Japan’s FamilyMart seeks to end pact with Chinese partner over royalty fee spat

A FamilyMart store in Shanghai. Photographer: Qilai Shen/Bloomberg

FamilyMart, the most successful Japanese convenience-store chain in China, is embroiled in a royalty payments spat between its joint-venture parents that threatens to destroy the partnership.

FamilyMart UNY Holdings Co. is suing to end its Chinese FamilyMart partnership with Ting Hsin International Group, saying the Taipei-based conglomerate hasn’t fairly shared the gains from the chain’s rapid expansion, according to people familiar with the matter and legal documents seen by Bloomberg.

Under the terms of the partnership, Ting Hsin effectively operates more than 2,500 FamilyMart stores in China, sharing profits and paying royalties to the Japanese company. Although Ting Hsin’s founders are Taiwanese, the company has had a presence in China since the late 1980s before the country’s economy opened up, and is considered a local entity. It also controls other food and beverage brands including China’s leading instant noodle maker.

FamilyMart has filed a petition to a court in the Cayman Islands — where Ting Hsin and the joint venture are registered — to force its partner to relinquish its 60% stake, said the people, who asked not to be identified discussing internal company affairs.

The tussle comes as China’s convenience-store market is set to grow by more than 60% in the next five years to $27 billion, according to Euromonitor International. As China rapidly urbanizes, demand for around-the-clock food, snacks and beverages is surging.

FamilyMart is the latest foreign brand seeking for a way to alter a local partnership as the government eases restrictions on non-critical industries such as consumer goods and retail.

Ting Hsin argues that the royalty fees are three times higher than the average charged by rivals such as 7-Eleven, the people said.

“We cannot comment on matters of litigation,” said Shinsuke Otsuki, a spokesman for Tokyo-based FamilyMart, which is 50.1%-owned by trading house Itochu Corp. Ting Hsin is not commenting due to contractual confidentiality agreements, the company said in a emailed statement.

Although 7-Eleven operates more stores in China, FamilyMart has had the most success among Japanese rivals, making up 8.4% of $17 billion in sales, according to Euromonitor. FamilyMart is second only to local chain Dongguan Sugar & Wine Group Co., which sells low-cost goods in less-developed parts of the country.

FamilyMart is alleging that Ting Hsin sought to reduce the royalty fee it pays for use of the brand to 0.3% or less from 1%, and withheld royalty payments for seven months, according to the documents. The payments were subsequently paid, one person said.

The Japanese company also alleged that Ting Hsin didn’t provide adequate disclosure of transactions related to the joint venture that would give FamilyMart Japan a full picture of the venture’s profitability, according to the documents.

The spat over FamilyMart in China is the latest in a long line of tussles involving joint ventures in China because of government restrictions on foreign companies seeking access to its vast consumer market. In 2004, when the FamilyMart joint venture was formed, non-Chinese businesses were mostly not allowed to set up shop in China without a local partner.

In the years since, under pressure from the global business community over an uneven playing field, Beijing has eased access and now requires joint ventures only in certain protected sectors such as agriculture and scientific research.

Caught up in a trade war with the U.S., China is preparing to open up sectors such as banking and auto manufacturing in 2020 to full foreign ownership, and curtail forced technology transfers. The shift of critical know-how to local partners is how European conglomerates Siemens AG and Alstom SA ultimately saw themselves out-competed globally in high-speed rail contracts by Chinese state-owned companies.

While technology transfers may not be as important in the market for convenience stores, other consumer giants have been wriggling out of their joint ventures in order to reap the benefits of their marquee brand names for themselves. In 2017, Starbucks Corp. paid $1.3 billion to buy out its East China joint venture partners in its then-biggest deal ever.

Bloomberg

 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.