China a key destination for US-based companies

Despite slower economic growth, China remains a key destination for United States-based companies.

US retailers that have entered the Chinese market with long-term plans, in particular, are looking into further expansion in the world's second-largest economy, according to a recent report by ratings agency Standard & Poor's.

Among the 150 US retailers and restaurant companies rated by S&P that have operations in China, five were analyzed in the recent report in terms of their exposure to China and the strategic importance that they attach to the country.

Three out of those five companies - McDonald's Corp, Starbucks Corp and Yum! Brands Inc - are restaurant companies. The other two are retailer Wal-Mart Stores Inc and clothing chain Gap Inc.

Helena Song, the New York-based director of S&P corporate and government ratings, said US retailers that expand into China tend to be the "largest players in their category".

Referring to the five sample companies in the study, Song noted that these companies have already penetrated the domestic US market, have experience in international expansion projects, and boast strong global brands and solid cash flow to support meaningful and longer-term investments.

"As the companies establish a base and accumulate more experience in China, they develop more local operational knowledge and expertise," said Song, who led the study.

Most US fast-food restaurant companies have shown a big appetite for China, with some entering the nation as early as the 1980s. Yum! Brands, for example, entered the country by opening a KFC in Beijing in 1987. Yum! Brands' officials have called China the "greatest restaurant opportunity of the 21st century".

And for good reason.

After more than two decades in the country, KFC is the largest fast-food chain in China with more than 4,400 restaurants in some 850 cities across the nation. In 2012 alone, Yum! Brands' Shanghai-based China division opened nearly 900 new restaurants in the country and generated more than $1 billion in profit.

Song said that the US quick-service restaurants' successful expansion in China reflects their "strong brand name appeal, solid financial resources and experience in developing new international markets".

"Moreover, they have helped change and shape how younger generations eat, drink and live in modern day China," said Song, adding such expansion will continue as consumer spending continues to increase and as the taste profile of the Chinese continues to evolve.

The past year may not have been a fruitful one for Yum! Brands, as the company saw a decline of about 10 percent in its China earnings for the first three quarters because of safety concerns over its poultry suppliers.

In the study, S&P predicted that the negative trend for Yum! Brands in China will moderate in the coming year and store sales will "turn positive" in 2014 because of the company's commitment to localization in menu initiatives and customer outreach.

As many economists have pointed out, China's slower GDP growth - currently at 7.8 percent compared with its one-time double digit pace - is a good opportunity for the country to reconsider its growth model.

China, as many experts suggest, needs to shift from an investment-led economy toward a consumption-driven model.

The S&P study pointed out that growing domestic demand will likely benefit Western retailers with successful operations in the country.

The expansion of US retailers in key international markets, such as China, is a supporting factor for ratings, because it strengthens the companies' business-risk profile through greater scale and geographical diversity, as well as better competitive advantages, operating efficiency and profitability over time, the S&P report said.

The future of these retailers in China does face some challenges, both among themselves and among China's domestic brands.