RETAIL: Yum Delivers, Starbucks and McDonalds Devour E-Payments

Bottom line: Yum’s purchase of a high-end take-out delivery service looks smart in targeting a higher margin, niche product in the competitive space, while McDonald’s and Starbuck’s rapid growth in mobile payments reflects rapid growth of the technology.

Yum buys take-out specialist Sherpa’s

Three of the world’s top restaurant chain operators are in the China headlines as we head into summer, in different moves that reflect their attempts to tap into the nation’s growing love affair with high-tech dining. The most interesting of the headlines has Yum Brands (NYSE: YUM), parent of the KFC and Pizza Hut chains, buying up one of China’s oldest take-out delivery services, hinting at a potential big push into the ultra competitive space. The other two headlines have McDonald’s (NYSE: MCD) and Starbucks (Nasdaq: SBUX) independently releasing new data that show just how hot electronic payments have become for both companies.

As someone living here in China, I have to admit I have completely embraced the country’s homegrown brand of mobile electronic payments, which has quickly become dominated by Ant Financial’s Alipay and Tencent’s (HKEx: 700) WeChat. But at the same time, I’ll also openly admit I’ve eschewed the home delivery services that are also all the rage in China, though the tide seems to be fading as people rediscover the fun of actually going out to eat.

All that said, let’s begin this high-tech restaurant round-up with Yum, which has announced it will buy a controlling stake in Daojia, owner of a home delivery service called Sherpa’s. (company announcement) The bottom line here is that the purchase will allow Yum to quickly expand its home delivery service through the business, which operates mostly in Beijing and Shanghai.

As a longtime China resident, I’m quite familiar with Sherpa’s, whose founding in 2010 makes it easily the oldest of the country’s home delivery food specialists, compared with Johnny-come-latelies, Baidu (Nasdaq: BIDU) take-out , Meituan and (Nasdaq: JD) New Dada. The company is quite a bit different from the others, in that it focused on providing its services to foreigners living in China and higher-end restaurants, a fact that Yum points out in its announcement.

The move actually looks like a slight mismatch to me, as KFC and even Pizza Hut aren’t typically the kinds of restaurants that Sherpa’s would partner with. But I do like Sherpa’s high-end, focused approach, even though I expect the company has suffered due to all the take-out dining wars lately. With Yum’s backing, I would wager the company could be poised for an expansion into other cities and perhaps beyond its traditional foreigner base, and would say it could ultimately pose a greater challenge to the more mainstream players.

Booming Mobile Payments

Next there are the headlines from Starbucks and McDonald’s, which are both relatively similar and come simply in the form of new data on the popularity of electronic payments at their China stores. The headline figure from McDonald’s has the company saying that 45 percent of transactions in its stores are now conducted through smartphone-based electronic payments. (Chinese article)

The Starbucks news has the company saying on a recent earnings call that 29 percent of all its China transactions now come from mobile payments over WeChat (English article), just five months after it announced its landmark tie-up with Tencent. (previous post) That’s quite an impressive amount, and takes us back to my original point that Chinese consumers love to pay for things electronically over their smartphones. I’m one of those converts, and seldom pay for anything these days using cash or credit cards, since nearly everyone — down to woman selling vegetables at my local market — now accepts WeChat and Alipay.

All of that leads us to the bigger question of where these two trends are heading, and what lies ahead for all three chains. As I’ve already said above, I really think the take-out dining wave has crested and is headed for a major pullback as people tire of ordering out for everything and companies like Baidu tire of losing big bucks in their search for market share. But that said, I do think there’s a place in the market for occasional take-out delivery, especially high-end fare, and Sherpa’s durability testifies to that fact.

As to mobile payments, I really do think the sky is the limit for this kind of service, and that such payments could account for two-thirds of all payments in China within the next 5 years. Nearly all Chinese now have smartphones, and WeChat and Alipay are making things so easy for everyone that people would have to be very resistant to not use these services. Accordingly, companies like Starbucks and McDonald’s are acting as trend setters, and are likely to benefit from this rapid migration to mobile payments.

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