Starbucks and Burger King are betting big on a partnership model that’s gaining traction in China. The company plans to sell a majority stake to a local private equity firm as the battle for market share intensifies. Foreign food chains once thrived in China without much adaptation, and high-end Western products virtually sold themselves. Today, decisions made from far-flung headquarters no longer preclude that. Chinese private equity firms tend to move quickly, revamping menus, adjusting prices and rapidly expanding scale, including entering lower-tier cities. “Their involvement allows businesses to operate at ‘China speed,'” said Kay Hasegawa, a partner at consulting firm YCP. Starbucks is selling a 60% stake in its China unit to Boyu Capital in a $4 billion deal, and expects its value to more than triple over the next decade, including licensing fees to the Seattle-based giant. CPE Capital will invest $350 million in Burger King’s China operations, acquiring an 83% stake. Both joint ventures are awaiting approval from Chinese regulators and are expected to be completed next year. This month, Beijing-based IDG Capital acquired a controlling stake in French yogurt brand Yoplait’s China operations in a deal that values the unit at about $250 million. That’s just part of what’s to come. General Mills is reportedly considering selling its Haagen-Dazs stores in China. Swedish oat milk brand Oatly Group AB is also reportedly considering selling its China operations. Western brands are seeing their fortunes change as homegrown companies leap forward with competitive pricing, smarter digital strategies and a sharper reading of local consumer tastes. Luckin Coffee overtook Starbucks in both sales and number of stores in 2023. Restaurant Brands International is struggling against Burger King in China, where its average sales per store ranks last among major markets. The readiness of domestic PE firms to reinvent themselves and their strong ties with local suppliers, distributors, landlords and regulators also make partnerships more attractive. Hao Zhou, partner and head of Greater China Private Equity Practice at Bain & Company, said the local partner brings not only financing but also turnaround experience, deep sector knowledge and talent networks to lead the next stage of growth. “Even before the deal closes, they will be ready to join the company and start focusing on some key initiatives,” Hao added. To be sure, it is nothing new for Western companies to form joint ventures to tap into China’s vast and complex market. But recent partnerships highlight the urgent need for a fundamental overhaul to survive the country’s cutthroat food industry. Joe Ngai, chairman of Greater China at McKinsey, said speed-to-market, or how quickly companies can launch new products, has become increasingly demanding, and multinationals face difficult calculations about whether to continue pouring more money into China to protect market share or bring in local partners for support. For example, 90% of the ice cream products sold at Dairy Queen in China are made for the local market and are not available in the United States, Frank Tan, chairman of FountainVest Partners, told an industry committee meeting in Hong Kong last month. Fountainvest operates an ice cream chain and Papa John’s Pizza in China. Loyalty arrangements are the focus This partnership model is intended to benefit both parties. Ansel Tan and Melanie Tan, Asia-Pacific private capital analysts at PitchBook, said more global companies may choose to hold minority stakes while retaining intellectual property licensing rights and hand over day-to-day operations to PE partners. For Starbucks, royalties from Boyu could represent the most lucrative part of the $13 billion valuation the coffee chain plans for its China division. The royalty fees paid to Starbucks during the bidding process exceeded what several other bidders were prepared to pay, according to two people familiar with the matter. Starbucks declined to comment, and Boyu did not respond to CNBC’s requests. Experts say coffee generally has higher profit margins than the food and beverage industry as a whole, but even a 1 percent change in royalties can make a big difference. Higher loyalty also helps offset lower advances, indicating a growth plan based on expanding the number of stores. Lowering or deferring royalties early on could improve cash flow and fund faster expansion, Hasegawa said. But he added that Starbucks can command higher loyalty because of its strong brand and its influence in negotiating favorable terms with prime locations, malls and developers. Boyu could use its recently acquired stake in Beijing’s upscale mall operator SKP to offer more favorable lease terms for the chain’s typically spacious stores. Why PE is going after subsidiaries Chinese subsidiaries of multinational brands have become valuable targets at a time when PE firms are facing pressure to leverage idle capital and move toward stable cash-generating businesses after years of lukewarm trading. For example, the Starbucks deal initially attracted interest from more than 20 buyers, primarily PE firms, to scale the business. “These businesses are very attractive” with strong cash flow, existing brand equity and a clear path to upside potential, said Bain & Company’s Zhou. As a business grows, private equity investors can make a tidy profit by reselling it to other buyers or issuing an initial public offering at a higher valuation. Many companies look to McDonald’s as a success story in China. In 2023, McDonald’s China bought back its shares from Carlyle after six years of ownership, giving the PE giant a 6.7x return on investment. PE-backed carve-out deals in China this year soared to a total of $39 billion as of Dec. 9, up from $23 billion in 2024 for all of 2024, said Jess Chow, head of China M&A at consulting firm ARC Group. This year’s resurgence was also boosted by several big deals, including the PAG-led acquisition of 48 shopping malls under Dalian Wanda Commercial Management for $6.9 billion. Zhou added that the Starbucks deal reflects a broader trend of foreign companies selling non-core and underperforming units in China as companies navigate rising geopolitical uncertainty, weak consumer demand and increased competition. “Some Western companies are facing pressure from shareholders to exit the low-growth Chinese segment,” he said, creating an opportunity for PE funds to acquire sectors no longer prioritized by their parent companies.
