Ambitious goal

McDonald's announced on August 8 that the deal to sell a majority of its business in China to CITIC Ltd., CITIC Capital and Carlyle Group had been completed. In the new partnership, CITIC Ltd. and CITIC Capital together will hold a 52-percent stake, Carlyle Group will hold 28 percent, and McDonald's the remaining 20 percent. The new company will run McDonald's business on the Chinese mainland and in Hong Kong.

On the same day, the new McDonald's China also announced it will accelerate its expansion in the country. Within the next five years it will open 2,000 new restaurants on the mainland, said Zhang Jiayin, CEO of McDonald's China, at a news conference.

The new company currently runs 2,500 restaurants on the mainland and 240 in Hong Kong. According to its plan, it will maintain double-digit growth in the next five years. By the end of 2022, the number of McDonald's restaurants on the mainland will increase to 4,500, and the speed of opening new locations will rise from 250 to 500 per year in the next few years.

Third and fourth-tier cities will be the new target. By 2022, the proportion of its outlets in such cities will increase from the current 35 percent to 45 percent, said Zhang.

"We will provide more local-style breakfast products and desserts, which should be brought to market between 2018 and 2020," she said.

China is now the third largest market for McDonald's, and Steve Easterbrook, McDonald's President and CEO, said it will soon become the chain's largest market outside the United States.

Such a high expansion target seems aggressive compared with the previously conservative image of the global fast food chain that has operated in China for 27 years.

In the global market, McDonald's is far ahead of its rival KFC in both the number of outlets and profits, but in China, the latter has established a much bigger presence. Now KFC runs more than 5,000 restaurants in over 1,100 cities and counties on the Chinese mainland. This is because McDonald's adopted a "conservative" business strategy in China. Different from its approach in the global market, where 80 percent of its outlets are franchised, McDonald's directly ran more than 70 percent of its restaurants in China, according to a report in The Economic Observer.

The new company is also targeting the delivery service market. Within McDonald's globally, China is the absolute leader in delivery service, because it has a much higher population density than other countries and Chinese consumers favor delivery service more than consumers in other countries do.

In McDonald's five-year plan for the Chinese market, an important goal is to accelerate development of delivery service. "We will build 2,000 delivery service centers by 2022, which means of the 4,500 restaurants, 75 percent will provide delivery service," said Zhang.

Strength from local partners

Another challenge for McDonald's China is that it faces stiff competition, especially the upsurge of local fast food chains.

China's fast food market is reaching saturation point. A forecast by market research firm Euromonitor International predicts that by 2019, the growth rate in China's fast food market will slow to 4 percent, less than one third of the growth rate 10 years ago. So, why is McDonald's confident of double-digit growth while the industry is believed to be slowing down and more rivals are competing for market share?

Zhang said based on the existing business scale, system and strategies, McDonald's can do better than the industry average, and the double-digit growth target can be realized by opening more restaurants and increasing sales.

Industry insiders think the new growth target for McDonald's is mostly supported by its new Chinese partners.

"With the participation of CITIC, McDonald's will gain more power and have access to better resources than before," Zhu Danpeng, a food industry analyst, told National Business Daily.

"Our shareholders CITIC Ltd. and CITIC Capital have powerful advantages in the real estate and banking sectors, and we will cooperate with them to make full use of the advantages," said Xu Yingting, Vice President of Public Relations at McDonald's China.

According to Xu, through CITIC's real estate networks, McDonald's will be able to establish cooperation with more real estate developers, and it will cooperate with China CITIC Bank in cash management and financing.

Zhang Yichen, Chairman of McDonald's China, said as one of the largest conglomerates in China, CITIC has many banking outlets in third- and fourth-tier cities. "When we choose locations in third- and fourth-tier cities, banking outlets of CITIC can share a lot of information with McDonald's because they understand local markets much better than we do," he said.

Various business sectors under CITIC, such as banking, securities and real estate, are establishing contact with McDonald's for possible cooperation.

"CITIC has very good domestic resources in China and has established cooperation with many local governments and large companies such as Tencent and Alibaba," said Zhang Yichen, adding that CITIC is planning to introduce cooperation between McDonald's and major Chinese real estate developers such as Vanke, Evergrande and R&F.

"These large real estate developers are entering third and fourth-tier cities as well. Their projects may not bring large flows of customers within a short time, but in the long term, they will have big business potential," he said.

"In first- and second-tier cities, sales at McDonald's restaurants are driven by wage earners' breakfast and lunch demands. But in third- and fourth-tier cities, sales during weekends, holidays and at tea time will be more important, so sales strategies for such restaurants might be different, and McDonald's must have deeper cooperation with many partners," he said.

Copyedited by Chris Surtees

Comments to wangjun@bjreview.com