From Starbucks to Burger King: Why Western food giants are selling large stakes to Chinese private equity funds
Starbucks and Burger King are betting big on a partnership model that’s gaining traction in China: selling majority stakes to local private equity firms as the battle for market share rages on. Foreign food-and-beverage chains once thrived in China without adapting much — premium Western products practically sold themselves. Today, decisions made from distant headquarters no longer cut it. Chinese private equity firms tend to move fast, revamping menus, adjusting prices and scaling rapidly, including into lower-tier cities. “Their involvement enables the business to operate at ‘China speed,'” said Kei Hasegawa, partner at consulting firm YCP. Starbucks is selling a 60% stake in its China unit to Boyu Capital in a $4 billion deal, projecting its value will more than triple over the next decade, including licensing fees to the Seattle-based giant. CPE Capital is investing $350 million in Burger King’s China operations, taking an 83% stake. Both joint ventures are pending regulatory approval in China and expected to complete next year. This month, Beijing-based IDG Capital acquired a controlling stake in French yogurt brand Yoplait’s China business in a deal valuing the unit at about $250 million . That’s just a taste of things to come. General Mills is reportedly considering selling its Haagen-Dasz stores in China. Swedish oat milk brand Oatly Group AB has also been reportedly exploring divesting its China business . Western brands have seen their fortunes shift as homegrown players surge ahead with competitive pricing, smart digital strategies and a sharper read on local consumer preferences. Luckin Coffee overtook Starbucks in both sales and store count in 2023 . Restaurant Brands International has struggled with Burger King in China, with average per-store sales ranking the lowest among its major markets. Domestic PE firms’ readiness to shake up management and stronger ties to local suppliers, distributors, landlords and regulators also make partnerships more appealing. Beyond funding, local partners bring turnaround experience, deep sector knowledge and a network of talent to lead the next stage of growth, said Hao Zhou, partner and head of Greater China private equity practice at Bain & Company. “Even before the deal is closed, they will go into the company, all ready to start focusing on a few key initiatives,” Hao added. To be sure, Western companies forming joint ventures to navigate China’s vast, complex market is not new. But the recent tie-ups highlight the pressing need for an overhaul to survive the country’s cut-throat food scene. As requirements on speed to market — how soon can a company launch a new product — localization and innovation keep intensifying, multinationals face a difficult calculus: whether to keep pouring more money into China to defend market share, or bring in a local partner for support, said Joe Ngai, chairman of McKinsey in Greater China. For instance, 90% of the ice-cream products sold at Dairy Queen in China are tailored for the local market and unavailable in the U.S., Frank Tang, chairman of FountainVest Partners, said at an industrial panel in Hong Kong last month. FountainVest operates the ice-cream chain and Papa John’s Pizza in China. Royalty arrangement in focus This partnership model is meant to benefit both sides. More global companies may choose to hold minority stakes while retaining IP-licensing rights, leaving day-to-day operations to PE partners, said Ansel Tan and Melanie Tng, APAC private capital analysts at PitchBook. For Starbucks, royalties from Boyu could potentially form the most lucrative part of the $13 billion valuation the coffee chain projects for its China unit. The royalty fees payable to Starbucks proposed during the bidding process were above what several other bidders were prepared to pay, according to two people familiar with the matter. Starbucks declined to comment, while Boyu did not respond to CNBC’s requests. While coffee is typically a higher-margin business compared to the wider F & B sector, even a one-percentage-point change in royalties can make a large difference, experts said. Higher royalties also often make up for a lower upfront payment and signal a growth plan built on expanding store count. Lowering or deferring royalties in the initial stage can help improve cash flows and fund faster expansion, Hasegawa said. But Starbucks can command higher royalties, thanks to its strong brand and leverage in negotiating prime locations and favorable terms with malls and developers, he added. Boyu could draw on its recently acquired stake in SKP, which operates luxury malls in Beijing, to offer more favorable lease terms for the chain’s typically spacious stores. Why PE chases subsidiaries China subsidiaries of multinational brands have become prized targets at a time when PE firms face pressure to deploy idle capital after years of tepid dealmaking, pushing them toward stable, cash-generating businesses. For instance, the Starbucks deal initially drew interest from over 20 buyers , mostly PE firms, to size up the business. “These businesses come as very attractive” with strong cash flows, existing brand equity and a clear path to capture the potential upside, said Bain & Co’s Zhou. Private equity investors can earn decent returns, if the businesses grow, by re-selling it to another buyer or through an initial public offering at higher valuations. Many businesses look to McDonald’s as a successful case in China. In 2023, McDonald’s China bought back its stake from Carlyle after six years of ownership, giving the PE giant a 6.7 times return on its investment. As of Dec. 9, PE-backed carve-out deals — where firms buy stakes in large corporations’ subsidiaries — in China this year surged to $39 billion in combined value from $23 billion for the full year of 2024, according to Jess Zhou, head of M & A China at consulting firm ARC Group. This year’s resurgence was also boosted by several mega-deals, including a PAG-led acquisition of 48 shopping malls under Dalian Wanda Commercial Management for $6.9 billion. The Starbucks deal reflects a broader trend in foreign businesses divesting non-core or underperforming units in China, Zhou added, as firms navigate rising geopolitical uncertainty, sluggish consumer demand and stiff competition. “Some Western firms face shareholder pressure to exit the slow-growth China segments,” she noted, creating an opportune window for PE funds to seize the units that their parent companies no longer prioritize.
