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McDonald's builds ties with Evergrande to speed up expansion in China

A McDonald's in Yichang, China. Photo: AP

Nearly half a year after McDonald's agreed to cede a controlling stake in its outlets in the Chinese mainland and Hong Kong to Chinese state-backed CITIC Ltd and CITIC Capital in a $2.08 billion deal, the US fast food chain has shifted its focus to property developers which it can piggyback to accelerate expansion in the country's less developed places.

Helped by an agreement McDonald's signed last week with Evergrande Group, a leading Chinese property developer, the American fast food chain will gain direct access to the untapped markets of China's smaller cities, as the Chinese property development giant reported that it increased the land reserves by about 40 percent year-on-year in 2016, with three-quarters of its land situated in or near the third-tier and fourth-tier cities.

The partnership with Evergrande Group came just days after McDonald's announced to add 2,000 more restaurants to its current 2,500 in the Chinese mainland over the next five years. That will double the target McDonald's set in the spring of 2016, when the US fast food giant was planning to open 250 new restaurants in China every year, replenished with an auction of its wholly owned restaurants in the country. Currently, McDonald's has about 2,500 outlets in the Chinese mainland and 240 outlets in Hong Kong.

With the completion of the $2.08 billion deal under which McDonald's sold the franchise right to CITIC Ltd and CITIC Capital, the vast majority of McDonald's outlets in China will be franchisee-operated, prompting the Oak Brook, Illinois-based company to seek ties with Chinese property development companies. In this aspect, CITIC Group could be helpful to McDonald's, which is exploring new locations across the country, because of its connections with the domestic property developers like Evergrande Group.

In a statement, CITIC Group Chairman Chang Zhenming hailed the strategic cooperation with Evergrande Group as a shortcut for McDonald's to quickly expand its footprint throughout China especially in the country's third-tier and fourth-tier cities, adding that Evergrande Group will give McDonald's priority in location selection in its strong property development network.

Negotiations with other property developers such as China Vanke and China Overseas Land & Investment for potential cooperation are in the pipeline, a Bloomberg News report quoted Zhang Yichen, chief executive officer of CITIC Capital, as saying. "All of these developers are very close to CITIC. It is very easy for us to put them together," Zhang said. "This is a strategy that you are not going to find in the US, and it is a strategic change that can only be made by people who understand how a market is shaped."

McDonald's plans to have 45 percent of its restaurants in the Chinese mainland in the less developed third-tier and fourth-tier cities, with the changing tastes of Chinese consumers in the big cities, who are switching to high-quality, healthy dining options. And coincidently, the ownership by Evergrande Group of about 700 property development projects in 240 Chinese cities, most of which are lower-tier ones, is consistent with McDonald's strategy.

Analysts said that the partnership with Evergrande Group would help McDonald's have its restaurants opened in the Chinese property developer's residential complexes, guaranteeing enough traffic volume.

Catching up with Yum

The foray into China's smaller cities is widely seen as McDonald's reaction to its rival Yum China, which owns the Pizza Hut and KFC brands and is now run independently in the country, with the management having the freedom to decide on whether to turn the company-owned outlets into franchised ones and what new menus should be introduced to appeal to Chinese taste.

As a result, KFC has grabbed a bigger share of the Chinese market than McDonald's.

According to statistics from consulting firm Euromonitor International, KFC had 11.6 percent of the Chinese fast food market last year, compared with McDonald's 5.6 percent.

At present, KFC has some 5,300 restaurants in the Chinese mainland, with its tentacle expanding to the fifth-tier cities and even the small towns.

In February, Yum China Chief Executive Officer Micky Pant reiterated the plan of opening more KFC restaurants as the "biggest opportunity" for the company to grow in the Chinese market, betting that the development of urbanization and the rapid construction of the transport system would be beneficial to its China business.

In light of it, it is foreseeable that the competition between McDonald's and KFC is expected to heat up in the less developed areas, thus possibly leading to lower prices for local consumers.

The key to succeeding in China's third-tier and fourth-tier cities will lie in location selection, Chen Yangzhi, an analyst specialized in the catering industry from market research company Mintel, said. "If McDonald's can hold on to those new, key locations (in the third-tier and fourth-tier cities), it would be an opportunity for it," Chen noted. But the analyst stressed that McDonald's should give some kinds of subsidies to the local consumers in order to compete with rival KFC.

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