Chinese food never tasted so good

European firm Apax Partners LLP has bought Golden Jaguar, which has 19 restaurants, including one in Beijing's Wangfujing. Wang Jing / China Daily

Foreign investors are lapping up lashings of profit in catering sector

The appetite of foreign investors for China's catering industry is growing as they try to capitalize on explosive growth in consumer spending by the country's rising urban middle classes.

Last month the global private equity firm Apax Partners LLP of London announced that it had bought Golden Jaguar, a buffet-style restaurant chain in China that offers more than 400 dishes from around the world.

Financial details of the acquisition have not been disclosed.

Golden Jaguar, or Jinqianbao in Chinese, was founded in Taiwan in 2003 and has its headquarters in Shanghai. It has 19 restaurants in eight big cities, including Beijing, Shenzhen and Wuhan. Monthly traffic in each store is around 100,000.

Richard Zhang, a partner at Apax and head of Apax Greater China, says retail and consumer goods are a key focus for the company.

"We have been paying close attention to China's fast consumption growth, especially (in the) food, beverage and catering industry."

In recent years, Apax has invested 4.3 billion euros in retail and consumers goods globally. Its Chinese investments include SouFun Holdings Ltd, one of the largest property websites in China.

Apax has had its eye on investment opportunities in retail and consumption goods, sectors that are enjoying the benefits of China's rapid growth and its domestic demand, Zhang says. "And Golden Jaguar has an attractive business model and excellent performance."

Zhang says that Apax, with its extensive investment experience, will provide a management fillip to Jaguar that will help the business expand nationally.

Chen Geng, a partner of Adfaith, a management consulting firm in China, says that the growing competition in high-end catering may be one reason for the acquisition.

"Golden Jaguar has set the model for the high-end buffet business, and as the leading company in that field it has a satisfactory performance. But as more competitors step in, Golden Jaguar's revenue is at risk."

Foreign capital has flooded into the Chinese catering industry in recent years, and several well-known companies have been taken over by overseas ones.

In May, Yum! Brands Inc, owner of KFC, put HK$6.7 billion (603 million euros) on the table as it sought to buy the nationally known hot pot restaurant Little Sheep Group Ltd.

Once the deal is sealed, Yum! Brands will have a 93.2 percent stake in Little Sheep Group and the latter would be delisted from the Hong Kong stock exchange.

In May of last year, Jollibee Foods Corporation of Manila signed a 30 million yuan (3.27 million euros) deal with Sanpinwang, a Chinese chain whose specialty is rice noodles, to buy a 55 percent stake in the company.

Jollibee develops, operates and franchises fast-food restaurants, and through subsidiaries and affiliates operates more than 2,300 stores worldwide.

It acquired a taste for Chinese fast-food chains several years ago, buying Yonghe King in 2007 and Hongzhuangyuan in 2008.

Its financials indicate that last year's total sales grew 10.2 percent to 70.2 billion pesos (1.15 billion euros), led by Yonghe King and Hongzhuangyuan in China, which recorded a 24 percent growth.

In June, the United States-based Starbucks Coffee Company announced an agreement with Maxim's Caterers Ltd, its joint-venture partner in South China, including Hong Kong and Macao, to assume 100 percent equity of Maxim's business in the provinces of Guangdong, Hainan, Sichuan, Shaanxi and Hubei, and Chongqing municipality.

"Full ownership of our stores in China is part of our broader strategy to build the country as our second home market outside of the US and allows us to accelerate growth as we look to achieve our goal of having 1,500 stores across the country by 2015," says John Culver, president of Starbucks Coffee International.

In the gloomy economy worldwide, foreign capital's increasing interest in China may be attributed to its fast growing economy.

A report by China Cuisine Association says that between 1991 and 2007 there was double-digit growth in annual sales in the national catering and accommodation industries.

Data show that in 2008 turnover in the sector was 1.54 trillion yuan, accounting for 14.2 percent of the country's total retail sales and giving a big spurt to economic growth.

The global financial crisis has done little to dampen this growth. Annual turnover was 1.8 trillion yuan in 2009, up 16.8 percent over 2008, and last year the increase was 18.1 percent. Many foreign giants are reaping the rewards.

Yum! Brands' annual report says operating profit rose 26 percent last year, before foreign currency translation. In the previous two years, growth was 24 percent and 17 percent respectively.

The company says its operating profit in China has more than doubled in the past three years to $755 million, making it the top profit-producing division in the company.

Total revenue of McDonald's in the Asia-Pacific, Middle East and Africa was $5.07 billion last year, $4.34 billion in 2009 and $4.23 billion in 2008. McDonald's says that last year's growth was primarily driven by sales increases in China, Australia and most other markets.

The secretary-general of China Cuisine Association, Feng Enyuan, says that frequent acquisitions in the catering business testify to China's significant development.

"Only industry leaders could draw enough attention," says Feng, adding that it is an inevitable trend.

"As the Chinese catering industry has a comparatively high level of free competition, there is no bar for foreign investment. Foreign companies can conduct an acquisition according to their development plans, and local brands normally end up with a higher premium. Everyone wins."

He says it takes a long time to build brand recognition in the industry, and buying well-established companies gives foreign capital a significant shortcut.

"They can cash in on existing firms' reputation and networks for further expansion. And local brands need to enhance their influence at home and abroad."

Li Xin, a catering industry analyst with Distribution Productivity Promotion Center of China Commerce, says that incoming foreign capital could help improve the management and technology of local brands.

"At present, many old and famous local brands have problems in service quality and management to varying degrees. Since foreign capital is willing to invest in these brands, they would certainly improve the management and technology."

But others see problems with this influx of foreign capital.

Xiang Jianjun, a food industry researcher with CIConsulting, says that while acquisitions may benefit the industry by cultivating self-regulation, local businesses may also face undue pressure.

The rush of acquisitions could reshape the market and lead to a degree of monopolization, he says.

"In some industries, foreign companies may control pricing and industry standards through mergers and acquisitions, which would hinder future development of local enterprises."

But Adfaith's Chen says that it makes no difference whether Chinese or foreign capital holds the stake.

"Continual foreign investment proves that the Chinese market is still promising. As long as the brand is still operated in China, it does not matter who runs the company."

But Zheng Peimin, chairman of Shanghai Realize Investment Consulting Co, has a warning on hostile takeovers.

"We should maintain our keen vigilance if a foreign company shows a strong desire to take control of the target company, eliminating market competition."