Taste of success

Beijing roast duck, Sichuan hotpot, Cantonese dim sum These traditional Chinese dishes are not only appealing to gourmands, but also investors eager to tap into China's obsession with food and its consumer boom.

Over the past two years, a slew of local restaurants looking to expand have secured big bucks from venture capitalists encouraged by the fact that China's dining business has maintained a double-digit growth rate for 16 years, surpassing 1 trillion yuan in 2006, according to the China Cuisine Association.

The association expects the national dining market figure to double to 2 trillion yuan in 2010 as the nation's young consumers are increasingly accustomed to dining out, rather than at home.

"Despite its enormous size, there haven't been a dominant player in China's dining sector," says Max Gu, partner of Roland Berger Strategy Consultants. "But in the coming years, the fast-runners stand good chance to become something big."

Currently, no single player holds more than 2 percent of China's dining revenue - including US-based Yum! Brands, which is the largest food empire in China. In 2006, the company's revenue grew to 16.9 billion yuan.

Since its entry in China in 1987, Yum! has built the largest restaurant empire in the nation - with 2,000 KFC outlets, 300 Pizza Hut restaurants, 44 Pizza Hut delivery stores and 10 East Dawning outlets - the last being the company's experimental Chinese-style fast food service.

The US company's success has not only delighted its shareholders but also impressed investors eying other food-sourced financial opportunities in China.

For example, in 2006, Europe's largest private equity 3i Group led a $25 million investment in Little Sheep, China's second largest restaurant chain. The European company is expected to realize a multimillion-dollar windfall as the hotpot chain reportedly prepares for an initial public offering in Hong Kong later this year.

By 2006, Little Sheep had built a chain of more than 700 outlets, two-thirds of which were franchisees.

"What we look for is much more than money," says Zhang Zhanhai, executive vice-president of Little Sheep. " We want investors that cam help with our management and growth strategy."

The empire also suffered from its own success. As it grew, the company found it difficult to effectively manage the franchises scattered across the nation.

"Even the taste could be different if you went to the same restaurant at a different time," says Zhang.

Thanks to well-connected 3i, Little Sheep began working out the kinks with a slew of restaurant veterans, including Yuka Yeung, former non-executive director of KFC's Hong Kong operation and Nish Kankiwala, former Burger King International CEO. Yeung and Kankiwala are now board directors of Little Sheep and offering advice ranging from growth strategies to how to set up tablecloths.

Earlier last June, Sequoia Capital, a Silicon Valley-based venture capital firm, agreed to invest up to $25 million in the Chongqing Little Swan hotpot restaurant chain. And last October, Capital Today and Liandong Capital, two domestic venture capital investment companies, made a 300-million-yuan investment in Kungfu Catering Management Co.

"China's consumer boom is a major theme for investors," says Neil Shen, director of Sequoia Capital. "The rising disposable income will help create many giants in the consumer sector in the coming years."

Last November, Quanjude, China's most famous roast duck restaurant went public on the Shenzhen Stock Exchange. Its shares closed at 42.3 yuan, up 271.4 percent compared with its issuing price of 11.39 yuan. Currently, the company is hovering around 70 yuan per share.

Earlier, Shanghai-based Ajisen Noodle, a local fast-food noodle chain, raised US$210 million with a Hong Kong share offering. Thanks to its 122 stores on the mainland, the company's opening price was 25.3 times of its 2008 earnings.

But caution is also recommended. "It's not easy to find investors who really understand the dining industry," says Zhang Lan, founder of Beijing-based South Beauty restaurant chain. "If you can't find a qualified expert, sometimes it's better to do it yourself."

Established in 2000, Zhang Lan's South Beauty is one of China's largest Sichuan-styled restaurant chains. With its novel dishes and delicate dcor, Zhang has opened 16 outlets in China's most affluent cities and plans to open 100 outlets across the globe including ones in New York and Paris.

This ambitious plan also translates into a talent shortage and to solve it South Beauty has opened its own management training school in Beijing.

South Beauty appears to be a promising pick for venture capitalists and Zhang says she has talked with several investors over the past year.

Another well-known chain, Nanjing-based Daniang Dumplings is also reportedly in talks with potential investors.

"Compared with the market potential, all these deals are just the appetizers, " says Roland Berger's Max Gu.

(China Daily 03/17/2008 page12)