When it comes to China’s fast food industry, Yum Brands Inc and McDonald’s Corp are living large, enjoying a combined 38 percent share of the market last year.
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 Chinese 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 dumplings) — proliferate.
The headwinds might 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 US$2 billion. That is 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 Li Weihua (李維華), management professor at China University of Political Science and Law, who has written more than 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.
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, while McDonald’s share 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 has about 2,200 outlets across the nation.
McDonald’s has attracted interest from suitors like Beijing Sanyuan Foods Co (北京三元食品), Sanpower Group Co (三胞集團) and Beijing Tourism Group (北京首旅集團), according to people familiar with the bidding.
Potential buyers might be reluctant to spend billions on established fast-food brands that are already so familiar with Chinese consumers. Yum’s KFC chain opened up its first near Tiananmen Square in Beijing 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.
For their part, both companies see profitable futures for their China operations.
Yum China is providing high-quality food and continually “adapting menus to cater to the evolving preferences of Chinese consumers,” the company said in an e-mail statement.
Yum Brands 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, and Yum China has a “massive runway for continued growth,” the statement said.
McDonald’s China, in its e-mail statement, also said it is committed to providing healthier choices, such as whole-wheat McMuffins and chicken cereal congee (porridge), to customers in China.
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