Funds dine out in China

It follows MUS Roosevelt, which bought pizza buffet chain Origus in late June. The rationale behind both deals is that Chinese consumers are getting richer, busier and hungrier for restaurant options.

“With the growing middle class and busier work schedules in cities, the dining-out sector will grow at double digit rate in the next 10 years. We are excited to be playing a role in accelerating the development of the dining-out sector in China,” Steve Wang, managing director of MUS Roosevelt, said in a statement regarding the Origus deal.

Analysts aver that restaurant chains of this vein – a cut above fast food – have shown signs of growth because they offer white-collar consumers an easy, economical way to experience out-of-home dining. Chain restaurants only have an 8% share of China’s overall restaurant market, according to Dong Zhong, a partner at Actis Partners, but their strong reputation for food safety, consistency and convenience appeal to private equity. 

“We believe chain restaurants are well placed to win further market share,” says Zhong, who is central to Actis’ management of hotpot chain Xiabu Xiabu.

Buffet play

In terms of recent investments, the Origus and Golden Jaguar deals have similar profiles. Origus manages approximately 100 Western-style and pizza buffet restaurants in China’s major cities, and MUS Roosevelt’s funding is set to jumpstart the firm’s expansion plans. Golden Jaguar, which has outlets in eight cities each capable of holding 500-plus diners, already claims to be the country’s largest international buffet restaurant chain, but Apax wants to transform it from a family-owned outfit into a corporation with a much wider national reach.

“Apax is focused on identifying and capturing consumer and retail opportunities that capitalize on China’s continued domestic consumption growth,” Richard Zhang, head of Apax Greater China, said in a release. “Golden Jaguar has an attractive business model and a proven track record.”

Analysts say that an appealing aspect to Golden Jaguar, Origus and similar restaurants is the scalability of their model. With questions of rising food prices in the country, the ability to serve a large number of diners at the same time creates economies of scale. Coupled with minimal service expenses – because they’re buffet style – restaurants have the opportunity to make the most of their service hours.

This model also came into play for Xiabu Xiabu. In 2008, Actis purchased its stake in the hotpot chain for $50 million as part of efforts to target businesses that could thrive despite the downturn. The firm announced at the time that Xiabu’s buffet approach meant it didn’t need to employ any chefs and could use a centralized kitchen, making plans to grow threefold a slightly easier endeavor.

Chinese diners retain a strong preference for local food, but Western-style buffet chains offer a formulaic, family-style strategy that is growing in popularity. Paul French, publishing and marketing director of market research firm Access Asia, tells AVCJ that, although China’s emerging middle class is looking to indulge in out-of-home dining, a level of frugality remains among consumers – and Western-style dining plays directly into this.

“With people feeling some affects of inflation and even the recession, they have to watch their money a little bit,” French says. “At traditional Chinese restaurants, people start ordering and the bill adds up, but at Western restaurants you know what you’re getting when you order. These restaurants also provide an opportunity for three generations of a family to eat together – grandparents don’t want to go to McDonald’s.”

Actis’ Zhong agrees there may be some truth in the theory that Western-style restaurants make for more compelling investment opportunities than their Chinese brethren, but that doesn’t mean attractive assets aren’t available in the space. “Chinese food is still closer to heart and taste buds of Chinese consumers now. And within Chinese cuisine, there is sufficient diversity of regional cuisines to keep the consumer interested,” she says.

Practical necessities

Arguments about cuisine aside, investing in restaurants can be a wholly formulaic exercise. First, does the asset have a scalable business model? Xiabu achieved this by pioneering the bar-style, one-person hotpot structure, and rolled it out in a way that resembles a fast-food operation, while offering quality and experience above that level of dining.

Second, does the asset represent a value proposition? The average customer in Xiabu’s price bracket spends approximately RMB35 ($5.44) on a meal, and there is a lot of competition in this space. To cut through the noise, restaurants need to find their own consumer appeal, and align their products with quality. Being able to serve fresh, tasty and convenient food in a clean environment is a plus point; and the ability to standardize that across the chain facilitates brand-build.

It is important that the companies' own management remains hands-on, Zhong says, instead of relinquishing too much responsibility to external managers. “Franchising is a good business model, but it needs strong management capability. When the business is small, directly-owned model is easy for control food quality and services.” 

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• Topics
• Greater China
• Consumer
• Actis Capital
• Apax Partners Hong Kong