American fast-food restaurant chain McDonald’s Corp. (MCD, Financial) is going to open 2,000 restaurants by 2022 in China, bringing the count to around 4,500 outlets. The company hopes to execute this plan in partnership with Chinese corporation CITIC Ltd. (HKSE:00267, Financial), CITIC Capital Holdings and The Carlyle Group LP (CG, Financial). When it entered into contracts with CITIC and Carlyle, the company disposed of most of its China and Hong Kong business for $2.1 billion. CITIC now has a controlling stake of 52% in McDonald’s China and Hong Kong operations and Carlyle has a 28% stake, leaving the Big Mac maker with a controlling stake of 20%.
McDonald’s largest market after the U.S. is Japan with approximately 3,000 restaurants. Adding 2,000 restaurants over the next five years in China, however, will make China the largest market after the U.S. with 4,500 outlets. McDonald’s currently has 14,000 locations in the U.S. and 36,000 restaurants across the globe.
McDonald's plans to expand and inflate its Chinese operations
Expanding does make sense for McDonald’s, particularly as the Chinese market offers a lot of room for growth. The company’s peer, Yum China Holdings Inc. (YUMC, Financial), already has more than 7,000 outlets in China and plans to have around 20,000 restaurants in the future. This suggests Yum China wants to expand to gain greater market share in this Asian economy.
Considering China's large population, McDonald’s announced its intensions to almost double its locations over the next five years, thereby reaching more customers.
“China will soon become our largest market outside of the United States," CEO Steve Easterbrook said. "We are excited to join forces with CITIC and Carlyle for better localized decision-making to meet changing customer demands in this dynamic market.”
Refranchising initiative
McDonald’s has seen a lot of ups and downs in the past. Having expanded quickly in Asia, the company’s growth came to a halt in 2013 with revenue reclining 1.9% in high-growth markets, including Asia-Pacific. The company’s revenue has been down on a year-over-year basis, from $28.1 billion to $24.6 billion in 2016.
As a result, the company plans to make the most of its franchised operations, which would be controlled by effective and sovereign business owners who pay royalty fees to the burger chain. Currently, 85% of the company’s outlets are franchised, but McDonald's aims to increase it to 95%.
Last word
McDonald’s plans to open most of its new restaurants in lower-tier and smaller Chinese cities over the next five years. The company is focusing on boosting its delivery capacity and initiating a digitalized and personalized dining experience. More than 75% of its new outlets opened in lower-tier cities would offer delivery services. The menu offerings will play a very key role for the company as it has already undergone a series of food supply scandals in China, severely impacting its reputation.
McDonald’s has opened more than 2,500 outlets in mainland China since 1990. The company will have to identify potential locations, hire and train staff, ensure food quality and maintain the highest level of safety when opening these stores. While McDonald’s might face challenges, the company will have to manage to achieve its target of double-digit sales growth in China.
Disclosure: I do not hold any positions in the stocks mentioned in this article.
