McDonald's is to sell its businesses in mainland China and Hong Kong for $2.08 billion to Citic, a state-owned conglomerate, and the Carlyle Group, a private equity firm. The deal gives Citic and Carlyle franchise rights for 20 years. Citic and its investment arm, Citic Capital, will have a controlling stake of 52 per cent, while Carlyle will take 28 per cent. McDonald's will retain the remaining fifth of the company.
“China and Hong Kong represent an enormous growth opportunity for McDonald’s,” Steve Easterbrook, McDonald’s chief executive, said in a news release. “This new partnership will combine one of the world’s most powerful brands and our unparalleled quality standards with partners who have an unmatched understanding of the local markets.”
Mr Easterbrook, who took over in 2015 and set about turning the company around, has seen it regain its financial footing recently, although growth has slowed. The turnaround plan announced involved making 95 per cent of its restaurants franchises, including more than 1,750 in China and Hong Kong. McDonald’s operates and franchises more than 2,400 restaurants in mainland China and more than 240 in Hong Kong.
McDonald's opted for a franchise deal to save on investing and modernising stores itself, according to Ben Cavender, a senior analyst at China Market Research, a consultancy based in Shanghai. "At the end of the day they can make more money," Mr Cavender said before the announcement. "They can be more profitable if they are asset light and make money off franchise fees and leave the heavy lifting to somebody else."
The consortium said it planned to focus on opening new restaurants in third- and fourth-tier cities. For Citic, the investment was seen as a way to tap into rising disposable incomes in China. Chang Zhenming, the chairman of Citic, said the deal was a “strategic opportunity for Citic to invest in the expanding Chinese consumer sector”.
If McDonald’s moved into smaller cities, there could be opportunities for growth, said Joel Silverstein, president of the consultancy East West Hospitality Group. “McDonald’s definitely has much more developmental potential ahead of it compared to Yum,” he said ahead of the announcement, referring to the fast-food group that owns KFC and Pizza Hut.
In the 1990s, Chinese consumers flocked to Western fast-food chains, drawn to them by their clean bathrooms and air-conditioning – a novelty in China at that time. Since then, however, restaurants like McDonald’s and KFC have struggled against increasing competition from a boom in quick-service Chinese restaurant chains and a shift toward healthier eating.
Yum split off its Chinese operations into a separate company in 2015, after falling sales and food safety issues. It has struggled to keep up with changing customer tastes and competition from both local and international players. Still, there was concern about how McDonald's could expand and retain customers. Chinese people were not "great burger eaters to the extent that they like fast-food chicken," Mr Cavender said. – (New York Times Syndication)