Jollibee breaks into China market

Fastfood giant Jollibee Foods Corp. (JFC) has entered the lucrative China market following a deal to acquire a controlling stake in the Yonghe King chain of restaurants for $22.5 million.

In a disclosure to the Philippine Stock Exchange, JFC said it has signed an agreement to acquire 85 percent of Belmont Enterprises Ventures Ltd., the holding company of the Yonghe Group, which owns and operates the Yonghe King fastfood chain of quick-service restaurants in China.

JFC said its wholly-owned subsidiary Jollibee International (BVI) Ltd. will pay for the acquisition of 77 Yonghe King stores. An initial payment of $11.5 million will be made, half of which will be financed by the Jollibee Group’s cash surplus and the balance through external sources.

Under the sale and purchase agreement signed last Friday, a bonus payment will be made by Jollibee to the sellers within the next three years if it gain a certain profit after tax level is achieved.

The Yonghe King restaurant, which started in 1995 in Shanghai, serves Chinese food through a Western fastfood service system. The brand "Yonghe King" has become a household name in key Chinese cities with 26 stores in Shanghai, 26 in Beijing, 11 in Shenzhen, 8 in Wuhan and 6 in Hangzhou.

"This acquisition is a very significant step in our international expansion. It provides us with an opportunity to become a major regional player in the quick service restaurant business in Asia. Yonghe King is a strong brand with 77 stores in very good locations in key cities in China. I believe that the Jollibee Group can contribute to make Yonghe King an even bigger brand," said Tony Tan Caktiong, JFC chairman and chief executive officer.

He added that Yonghe Group founders Lin Yu Au and Lee Yu Lin, currently Yonghe’s chief executive officer and head of marketing and public relations, respectively, will continue to work with the Jollibee Group in their present capacities. They will likewise retain ownership of 15 percent of the Yonghe Group of companies.

"We are optimistic about our entry into China and a big factor for that confidence is that the original leaders of Yonghe, together with its 2,900 employees, will continue to manage our new business there," Tan Caktiong said.

For its part, the Yonghe Group said Jollibee’s takeover will certainly have a significant positive impact on Yonghe King’s business in China. "It has the expertise in the fastfood business as demonstrated by its successes in the Philippines," the Chinese group said.

JFC chief financial officer Ysmael Baysa said the transaction is a good financial deal for Jollibee and the sellers. "All will benefit from the future success of the business. For Jollibee in particular, the financial deal limits its definite purchase investment. Our purchase investment will increase only when we are assured that the business will have grown profitably," he said.

Baysa said last year, total sales of Yonghe Group reached about $4 million. He also disclosed that the Yonghe Group is generating modest net income and positive cashflow from operations.

He said he expects the Yonghe King fastfood business to add about five percent to the Jollibee Group’s system-wide sales.

"The Jollibee Group is acquiring a successful and established business with significant growth potential. The financial challenge is to what extent we can profitably grow the business and to what level we can drive the return on our investments," Baysa added.

The Jollibee Group of Companies operates the Philippines’ largest fastfood network. It has a total of 988 stores worldwide as of end-2003: 467 Jollibee, 245 Chowking, 213 Greenwich, 30 Delifrance and 33 stores abroad, including the Tomi’s Teriyaki Japanese food outlets in the US. With the acquisition of Yonghe King in China, the group’s total stores worldwide has grown to 1,065.