Bottom line: McDonald’s is likely to reach a final deal to sell its China-owned stores by the end of summer, while Cheesecake Factory is likely to enjoy modest success as it launches its first China stores.
A couple of restaurant stories are in the headlines today, one featuring fast-food veteran McDonald’s (NYSE: MCD) as it seeks a new China partner, and the other starring the popular US Cheesecake Factory (Nasdaq: CAKE) chain as it prepares to open its first China restaurant. The McDonald’s story is clearly the larger of the stories, and focuses on a drive to shed direct ownership of its China stores and move to a franchise-based model that has underpinned its success in the west. Meantime, I have to admit that one of my main reasons for writing about Cheesecake Factory is that I used to be a big fan of the chain, though the remote location of its first China restaurant means I probably won’t dine there.
Let’s start with McDonald’s, which is reportedly talking to a number of Chinese bidders, including China National Chemical Corp (ChemChina) and New Hope Group, as it looks to sell its 1,650 self-owned China-based restaurants. (English article) ChemChina seems like an odd buyer, but the reports point out it does have some restaurant experience through its ownership of a Beijing-based noodle chain. New Hope, meantime, is a Beijing-based conglomerate with a wide range of food-related assets.
The latest reports also say that US private equity giant KKR may join one of the bids for McDonald’s China stores, implying that the source of this particular news is KKR itself. In April, a separate report said that other big private equity firms including TPG, Bain, MBK and Baring were also interested in bidding on McDonald’s stores in China, as well as similar company-owned stores in Hong Kong and South Korea. (previous post)
The earlier report also said that Chinese consumer conglomerate China Resources was interested in bidding on some of the assets, most likely the ones in China and possibly in Hong Kong. China Resources’ name isn’t included in the latest reports, meaning perhaps it has dropped out of the bidding. But I suspect it’s still interested, and these latest reports simply indicate the talks are heating up and a final buyer is likely to be announced by the end of this summer.
Of the partners mentioned so far, China Resources looks the most logical due to its strong background in retail and consumer products. Accordingly, I would expect it to be a leading contender to win the bidding if it can finance the deal by teaming up with some big-name private equity partners.
Betting on Disneyland
Meantime, we’ll close with a quick look at Cheesecake Factory, whose China story is closely tied to the opening of the mainland’s first Disney (NYSE: DIS) Resort in Shanghai later this week. Cheesecake said it will open the restaurant in a retail center that’s part of the Disneyland complex in Pudong, a relatively remote area nearly an hour drive downtown Shanghai. (company announcement)
The chain is opening its first China restaurant in partnership with Maxim’s, a quite reputable restaurant operator in Hong Kong. While that sounds good in theory, we should also point out that Maxim’s had an earlier partnership with Starbucks (Nasdaq: SBUX) in South China, but that the pair dissolved that tie-up in 2011. (previous post)
Cheesecake actually announced its China plans, including the Maxim’s partnership, 2 years ago, and said at the time it aimed to open 14 stores over the next 10 years in Hong Kong, Macau, Taiwan and China. (previous post) It joins a a number of other big US chains like Outback Steakhouse, TGI Fridays and Hooters, which operate similar mid-range family-style restaurants in China. All of these restaurants do modest though not spectacular business, and I expect that Cheesecake Factory will follow with similar results.
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