China Consumer

Stirring the pot

Yum makes another acquisition in China

Yum-China-w

Yum China’s latest nosh

Back in 2011, Yum China – which owns the Chinese businesses of KFC and Pizza Hut – agreed to pay $586 million for a stake in the popular hotpot chain Little Sheep. The goal, the fast food giant said at the time, was to introduce hotpot to a global audience. A year later Yum China raised its stake in the Hong Kong-listed firm and took it private. Separately, it also bought a controlling stake in food delivery company Daojia for an undisclosed amount in 2017.

The acquisitions, however, have failed to deliver the envisaged returns, according to InvestorsCN, a blog. In the last seven years, Little Sheep has been shutting down non-performing stores. The number of restaurants fell from 469 (both franchises and company-owned) before Yum’s initial acquisition to ‘around’ 320 outlets according to its most recent financial statements (the qualification is due to the fact this category in its reporting also includes the coffee chain COFFii & Joy and Mexican chain Taco Bell, although Little Sheep accounts for the majority of outlets).

Similarly, Daojia, which ranked a distant fourth in China’s food delivery industry, behind leaders Meituan Dianping and Ele.me, has become “marginalised,” says InvestorsCN. After the acquisition, not only did Yum China pay little attention to the platform, it even established a rival online food delivery network for Pizza Hut and KFC.

Still, in a sign that Yum China hasn’t given up its localisation effort in the Chinese market, the fast food giant announced in late August that it has signed a definitive agreement to acquire a controlling stake in the chain restaurant Huang Ji Huang. The transaction is subject to closing conditions and regulatory approval, and is expected to complete by early 2020.

“With the acquisition of Huang Ji Huang, Yum China hopes to obtain a stronger foothold in the Chinese catering industry as Chinese food and beverage has a considerable market share in the country,” it said in a statement.

Yum China now operates 8,750 restaurants in China. Ant Financial bought a minority stake in the company in 2016 but the American parent reportedly refused an $18 billion buyout from Chinese investment firm Hillhouse Capital last year.

Its latest purchase highlights that Yum  is determined to continue its strategy of catering to local tastes. Just recently KFC added Sichuan-style skewers, a popular street food in China, to its menu, (see WiC462). “The acquisition of Huang Ji Huang suggests that Yum China is still eager to expand the scope of the Chinese restaurant industry and adapt to the domestic market,” Zhu Danpeng, a food industry analyst, told China Times.

At Huang Ji Huang, diners can choose from various proteins and vegetables that go into their stew pot. The server then sets an electric hot plate and a heated pot in the centre of the table. Each ingredient – completely raw – is added in layers and then cooked in its own juices until fully done (the pot is specially designed to cut down cooking time). A sauce – usually containing elements of traditional Chinese medicine for health benefits – is added towards the end to enhance the flavour of the stew.

When it comes to the operation of the restaurant, there’s a similarity between Huang Ji Huang and Little Sheep. Both concepts are more scalable as they don’t require a lot of cooking technique – a major staffing bottleneck for a lot of restaurant chains in China. The ingredients can also be prepared in advance, which makes it easier to centralise food preparation.

The Beijing-based chain was founded in 2004 and it now operates 640 outlets at home and abroad. The business is primarily a franchise model, with the company only operating six outlets itself. Its brand portfolio also includes the newly launched Chinese-style fast food brand Sanfenbao.

Nevertheless, some industry observers do not seem optimistic about the deal. “Yum China acquiring Huang Ji Huang is hoping that the ‘East meets West’ model is going to work; that is, one plus one is greater than two. But Huang Ji Huang is not a very good target… And more importantly, these ‘stew pot’ style of restaurant chains have been oversaturated and there is little room for growth,” a sceptical Zhu concluded. n


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