Tim Hortons Gobbles Up Popeyes in China

Key Takeaways:

• TH International will take over operation of the Popeyes fried chicken chain in China from the brand’s owner, Restaurant Brands International
• TH International is likely to announce a major expansion plan for Popeyes in the months ahead, after the chain failed to gain traction in its first three years in China

By Doug Young

What’s the Popeyes fried chicken chain worth in China?

The answer might be $170 million, based on the huge jump in both the share price and market value of TH International Ltd. THCH after it announced it gained exclusive rights to develop the U.S.-based Popeyes brand in China. More precisely, shares of TH International, which already operates the Tim Hortons donut and coffee chain in China, jumped 26% after the company announced it was adding the Popeyes brand to its China menu.

That took TH International’s market value to $790 million, up from $620 million before the announcement, which is how we got our $170 million figure.

But this story is more complex than a single deal, and we’ll admit we follow it a bit more closely than most due to our personal affection for Popeyes fried chicken, as well as the donuts and coffee that are Tim Hortons specialty. The deal looks relatively shrewd, building on a foundation already established by a fast-growing Tim Hortons chain in China over the last few years.

The story actually starts with the Tim Hortons chain’s owner, Restaurant Brands International QSR, which also owns the Popeyes and Burger King chains. Restaurant Brands International (RBI) brought Tim Hortons to China in 2018, and now operates the franchise in the country in a joint venture with private equity firm Cartesian Capital, along with internet giant Tencent (0700.HK) and Wumart, operator of the German Metro hypermarket brand in China.

Since launching Tim Hortons in China, TH International has rapidly built up the chain and last month announced the opening of its 600th store. The company has big plans for the market, with a target of opening 1,000 stores by the end of this year and 3,000 by the end of 2026. It also boosted its cash last August when it listed in the U.S. through a back-door merger using a special purpose acquisition company (SPAC).

Then there’s Popeyes, which RBI introduced to China as a wholly owned venture with its first store opening in Shanghai in 2020. RBI had big plans for the chain in China, saying it wanted to open 1,500 outlets over the next decade. That’s not too unreasonable when one considers that market leader KFC had more than 9,000 stores in China at the end of last year, making it the country’s largest restaurant chain, according to data released by parent Yum China (YUMC.US; 9987.HK) earlier this week.

But things didn’t go quite as smoothly as planned for Popeyes. After attracting huge attention with its first store opening on Shanghai’s famous Huaihai Road in 2020, the chain failed to gain much traction and had less than 10 stores in China last year. Then the chain suddenly closed all but two of its seven mainland China outlets in August last year, according to media reports at the time.

A check of Dianping, the Chinese equivalent of Yelp, shows that, indeed, only two Popeyes outlets were operating in Shanghai at the time of this writing.

Tim Hortons to the rescue?

The August closures occurred around the same time that RBI had an apparent change of strategy for Popeyes. Right around the same time, RBI announced another deal with Cartesian Capital for the development of Popeyes in China. Very few details were given in that announcement. But now it looks like that was a prelude to this latest announcement, which makes TH International the exclusive franchisee for Popeyes in China.

The latest announcement is also very thin on details, saying only that TH International will pay for rights to the Popeyes brand in China using its shares, with no cash changing hands. That’s probably a good thing, since TH International had a relatively modest 760 million yuan ($112 million) in cash at the end of September, which it will likely need for its aggressive expansion of Tim Hortons, and now the Popeyes chain as well.

As we’ve noted already, investors seem quite pumped about the latest combination, at least based on the big one-day share gain. But the reality is slightly more complex, since TH International’s stock has hardly been a stellar performer since it completed its SPAC listing last August. Following that, its shares moved steadily downward and at one point lost about two-thirds of their value.

Since then they have bounced back a bit, and following the latest rally they are about double an all-time low from late December. But at their latest close of $5.29, the shares are still down by about a third from where they were at the time of the SPAC listing’s completion last August.

That seems to indicate investors are still undecided about whether the company can succeed with its current aggressive expansion plan. We expect that following this latest announcement we may see some new aggressive targets rolled out for Popeyes, similar to what TH International has announced for Tim Hortons.

The company’s latest results do appear to show it can grow quickly while controlling costs, which will be important to its success. Its revenue grew 68% year-on-year in last year’s third quarter to 305.7 million yuan, while its operating costs and expenses grew at a much slower 36.3% to 300 million yuan. That allowed the company to boost its adjusted store EBITDA margin by 4 percentage points to 6.7%, though its net loss still widened to 195 million yuan from 113 million yuan a year earlier.

Despite the investor indecision, TH International’s shares still trade at a relatively high price-to-sales (P/S) ratio of 4.5, similar to the 4.6 for fast-growing local coffee chain Luckin LKNCY, but nearly twice the 2.6 times for much larger and also profitable Yum China.

At the end of the day, this deal really does look like a good one for both RBI, which was clearly struggling with its self-owned Popeyes China operation, and for TH International, by giving it another major brand that should appeal to Chinese diners. Now the two partners just need to cook up a new roadmap for Popeyes in China, and also provide investors with another clear picture showing when TH International might become profitable in the not-too-distant future.