LOUISVILLE KY. Yum! Brands Inc. is set to pay $63 million to purchase a 20-percent stake in Little Sheep Group Ltd., a China-based operator of 375 “hot pot” restaurants, in a move that could further extend the quick-service franchisor’s reach in China. —
The transaction, which the company announced late last month and is expected to close this summer, makes Yum Brands the second-largest shareholder in Little Sheep. Should it pursue a controlling stake, Yum would grow its long-term growth prospects in China, where it already has a significant presence with its KFC and Pizza Hut brands. Yum garners about 28 percent of its annual revenue from its operations in China. —
“Our strong position in China allows us to identify opportunities for strategic partners such as Little Sheep, a leading concept with strong branding and a nationwide network,” said Sam Su, president of Yum Restaurants China and vice chairman of Yum Brands. “We look forward to working with Little Sheep as we continue to focus our own management on growing our existing portfolio of brands. —
“China remains the biggest growth opportunity in the restaurant industry in the 21st century.” —
Little Sheep, which is based in the Inner Mongolia region, operates restaurants primarily in China as well as Hong Kong, Japan, Canada and the United States. The concept specializes in Mongolian-style hot-pot cuisine, which is characterized by its proprietary soup base and Mongolian-lamb specialties. Customers cook their own food in soup pots at the table. According to analysts, it is the market leader in the hot-pot space in China. —
Lin He, an analyst who covers the Chinese restaurant space out of Shanghai for Morgan Stanley, said in a research note that Little Sheep is an attractive brand, as it boasts a high “value-for-money” offering. For 2008, Little Sheep saw net profit increase 41 percent from the year earlier and total sales increase 35 percent. Its same-store sales rose 10 percent. —
“As seen in the United States, unemployment fears and collapsing stock and housing markets have led many consumers to cut their spending on dining out by reducing the frequency of restaurant visits and/or switching to less costly products,” He said. “As a result of ‘trading down,’ higher-priced casual-dining chains have suffered bigger comp-store declines than lower-end fast-food chains have.” —
He said he expected Little Sheep to outperform other restaurant chains in China, even as the country suffers a downturn similar to that being battled in the United States. —
Analysts also expect long-term trends in China, much like in the United States, to favor the restaurant industry. —
“We see multiyear growth opportunities, driven by the secular trends of rising income, a faster-paced lifestyle and a demographic shift to smaller families,” He said in a report last year initiating coverage of the Chinese restaurant industry. “Branded Chinese restaurant chains with modernized management are growing much faster than independent restaurants are. We expect this trend to accelerate as Chinese consumers focus more on brand, food hygiene [and] safety, and dining environment.” —
He noted that Chinese consumers are eating out more than in the past. From 2000 to 2007, the share of food away from home of the total food budget for urban residents climbed from 14.7 percent to 21 percent, according to He’s research. For rural residents, the ratio climbed from 10.6 percent in 2002 to 13.7 percent in 2007. —
Yum’s position in China was solidified with the success there of its KFC and Pizza Hut brands and the newer East Dawning and Pizza Hut Home Service concepts. The company boasts about 3,000 restaurants in China. In addition to those brands, the Louisville-based company also owns the Taco Bell, A&W and Long John Silver chains. Together, the company operates or franchises more than 36,000 locations worldwide. —