data from Euromonitor International. While sales have been growing again in China in the mid-single digits since late last year, the company has suffered from consumers shifting to healthier options and domestic chains sprouting up with more variety.


Volatility Reduction

Unlike Yum’s U.S. operations, where most of its restaurants are run by franchisees, Yum China directly operates over 90 percent of its outlets and plans to triple the number to more than 20,000 in the long term.

Yum’s spinoff would reduce volatility for its remaining business, while “giving investors with a higher risk tolerance access to a more pure-play China growth story,” said Jonathan Morgan, an analyst for Edge Consulting. “China’s economic slowdown could induce other U.S.-listed restaurant stocks to spin off their China businesses, to protect their core businesses.”

So far, companies with China consumer arms have often chosen instead to sell the division to a local competitor and take a stake in that business instead.

Wal-Mart Stores Inc. in June sold its e-commerce platform Yihaodian to China’s second-largest e-commerce company, JD.com Inc., for a 5 percent stake in JD. In August, Uber Technologies Inc. surrendered after a year-and-a-half battle with Didi Chuxing and agreed to sell its business in China. It departed the country in exchange for $1 billion in cash and a 17.7 percent stake in Didi.

McDonald’s Corp., meanwhile, is seeking to sell its 20-year mass franchise rights for China and Hong Kong for a reported $2 billion.

Starbucks Corp. is the only other major U.S.-listed food and beverage chain in China beside Yum, which owns and operates its outlets, numbering 2,400 stores across 110 cities.

China, Starbucks’ largest international market, represents the most significant opportunity for the company, said a company representative. The company has no intention to change its operation model in the market, according to the spokesperson.

Jackpot Valuations

“What we’ve seen across various industries is that foreign players eventually pull out or find a local partner,” said Hong Kong-based S&P Global Ratings’ restaurant and retail analyst Shalynn Teo. “It’s the local market knowledge and local relationships that determine which foreign businesses survive in China, and local players will always have an edge.”

With Chinese investors paying a premium for market share, such deals can prove attractive, said Peter Fuhrman, CEO of Shenzhen-based investment bank and advisory firm China First Capital. “As long as Chinese investors are offering jackpot valuations,

Those that don’t face the need to tailor their businesses to China’s widely diverse and morphing consumer market. Only from March this year did KFCs in China began accepting WeChat Pay; they started accepting Alipay mobile payments in July last year. Yet the country leads the world in the use of such transactions, with four out of 10 Chinese consumers using mobile payments at physical stores, research firm EMarketer estimated.

Starbucks stores in China still do not accept Alipay or WeChat, only Apple Pay, a decision which costs them 5 to 10 percent of sales, estimates China Market Research Group’s Rein.

Starbucks launched its own mobile payment system in China in July, allowing customers to pay with preloaded Starbucks Gift Cards via their mobile devices, according to the company.

As China’s consumer market continues to grow, more overseas companies may consider following Yum down the path of segregation.

“Four out of 10 spinoffs do not generate a return in the first year of separation,” said Edge Consulting’s Morgan. “How Yum China performs will help U.S.-listed companies evaluate their strategic options in China.”

 

http://www.bloomberg.com/news/articles/2016-10-31/yum-s-spinoff-offers-roadmap-for-western-brands-in-china-market

In China, Yum and McDonald’s likely need more than an ownership change — Nikkei Asian Review

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HONG KONG — China’s fast-food sector has been dominated by U.S. chains like Yum’s KFC and Pizza Hut as well as McDonald’s. But now a question hangs over these household brands: Can new owners reverse their declining fortunes?

China Investment Corporation, a sovereign wealth fund, is reportedly leading a consortium that also includes Baring Private Equity Asia and KKR & Co. to acquire as much as 100% of Yum’s China division, valued at up to $8 billion. According to a Bloomberg report, Singaporean sovereign wealth fund Temasek Holdings, teaming with Primavera Capital, is also vying for a stake in Yum China, whose spinoff plans were announced on Oct. 20 — five days after Keith Meister, an activist hedge fund manager and protege of corporate raider Carl Icahn, joined the board.

Meanwhile, McDonald’s is likely to start auctioning its North Asian businesses in three to four weeks. Among its would-be suitors are state-owned China Resources, Bain Capital of the U.S. and South Korea’s MBK Partners, among other buyout firms. The winner or winners would oversee more than 2,800 franchises — plus another 1,500 to be added during the next five years — in China, Hong Kong and South Korea.

The company on Friday reported that sales in China surged 7.2% in the first quarter ended in March.

Yum’s and McDonald’s goal to become pure-play franchisers comes as competition in China’s food services market is heating up and as middle-class consumers grow increasingly concerned about food safety and nutrition.

http://asia.nikkei.com/Business/Trends/In-China-Yum-and-McDonald-s-likely-need-more-than-an-ownership-change?page=1

General’s Mills’ Stunning Success in China

Wanzai Matou 湾仔码头

America’s most successful M&A deal in China is also possibly its most clandestine. The reason: an old-line Midwestern Fortune 500 company around since 1856 owns a company that is the dominant brand-name supplier in China of a vital Chinese national asset. No, it’s not missile fuel or encrypted handsets for battlefield command-and-control. It’s dumplings.

