Global brands seek private equity partners to save their China businesses
Companies weigh selling stakes to local groups to compete against fast-moving domestic rivals
Global companies are seeking private equity partners in China to take on their local operations as they grapple with an increasingly competitive local market, a sluggish economy and volatile US-China relations.
The owners of sports retailer Decathlon, ice cream brand Häagen-Dazs, coffee houses Peet’s and Costa, convenience store operator Lawson and GE HealthCare are all weighing options for their China operations, including selling parts or all of their businesses, said people familiar with their thinking.
The rush to rethink China comes amid whiplashing relations with the US, the slowing of the world’s second-largest economy and the rise of fast-moving and better-adapted local rivals across a swath of industries.
The owners of Peet’s and Costa are reviewing options for their China units, though deals under way for their global businesses might shift their priorities, the people said.
“People are realising again that it’s worth it to have a local partner,” said a private equity executive who asked not to be named, arguing that empowered local managers were better placed to make fast decisions to deal with the country’s changing market environment.
The executive added that “many companies’ global boards previously looked at getting out entirely” in 2023 — a low point in US-China relations, when ties were hit by economic strains and differences over the war in Ukraine.
But he said many groups did not do so at the time because of the opportunity cost of leaving the vast Chinese market. “It didn’t really make sense. If you get out of China, why even stay in Asia?”
Today, many foreign-owned companies are downbeat about their prospects and are seeking strategic guidance. The proportion of respondents optimistic about their business outlook hit a historic low of 41 per cent in a survey this September by the American Chamber of Commerce in Shanghai.
Members cited US-China tensions as the biggest challenge to their local operations, followed by increased domestic competition.
“The market is both changing rapidly and hyper-competitive, so it’s a difficult time for foreign brands,” said Frank Tang, chair of FountainVest Partners, which has made working with brands such as Papa John’s and Dairy Queen in China a pillar of its business. “If they don’t adapt, their China business might not be around for long.”
Nimble Chinese challengers have transformed a once highly profitable market into a fiercely competitive battlefield.
Luckin Coffee now operates three times as many China stores as Starbucks, Peet’s and Costa combined, while convenience store chain Meiyijia outnumbers its Japanese rivals by multiples.
Partly in response to such pressures, Starbucks last month agreed to sell 60 per cent of its local business to Hong Kong-based Boyu Capital, while the owner of US fast-food chain Burger King has tapped Beijing-based private equity group CPE to help plot its China expansion.
Starbucks, which is among China’s best-known foreign brands, attracted multiple suitors and secured favourable terms. Boyu agreed to pay $2.4bn and a mid-single-digit percentage of revenue as royalties, said people familiar with the terms.
The two companies said they expected to raise Starbucks’ footprint in China from 8,000 stores to more than 20,000 in the coming years.
Shaun Rein, founder of China Market Research Group, said foreign brands’ problems were compounded by more pessimistic consumers in smaller cities hit by a protracted property slowdown.
Western fast-food brands “are not cheap food destinations for the Chinese consumer”, he said.
General Mills-owned Häagen-Dazs, in the ultra-premium segment, has yet to find the right buyer for its roughly 400 Chinese ice cream shops, which it put up for sale this summer.
Decathlon has drawn only lukewarm interest for a minority stake in its China business, said people familiar with the company’s thinking, while GE HealthCare, with China sales of $2.4bn last year, could be one of the bigger carve-out deals.
Bloomberg previously reported some of the sale processes.
Costa, General Mills, Peet’s and Starbucks did not respond to requests for comment. Decathlon and GE HealthCare declined to comment on what they called market rumours and said they remained committed to China.
Lawson denied there was an active discussion about selling a stake in its business. The company’s co-owner, trading house Mitsubishi Corporation, said “no decisions have been made on this matter at this time”.
Carlyle’s 2017 buyout of McDonald’s China with Citic Group and Trustar Capital is often held up as a model for how private equity can help turn around a Chinese operation. Carlyle put in about $300mn for 28 per cent of the business and sold it back to McDonald’s last year for $1.8bn.
Under Carlyle, the fast-food chain’s China store count more than doubled to 5,500, delivery orders rose to more than 30 per cent of revenue and app users grew from 10mn to 270mn, giving McDonald’s a channel for targeted marketing, according to the private equity group.
Dennis Wang, a partner at Carlyle, said McDonald’s growth in the market had plateaued when the firm came in and reconstituted management to report to an on-the-ground board instead of headquarters, which “made decision-making much simpler and quicker”.
The new owners also helped push through menu changes that headquarters had on its radar but was hesitant to enact because they would diverge from the global menu, Wang said.
For breakfast, they added local favourites such as fried dough sticks and congee and ran chicken product trials to convince headquarters to double down on poultry in China.
“Beef is part of the brand DNA, but when we took over, we said it makes sense to go big on chicken because China is really a chicken market,” Wang said.
An industry insider said the need for localisation was “logically true in any market . . . [but] China is the only one to come up with enough scale to warrant it”.