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FamilyMart's China business threatened by partners' feud

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.

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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 urbanises, demand for around-the-clock food, snacks and beverages is surging. FamilyMart is the latest foreign brand seeking 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 50.1per cent-owned by trading house Itochu Corp. Ting Hsin is not commenting due to contractual confidentiality agreements, the company said in an 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 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. BLOOMBERG