The same Five Guys, but its fate has diverged. This chain, famous as one of America's top three burgers, is expanding stores in China while being put up for sale in Korea.
Five Guys, the chain famous as one of America's top three burgers, plans to open its first store in Beijing, China, next month. Although the United States and China are locked in conflict over issues such as the artificial intelligence (AI) hegemony battle, American fast-food chains including hamburger brands are accelerating their entry into the Chinese market. As their domestic market faces saturation, they are turning to the world's second-largest consumer market in China to expand their share. Chinese consumers' preference for American fast food is also growing by the day.
According to the South China Morning Post (SCMP) on the 13th, US burger chain Five Guys announced it would open its first Beijing store next month. Facing saturation in their home market, American fast-food brands are entering China one after another or accelerating their expansion. The SCMP reported that Wendy's, Chili's, Texas Chicken and Popeyes are seeking a path forward in China.
Fu Yifu, a special researcher at Suning Bank based in Nanjing, Jiangsu Province, China, said, "In the United States, inflation continues to pressure household purchasing power, while in China, the penetration rate of Western fast food is steadily rising."
Earlier, Five Guys opened its first Chinese store in Shanghai in 2021 to great popularity. This time, targeting young consumers, it plans to open stores in three popular shopping centers in Beijing. Sandy Lim, a China consumer analyst at S&P Global Ratings, said, "Some smaller US chains are seeking opportunities in China to offset saturation in their home market." She added, "Despite fierce competition, demand still exists in China's vast dining-out market."
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American fast-food brands have also changed the way they enter the Chinese market. In the past, foreign brands relied on direct-operation models managed by overseas headquarters. However, this method left them fully exposed to profits, losses and volatility, which ultimately caused some brands to leave the market. Recently, they have favored a franchise method in which they sign partnerships with local brands and operate. It is known as the "local franchise partner" model.
Early entrants such as KFC, McDonald's and Starbucks refined the local franchise model to reduce risk. Five Guys targets quality-conscious consumers in first-tier cities. Researcher Fu said, "Chinese consumers no longer blindly prefer foreign brands," adding, "These chains can grow only if they rely on differentiated products and localized operations."
Nasdaq-listed Wendy's said in May that it would open up to 1,000 stores in China over the next 10 years. According to its first-quarter earnings report, Wendy's signed a new franchise agreement with an experienced local dining operator. According to the earnings report, Wendy's first-quarter same-store sales in the United States fell 7.8% from a year earlier. In contrast, its total overseas market sales rose 6% from a year earlier.
Texas Chicken decided to open its first Chinese store in Shanghai as early as next month. In April, it partnered with Dexin Catering, a leading local operator holding several quick-service dining brands, and announced it would open at least 600 stores nationwide over the coming years. Another US chain, Chili's, opened its second Beijing store in May, drawing crowds and long waiting lines. Louisiana fried chicken brand Popeyes re-entered China in April in Beijing, more than 20 years after withdrawing from China in 2003. It also operates more than 80 stores in Shanghai.
Operating Profit of 1 Billion Won, Price Tag of 70 Billion Won... 'Gap' in Five Guys' Sale Price
By contrast, Five Guys in Korea is the exact opposite. Five Guys, brought into the country by Kim Dong-seon, a third-generation member of the Hanwha family and vice president in charge of future vision at Hanwha Hotels & Resorts and Hanwha Galleria, is experiencing ups and downs. In the early days of its opening, it saw long "open run" lines forming, but its performance is deteriorating due to high prices and a failure to reproduce the local taste. Ultimately, as the aggressive expansion strategy revealed its limits, the Apgujeong store in one of Korea's premier commercial districts abruptly ceased operations. Vice President Kim decided on the sale to secure the funds needed for large-scale investments such as the reconstruction of the Hanwha Galleria Apgujeong luxury hall.
However, the sale of the operator, FG Korea, has also failed to gain momentum. Last month, Hanwha Galleria signed a memorandum of understanding (MOU) again with private equity firm H&Q Korea to sell its stake in FG Korea. This followed the expiration of the preferred negotiation period of the existing MOU signed in December last year. Since the sale plan became known in July last year, the related process has continued for nearly a year but remains difficult.
The variable is "performance." Last year's results for FG Korea, the operator of Five Guys, showed simultaneous top-line growth and deteriorating profitability. According to a disclosure to the Financial Supervisory Service, sales last year came to 53.8 billion won, up 15.7% from the previous year, but operating profit fell 69.8% to 1 billion won. Net profit also declined from 2.1 billion won to 200 million won. Sales increased but profits fell sharply, once again confirming the gap between the business's growth potential and profitability.
The deterioration of Five Guys' profitability in Korea is due to its business structure. Unlike China, which favors the franchise method, Vice President Kim led the introduction of Five Guys and operated it centered on directly managed stores. Although it is not directly operated by the US headquarters, it is a "corporate direct-operation" model in which FG Korea directly operates domestic stores. This means the burden of rent and labor costs is heavy, and diversifying revenue through delivery or franchise businesses is not easy.
The market puts the expected sale price of Hanwha Galleria's 100% stake in FG Korea at around 60 billion to 70 billion won. In recent dining franchise deals, a cash-generation (EV/EBITDA) multiple of around 10 times has been applied, and Five Guys is also being discussed at around 7 to 10 times. However, with the profit decline continuing, it is uncertain whether the market will recognize this level of value. The general view in the industry is that it seems difficult for investors to bet blindly on future growth potential.
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