Fast Food for Fast Growth

By+Deng+Yaqing

The worlds leading fast food restaurant chain， McDonalds， has sold a majority stake of its China business to a local investment group， in an attempt to quicken its expansion in the booming market.

On January 9， McDonalds Corp. announced its entry into a strategic partnership with Chinese conglomerate CITIC Group and U.S.-based private equity house Carlyle Group. The trio set up a company that will act as the master franchisee responsible for McDonalds business on the Chinese mainland and Hong Kong for a term of 20 years.

The total consideration payable by the new company to purchase McDonalds Chinese mainland and Hong Kong business may reach up to $2.08 billion. This amount will be settled partly in cash and by issuing new shares in the company to McDonalds， according to a statement on the companys website.

After the completion of the transaction， CITIC Ltd. and CITIC Capital will have a controlling stake of 52 percent in the new company， Carlyle will hold 28 percent， while McDonalds will take 20 percent.

The new companys board members will be chosen from CITIC Ltd.， CITIC Capital， Carlyle Group and McDonalds， while the current management team will remain unchanged. The transaction is now awaiting examination and approval and is expected to be finished in mid-2017， according to the statement.

Win-win partnership

“The Chinese mainland and Hong Kong is an enormous opportunity，” said Steve Easterbrook， McDonalds CEO， who believes the companys new partners would bring a better understanding of the Chinese market.

As urbanization continues in China， a growing middle class with rising disposable household income is expected to lead the growth of domestic consumption.

With a working population larger than that of the United States and Europe combined， China has seen its middle class spend much less than that of the developed world. Nonetheless， some experts have predicted that rising disposable incomes may spur people in China to spend more on leisure and dining out.

As to why McDonalds chose CITIC and Carlyle as its allies， Xu Yingting， Vice President in charge of public relations for McDonalds China， outlined six points： The need for strong financial strength， better knowledge of and rich experience in the Chinese mainland and Hong Kong markets， solid relations with the government， wide real estate networks， and complete digital cooperation networks.

CITICs unique platform and rich resources will help further explore McDonalds value in an all-round way， said Chang Zhenming， President of CITIC Ltd.， who also suggested that the vast network owned by McDonalds and its consumers are precious resources that would give a leg up to the future expansion of CITICs business.

Yang Xiangdong， Managing Director of Carlyle Group and prospective Vice Chairman of the board of the newly established company， also expressed confidence in the Chinese market. “Its one of Carlyles most important investments in China，” he said.

“McDonalds has huge development potential in China. The current management team as well as partners like the Beijing Capital Agribusiness Group （CAG） will work closely to multiply and optimize the business， in order to better satisfy the demand of Chinese consumers，” said Zhang Yichen， President and CEO of CITIC Capital.

CAG， a large state-owned agricultural company whose brands such as Sanyuan and Huadu Broiler are compatible with the McDonalds menu， has deep ties to the global fast food giant. The long-standing partner holds a 50-percent stake of McDonalds Beijing business.

McDonalds had operated and franchised over 2，400 restaurants on the Chinese mainland and more than 240 in Hong Kong by the end of 2016. In May 2015， the company decided to re-franchise 4，000 restaurants by the end of 2018， with the long-term goal of becoming 95-percent franchised. Through this transaction， McDonalds is refranchising over 1，750 company-owned stores on the Chinese mainland and Hong Kong.

The partnership aims to add over 1，500 more stores over the next five years. Along with unit expansion， the companys focus will be on menu innovation， improved restaurant expediency， digital headship and smooth delivery， according to a statement on the official CITIC website.

Expansion plan

In October 2016， Yum！ Brands entered into agreements with Primavera Capital Group， a China-based private equity firm， and Ant Financial Services Group， the financial services affiliate of Chinas e-commerce giant Alibaba Group. They invested a total of $460 million in Yum China， concurrent with the completion of Yum Chinas spinoff from Yum！ Brands. The two new strategic partners combined roughly hold 20 percent of Yum Chinas stake.

McDonalds decided to franchise its business on the Chinese mainland and Hong Kong to CITIC and Carlyle to catch up to its rivals. Thats to say， both Yum！ Brands and McDonalds have the same long-term strategy in China.

Since 2015， McDonalds has ceased opening company-owned stores， but has instead focused on promoting franchisees across China. Compared with company-owned stores， franchisees are characterized by low input and guaranteed income， which can elevate McDonalds return on equity.

“Both companies want growth in China—in market share， number of stores and return on equity. To achieve this， both are moving from an ‘owned and controlled from the United States model to a more hands-off， localized and franchised model，”said Jeffrey Towson， a professor of investment with Peking University.

“This is pretty common for quick service restaurants （QSRs） in developing economies. As the market is emerging， they will often keep control， provide the capital and accept slower growth—in return for greater operational control. As the market matures， they franchise more， which has better economics and lets them grow faster，” said Towson， noting that not franchising means they are missing out on the best part of being a popular QSR chain.

Zhu Danpeng， a commentator specializing in Chinas food industry， believes the introduction of external partners into Western fast food chains will exert a profound and far-reaching influence on Chinas fast food sector.

“In the future， when these Western chains introduce Chinese food products on a large scale， market competition between Chinese and Western brands will escalate. Besides that， as these Western chains are trying to expand in third- and fourth-tier cities， the local fast food industry will undergo business reshuffle and upgrading，” Zhu predicted.

Yao Xuezheng， Honorary Vice Chairman of Guangdong Restaurant Association， held that Western catering giants big moves will significantly revitalize Chinas catering market and fuel the emergence of new trends.

“Most Chinese catering enterprises are reluctant to expand their business scale. As a result， the domestic catering market lacks vigor. The whole industry may be stirred up as foreign rivals keep penetrating into the local market，”said Yao.

According to the National Bureau of Statistics， from January to November 2016， the countrys catering revenue totaled 3.24 trillion yuan （$470.2 billion）， up 10.8 percent year on year.

Despite the fact that McDonalds China has let in new stakeholders， its long-term development plan will not be changed， said Xu， who is confident in the Chinese markets prospects.

“Teaming up with CITIC and Carlyle will make McDonalds growth faster because we are closer and more sensitive to the local market，”said Xu.