America’s General Mills, the iconic maker of US breakfast cereals Lucky Charms and Cheerios as well as Häagen-Dazs ice cream, owns a similarly iconic brand in China – Wanzai Matou (湾仔码头), or Wanchai Ferry, as it’s known in English. It is China’s major premium-priced and premium-quality supplier of frozen dumplings. Since acquiring the business thirteen years ago, it’s become a large and especially fast-growing business for General Mills, with China revenues of at least $300mn. Better still, the margins are probably a lot higher than Cheerios and just about any other product General Mills sells worldwide. The Wanzai Matou dumplings sell in China for equivalent of about $3.50 a pound. You can buy fresh hand-made ones just about everywhere in China for quite a bit less. But, people flock to the General Mills product, because it’s considered both tastier and healthier.

Dumplings are a central aspect of Chinese life and culture, a more potent part of national identity and the national diet than the Thanksgiving turkey, Big Mac, beef hotdog or apple pie are to us Americans. Dumplings (whether boiled, steamed or pan-fried) have been a daily staple of the Chinese diet, as far as anyone can judge, for about 1,800 years. They’re eaten here at breakfast, lunch and dinner. Dumplings are also the mainstay for many Chinese at the most important meal of the year, the one that rings in the Chinese New Year. Dumplings symbolize a prosperous year to come.

For all the many global corporates still edgy about investing in or acquiring businesses in China, General Mills is prime evidence that inbound cross-border M&A can work in China. This one deal combines four aspects often thought to be unattainable in China deal-making: a large US company buys a smaller local Chinese brand, builds it into a national leader while piling up big profits. It is, hands down,  my favorite case study of how to do M&A right in China.

Not that General Mills is eager for the world to know. It doesn’t talk about its booming China business in its annual report. Packages of Wanzai Matou sold in China don’t include the General Mills name or famous blue logo.

While everyone knows about KFC, McDonald’s and Starbucks big success in China, they are actually doing something much easier: introducing and selling exotica, American products to Chinese with a whim to try something from afar. General Mills is making money in China the hard way. Not only do they make the most popular brand of frozen dumplings in China (estimated market share of about 50%) , they also had to convert a large number of Chinese to buy in a supermarket a frozen version of a product only available previously fresh, hand-made.

As General Mills foresaw, making dumplings at home, once a daily chore,  has become something fewer and fewer Chinese have the time routinely to do. Done properly, it can take even experienced hands two hours or longer.

General Mills got control of Wanzai Matou in 2001 when it acquired US rival Pillsbury from British company Diageo. Pillsbury had bought majority stake in Wanzai Matou in 1997, when it was a rather tiny Hong Kong company with very limited presence in the PRC. Today, the freezer section of most larger big city supermarkets in China is stocked to bursting with different flavors and fillings of Wanzai Matou dumplings, along with Wanzai Matou frozen wontons and stuffed buns.

General Mills buys some tv advertising, but mainly the success here in China was earned by word-of-mouth. I’ve been a customer for as long as I’ve been living in China. Take it from me. There is no tastier frozen food sold anywhere than the boiled Wanzai Matou pork-and-corn dumplings (see package above).

Pillsbury made a vital strategic move in the early years after buying control of the Hong Kong Wanzai Matou. It was also an atypical one for big corporate buyers. They decided to keep Wanzai Matou founder, Kin Wo Chong, involved. Her photo is still prominently-featured on every package, in much the same way as Betty Crocker used to be pictured on every box of brownie mix made by that General Mills brand.

Betty Crocker is pure fiction, a made-up name for a made-up housewife. Ms. Chong is very much a genuine entrepreneur, a Hong Kong immigrant from dumpling-loving Shandong province. She started her professional life in 1977 selling dumplings from a push cart in a not-too-tony part of Hong Kong.

Keeping Ms. Chong involved, as both a senior executive and minority shareholder, has evidently worked well for both sides. General Mills gets all the benefits of her extensive knowledge of how to make tasty dumplings. She gets a deep-pocketed partner with the skills and resources required to make her small company into a Chinese household name.

This sort of arrangement is rare in the M&A world outside China. Generally, the buyer gives the current owner a two-to-three year earn-out period and then is sent packing. That’s the way MBA textbooks recommend M&A deals get done. The thinking is founders, once they’ve put a large chunk of cash in their pockets, are distracted, demotivated and anyway not amenable to taking orders on how to run their business from a large, often bureaucratic global corporation.

But, in China, the most successful M&A deals we know of all tend to have this same structure, that the founding entrepreneur stays on, stays active, long after the earn-out period expires. By contrast, the list of failures is long where an acquirer gets control of an entrepreneur-founded Chinese company, shows the owner the door and then tries to run it on its own.

General Mills also did add something Ms. Chong never would have managed to do on her own. It started up a frozen stir-fry-it-yourself business for the US market, under the Wanchai Ferry brand. In its first year, it had revenues in the US of over $50 million. Impressive.

As anyone living here can attest, when it comes to food, Chinese are every bit as jingoistic as the French or Italians. It would shock many of them to think Americans can produce dumplings better and more profitably than any domestic competitor. But, even if General Mills is outed, and more Chinese come to know who’s behind Wanzai Matou, I’m confident they will go on buying dumplings made for them by the company from Golden Valley, Minnesota. “Eating”, as the Chinese saying aptly has it, “is more important than the Emperor”. “吃饭皇帝“.