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I saw this from “Sage Brennan’s this week in China” at MarketWatch. I have been to Chatea (Yi Cha Yi Zuo 一茶一坐) at Huangzhou in 2004 and was very impressed by the settings and the service. Also walked outside a store in Xu Jia Hui (Shanghai) during dinner time and the waiting line was just too long. After reading the article I am even more impressed by the investors and management of the company.
Here is the excerpt:
Chatea raises unconventional funding
Much has been made of recent increases in high-yield lending to take up the slack that resulted when domestic banks began to tighten credit. But China’s booming private sector is looking to a variety of mechanisms to finance growth. As an example of the increasingly creative deals that China’s private equity sector is likely to see in the coming year, I offer up the unique funding of Shanghai-based restaurant chain Chatea (Yi Cha Yi Zuo) by several investors known for deals in completely unassociated industries.
IDG Technology Venture Investment, one of China’s best-known backers of successful early-stage technology companies like Baidu, Sohu.com Inc, eBay’s Eachnet and Ctrip, as well as a large number of promising startups, was a surprising participant in the financing of Chatea’s privatization, joining Susquehanna International Group.
The $7 million round, closed in early December, privatized the 70% share of the company that had been owned by the Shanghai government, which reportedly made a 30% return in the roughly one year that it owned its share of Chatea.
Is this an example of the influence of the Shanghai government in private enterprise? Sure, but it also is a recognition that a solid business concept deserves attention – even from unexpected quarters. Investors known for whiz-bang technology investments out on the Long Tail were willing to bet on a decidedly old-economy business model and management team, which hails from the China divisions of McDonald’s Corporation, Yum Brands Inc.’s KFC and the original Taiwanese founders.
So why is this a venture capital deal? Chatea emphasizes a commitment to providing a high-quality customer experience, which diners in the West, for the most part, take for granted. In China, restaurant customers are treated unevenly, at best. So an operation that keeps customer service as a mantra and provides a stylish atmosphere has a real chance to grow quickly if it is adequately capitalized, much as Starbucks has in China. In this concept, the investors apparently see the potential for VC-like returns.
One of the most interesting aspects of Chatea is that with 17 restaurants, several of which are located in cities as far as Beijing, the company has developed a scalable model to produce food of consistent quality from a single kitchen in Shanghai, similar to the McDonald’s model, but with a stylish twist. Chatea claims that the kitchen can support up to 60 restaurants. Customers, in general, have no idea that the gleaming kitchens featured in every location do not actually produce any of the dishes that are served. They also have only a vague notion of the massive margins that Chatea makes on the gourmet teas it sells.
Will we see more deals like this one? Probably not exactly, but compelling deals that can clearly be pulled off with a bit of creativity abound in China.