Retail Food Group Limited expands into China: Is it a buy?

Can Retail Food Group Limited (ASX:RFG) follow Domino’s Pizza Enterprises Ltd. (ASX:DMP) in delivering blockbuster returns?

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Australia’s largest multi-brand food and beverage franchisor Retail Food Group Limited (ASX: RFG) today announced plans to expand its newly acquired Gloria Jean’s coffee business into brand-loving China.

In October Retail Food Group (RFG) announced the purchase of Gloria Jean’s for an initial consideration of $163.5 million, and it is already cashing in with the announcement of a joint venture partnership with Chinese restaurant chain GouBuLi Group.

Under the terms of the partnership GouBuLi will give RFG an initial license fee of $6 million and 20% interest in the joint venture. In return GouBuLi receives a perpetual license to operate a small number of coffee businesses within China.

This seems promising news for RFG and its shareholders given the receipt of a significant upfront fee and potential to retain future earnings by way of the profit share agreement under the terms of the joint venture.

Moreover, RFG has the expertise of a local partner to diminish execution risk in entering a complex Chinese market, while opening up a potentially huge new market for itself. The middle-class Chinese consumer is known for a love of Western brands and Gloria Jean’s coffee could fit the bill nicely to leverage this.

There’s plenty of money to be made in expanding fast-food and franchise businesses as one of the ASX’s best performing mid-cap stocks recently, Domino’s Pizza Enterprises Ltd. (ASX: DMP), demonstrates well.

The slow turning wheels of institutional stock analysis mean the market has yet to really react to the news, and at $5.87 RFG looks a good buy given its valuation, yield and brightening outlook.

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Motley Fool contributor Tom Richardson owns shares in Retail Food Group. You can find him on Twitter @tommyr345

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