Cheesecake Picks Tasty China Partner In Maxim's

| About: The Cheesecake (CAKE)

When it comes to running restaurants in China, most foreign operators with any experience will say the most important step is finding the right partner to navigate both regulations and highly different tastes among Chinese diners. With that thought in mind, U.S. restaurant stalwart The Cheesecake Factory (Nasdaq: CAKE) has picked one of the best partners possible in its newly announced decision to expand to Asia, with China as its most likely first destination. Cheesecake said it will enter the market with Maxim's Caterers, one of Hong Kong's most famous cake makers.

Before I go any further, I'll openly admit that I was quite excited by the news of Cheesecake's plans, since I was a fan of their restaurants when I was living in the U.S. The chain is famous for its American style food and atmosphere, as well as its very large portions at reasonable prices. It was hugely successful in its early days back in the 1980s, though I do get the sense that it isn't the hot ticket in the U.S. that it once was.

Of course, none of that will mean anything to the average Chinese consumer, who will only see Cheesecake Factory as the latest mid-range foreign restaurant operator to enter China. Others now in the market include names like Outback Steakhouse, as well as the TGI Fridays and Hooters chain, all of which have stores in Beijing or Shanghai or both.

Under its new partnership, Cheesecake has licensed Maxim's to open its trademark stores throughout the Asia region (company announcement). The pair initially aim to open 14 stores over the next 10 years in Hong Kong, Macau, Taiwan and China. The deal could later be extended to other Asian markets, including Japan, South Korea, Malaysia, Singapore and Thailand.

From a purely culinary perspective, Cheesecake's choice of Greater China and Asia looks like a good one. As a longtime Asia resident, I can say with authority that cheesecake is one of the few western confections that most Asians seem to enjoy in its original western form. By comparison, most other western cakes and confections must undergo radical transformations to suit Asian tastes. The biggest of those is a severe reduction in sugar, and also the substitution of fruit flavors and whipped cream for more traditional western ingredients like chocolate and butter.

Maxim's is already known as one of the region's best cake makers, and I was personally a big fan of its fast food restaurants when I lived in Hong Kong. The fact that this is a licensing agreement rather than a joint venture also looks good, since it means Maxim's will have complete control of the Asian operation.

Maxim's was previously a joint venture partner with Starbucks (Nasdaq: SBUX) in south China, but ended up selling out its stake in 2011, presumably due differences of opinion (previous post). Another partnership that fell apart for similar reasons was one that saw Dunkin Brands (Nasdaq: DNKN) pull its trademark donut stores from Shanghai last year. Yet another deal saw U.S. institution Denny's announce a major China expansion plan in 2012, only to retract the plan months later due to differences with its joint venture partner.

I'll conclude this post by saying that no one is going to become fabulously rich from this new partnership, since its scale does look rather small. Just 14 stores in 10 years looks quite modest, though Maxim's is famous for its conservatism and the number could possibly increase if early stores prove popular. On the whole, I would give the partnership a strong chance of success, and would expect to see new store openings over the next 2-4 years in the major cities of Hong Kong, Taipei, Shanghai and Beijing.

Bottom line: Cheesecake Factory's China foray stands a strong chance of success due to its choice of a strong local partner and a Chinese preference for cheesecake.

Disclosure: No positions