TH International dumps Popeyes

The Chinese fast-food operator is raising $50 million in new funding through the sale of convertible notes to its two founding partners

Key Takeaways:

  • TH International will return China rights for Popeyes to the brand’s owner and focus on developing its core Tim Hortons chain in China
  • The company concurrently announced $50 million in new funding, providing an important financial cushion as it suffers in a brutal Chinese coffee price war


By Doug Young

Spurned once is bad enough. But the Popeyes fast food brand is looking increasingly like a wallflower in the massive China restaurant market, after being dumped there last week for the third time. The popular fried chicken chain was spurned this time by TH International Ltd. (THCH.US), which only acquired the China rights to Popeyes two years ago.

TH International’s two-year experiment with Popeyes followed another similar-length marriage for the brand in China with another franchise partner, which also ended in divorce in 2022. Popeyes first ventured into China around 20 years earlier when the country’s economy was just taking off, though that foray also ended in failure.

This latest failure is less about Popeyes, which is owned by Restaurant Brands International Inc. (QSR.US), whose other chains include Tim Hortons and Burger King. Instead, it’s more about a recent coffee war in China that is pressuring companies up and down that food chain, from Starbucks (SBUX.US) at the top to cheaper options like Luckin (LKNCY.US) and Cotti that are now selling cups of premium brew for just 10 yuan, or about $1.40.

In this case, the story revolves around TH International, which made a splash when it brought Restaurant Brands International’s (RBI) Tim Hortons chain to China in 2018. TH International embarked on an aggressive campaign with the brand, known locally as Tims, aiming to position it as a cheaper alternative to Starbucks.

Along the way, the company also acquired rights to Popeyes in China two years ago, in a budding romance between itself and RBI. TH International touted big plans for both chains, targeting 3,000 Tims China stores by 2026 and 1,700 Popeyes over the next decade.

It relaunched Popeyes in China last September with fanfare and opened about a dozen more stores not long afterwards. Meantime, its Tims chain reached more than 900 stores by the end of last year. But toward the end of last year the company’s aggressive plans crashed headlong into reality, slamming the brakes on the expansion.

TH International managed to report slight revenue growth in this year’s first quarter, as the figure rose 3.1% to 347 million yuan ($48 million) from 337 million yuan a year earlier. But that small gain and more was solely due to new store openings, as its total store count rose by a much bigger 42% to 917 at the end of March from 648 a year earlier. Its same-store sales, one of the most widely watched metrics for restaurant operators, actually plunged 13.6% for the quarter, contracting after the growth rate dropped steadily throughout last year.

Signs of behind-the-scenes trouble first burst into public in February, when RBI’s CEO Joshua Kobza criticized TH International for not putting enough resources into its Tims China expansion. That impasse was finally resolved last week, when TH International announced a “significant financing” from RBI and Cartesian Capital, its two founders. As part of that deal, RBI agreed to take back the Popeyes brand from TH International, which would then focus on shoring up the Tims China business.

Modest financing

The new financing is relatively modest but should help to support TH International’s relatively weak financial position that saw it holding just 220 million yuan in cash at the end of March. That figure will more than double with TH International’s sale of $40 million worth of three-year convertible notes to RBI and Cartesian Capital. That pair also committed to buying another $10 million worth of notes within the next seven months.

Meantime, RBI said it would pay $9 million to take back the Popeyes China operation, giving it an enterprise value of $15 million, according to a stock exchange filing. “Longer-term, RBI expects to bring on local partners to form a more traditional master franchisee (for Popeyes in China), similar to other Popeyes international markets,” RBI said in its own statement on the new financing and termination of the Popeyes agreement.

TH International and RBI may have expected a relief rally for the company’s embattled stock after announcing the new financing, but investors served up something else completely. The shares fell 2.8% the day of the announcement and continued to slide by as much as 17% over the next trading days. They later regained some of that but are still down about 10% from pre-announcement levels.

The stock has now lost more than 90% of its value from when the company completed its listing in September 2022 by merging with a special purpose acquisition company (SPAC). It trades at a depressed price-to-sales (P/S) ratio of 0.51, or less than half the 1.17 for Yum China (YUMC.US; 9987.HK), operator of the KFC and Pizza Hut chains in China, and 2.49 for DPC Dash (1405.HK), operator of the Domino’s pizza chain in China.

An even more suitable comparison for TH International might be Luckin, which also trades much higher with a P/S of 1.77 and has surpassed Starbucks to become China’s biggest coffee chain. Luckin has provided endless headaches not only for TH International, but for coffee chains through China, by sparking a price war with the newer Cotti Coffee, which just happens to be founded by Luckin’s own co-founders who were tossed out after an accounting scandal.

TH International has become caught in an uncomfortable position in China’s booming coffee landscape, sandwiched between higher-end chains like Starbucks and bottom-of-the-pot operators like Luckin. Chinese consumers that once embraced the pricier options like Starbucks and Tims are increasingly flocking to the lower end of the spectrum as the country’s economy slows and many feel less secure about their futures.

TH International has yet to earn profits, and its flow of red ink continued with a 143 million yuan loss in the first quarter. Still, that was an improvement over the 175 million yuan loss a year earlier, and the company also reported slight improvement in its margins despite the difficult environment. That seems to show that it probably has the financial savvy to weather the current coffee wars.

The new cash infusion and Popeyes divestment both look positive, as they will give the company some financial breathing room and remove a distraction to let it focus on improving Tims China. Now, it just needs to wait for the coffee wars to subside – and move prudently to avoid becoming a casualty in an industry consolidation that looks inevitable.

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