Will McDonald's revitalization plan pay off in China?

McDonald's restaurant in Beijing. Photo: AP

US fast food giant McDonald's Corporation is planning to open 250 restaurants in China per year over the next five years, while preparing a potential auction of its wholly-owned outlets in China, a market it expects to grow into its second-largest after the US, and where it currently runs about 2,200 locations.

The turnaround plan, which has been further carried out in the US to sell more restaurants to franchisees since CEO Steve Easterbrook took over the reign from his predecessor Don Thompson last year, will be put in place in the Chinese market, where McDonald's is seeking strategic partners to help streamline its franchise business, among which is the state-backed China Resources, which is the parent company of China Resources Beer and operates Pacific Coffee in the Chinese mainland, Hong Kong, Macau and Singapore.

McDonald's has said that the majority of its outlets in China are company-owned, hoping to grow the country's franchising ratio beyond 30 percent in the future. The franchise model is typically adopted for relatively mature markets due to standardized food quality control there. In the US, the ratio of franchised McDonald's outlets is as high as 90 percent.

The move contrasts with some transnational quick-service restaurant chains, which have avoided franchising in China out of concern that the business model could more easily jeopardize their product quality in a possible trust crisis due to lack of unified food processing criteria, especially after sales of McDonald's were bruised by a food safety scandal in the country in 2014, when one of its beef suppliers was reportedly found to use expired ingredients.

But the Oak Brook, Illinois-based company, which has 36,000 restaurants worldwide with 80 percent of them owned and operated by independent local franchisees, said that franchising will be an easy way to unlock its growth potential in China, as the business model could help free up capital and generate stable profits.

In 2015, the capital spending of McDonald's reached $2.6 billion, forcing the company to consider putting more restaurants under local ownership. The restaurant chain has set a long-term goal of enhancing the ratio of franchised outlets worldwide to 95 percent.

"We are in the midst of transforming our business and taking a strategic and thoughtful approach to enhance our ability to grow around the world. These actions build on our turnaround efforts and will advance local ownership," said Easterbrook in a note released on March 31. The chief executive officer is bullish on his company's prospect in China, betting on the country's growing population and urbanization rate.

In May 2015, McDonald's announced the initial steps of its global recovery plan involving a change in ownership structures in its key markets across the world, before which the food-service retailer had seen a consecutive 11 months of sales decline.

McDonald's posted a 4 percent growth in same-store sales in the fourth quarter of the fiscal year of 2015, a second straight quarter of growth.

The improved sales figure, however, may not soothe McDonald's nerves due to China's increasingly competitive fast food market, where cheaper local rivals, especially Internet-based food-service companies gaining more support from private investors, are gaining ground.

Analysts said that McDonald's has to reduce its operating costs to make its prices stay competitive in order to survive the intense Chinese market. And franchising, which will entitle local franchisees to own a majority stake or 100 percent of the restaurants, will relieve the burden of the rising capital spending for the company, by only charging a one-time franchise payment and royalty fees.

Another problem that McDonald's is facing in China comes from middle-class consumers, who do not see having dinners at McDonald's restaurants as a symbol of higher social position as they did in the 1990s when the fast food giant entered the country.

Further, Chinese consumers are becoming more demanding about nutrition value of what they eat every day. In a survey of 10,000 respondents across China, 51 percent said that they consumed Western fast food in 2015, down from 67 percent in 2012, according to consultancy McKinsey & Co.

A 29-year scientific study, which surveyed about 28,000 youngsters in the rural areas of eastern China's Shandong province and was published in the European Journal of Preventive Cardiology, may dampen the ambition of McDonald's in China, as researchers found that 17 percent of boys and 9 percent of girls under the age of 19 were obese in 2014, up from 1 percent for both groups in 1985.

Dr. Zhang Yingxiu, head of the investigation team at the Shandong Center for Disease Control and Prevention, Shandong University of Prevention Medicine, in Jinan, Shandong, partly attributed the trend to the nutritional transition from traditional Chinese diet to Western recipe which is high in fat and calorie and low in fiber.

According to Easterbrook, McDonald's is providing healthy menu items in its restaurants in China this year, like apple slices, veggie cups and multigrain muffins.

Related Stories
Share this page
Touched Sympathetic Bored Angry Amused Sad Happy No comment