A feud threatens to tear apart convenience store chain

[TAIPEI] FamilyMart, the most successful Japanese convenience-store chain in China, is embroiled in a royalty payments fight between its Japanese and Chinese joint-venture partners that could change how much money each side makes or scuttle the partnership entirely.

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 per cent stake, said the people, who asked not to be identified discussing internal company affairs.

FamilyMart UNY's stock dropped 2.2 per cent on Tuesday in Tokyo trading to reach its lowest level in 5 weeks.

The tussle comes as China's convenience-store market is set to grow by more than 60 per cent in the next five years to US$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 per cent-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 per cent of US$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 per cent or less from 1 per cent, 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 US, 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 US$1.3 billion to buy out its East China joint venture partners in its then-biggest deal ever.

BLOOMBERG