Why McDonald’s Is Thriving In China

Summary

McDonald's, one of the world's largest restaurant chains with 60 million daily customers, plans to open 900 new restaurants in 2023, with a significant focus on China. Despite facing challenges such as food safety issues and competition, McDonald's has adapted to the Chinese market with localized menus and digital innovations. The company has also embraced the franchise model to reduce operating costs and is exploring the coffee market with plans for 1000 new McCafes, capitalizing on China's growing coffee consumption.

Takeaways

• 🌐 McDonald's is one of the world's largest restaurant chains with 60 million customers daily and over 40,000 locations in more than 100 countries.
• 📈 The company plans to open 900 new restaurants in 2023, with nearly half of those in China due to its massive growth potential.
• 🏠 McDonald's entered China in the early 1990s and currently operates over 4500 restaurants in mainland China and Hong Kong.
• 📉 The brand has faced challenges in China, including COVID-19 lockdowns, food safety issues, and competition from local fast-food chains.
• 🍔 In China, McDonald's has had to adapt its menu to cater to local tastes, which differ from the U.S., with less emphasis on hamburgers.
• 👥 McDonald's has over 1.9 million employees globally and is the second-largest market for McDonald's by store count, after the U.S.
• 💼 The company sold its China business to CITIC and Carlyle Group in 2017, retaining a 20% stake, to reduce operational costs and volatility.
• 📱 McDonald's has embraced digital technology in China, with almost 90% of transactions being digital compared to about 25% in the U.S.
• ☕ McDonald's sees an opportunity in China's growing coffee market and plans to launch 1000 new McCafe locations by the end of 2023.
• 👷‍♂️ The availability of a large labor pool in China is an advantage for McDonald's, contrasting with the highly saturated and competitive U.S. market.

Q & A

How many new restaurants does McDonald's plan to open in 2023?

McDonald's plans to open 900 new restaurants in 2023.

In which country will almost half of the new McDonald's locations be opened?

Almost half of the new locations will be in China.

What is the current number of McDonald's restaurants in mainland China and Hong Kong?

McDonald's currently has more than 4500 restaurants in mainland China and Hong Kong.

What challenges has McDonald's faced in China?

McDonald's has faced challenges such as lockdowns due to COVID-19, food safety issues, and competition from rivals whose menus may be more suited to the Chinese palate.

How does McDonald's approach the cultural differences in China?

McDonald's navigates cultural differences by having local franchisees that help determine the menu and the best way to operate, considering regulatory and cultural factors.

What was the significance of McDonald's first restaurant in China?

McDonald's first restaurant in China opened in Shenzhen in 1990, and its move into Beijing two years later with the world's largest McDonald's at the time, serving 40,000 customers on opening day, marked significant milestones for the brand.

How does McDonald's compete with rivals like KFC and Pizza Hut in China?

McDonald's competes by building out its supply chain, adapting to the Chinese market, and embracing its franchise model to reduce operating costs.

What was the outcome of McDonald's decision to sell its China business in 2017?

In 2017, McDonald's sold its China business for a little over $2 billion to CITIC and the Carlyle Group. McDonald's retained a 20% stake, CITIC owned 52%, and the Carlyle Group had a 28% stake.

How does McDonald's approach to real estate differ between the U.S. and China?

In the U.S., McDonald's is a significant holder of commercial real estate and acts as a landlord, but in China, due to different land ownership laws, it cannot own land 100% and must operate more like a traditional franchisor.

What percentage of McDonald's revenue came from the U.S. in 2021?

More than 30% of McDonald's revenue came from the U.S. in 2021.

How does McDonald's plan to expand its presence in China?

McDonald's plans to open an additional 900 stores in China in 2023 and has leaned into digital delivery and adapted its menu to cater to Chinese tastes.

Outlines

00:00

🍔 McDonald's Global Growth and China Expansion

McDonald's is a global fast-food giant, serving 60 million customers daily across more than 40,000 locations in over 100 countries. It plans to expand further by opening 900 new restaurants in 2023, with nearly half of them in China. Despite challenges like COVID-19 lockdowns, food safety issues, and competition, McDonald's sees massive growth potential in China, where it currently operates over 4,500 restaurants. The company's focus on local adaptation and store expansion highlights China's importance as a key priority market.

05:02

🇨🇳 McDonald's Entry into China and Early Growth

McDonald's entered China in 1990 with its first restaurant in Shenzhen and opened its Beijing location, the world's largest McDonald's at the time, in 1992. The chain's early success was driven by its novelty, drawing long lines of curious Chinese consumers eager to experience American culture. By 1994, McDonald's had opened 20 restaurants, and in 2010, it announced plans to double its footprint. Despite these efforts, McDonald's has been playing catch-up with KFC, which entered China earlier and leveraged the country's preference for chicken over beef.

10:03

🐔 Competition with KFC and Operational Challenges

McDonald's has faced stiff competition from KFC, which has more stores in China due to its earlier entry and focus on chicken, a more popular protein in China. Additionally, operational challenges such as a food quality scandal in 2014 and competition from inexpensive local fast-food options have impacted McDonald's growth. The company's need to balance real estate costs and local franchisee involvement has been crucial in navigating these hurdles. McDonald's adapted by selling its China business in 2017 to Chinese state-owned CITIC and Carlyle Group, retaining a minority stake.

🏢 McDonald's Franchise Model and Real Estate Strategy

In 2017, McDonald's sold its China operations to CITIC and Carlyle Group but retained a 20% stake, allowing it to focus on franchise royalties and fees while cutting operational costs. This refranchising strategy provides McDonald's with an advantage in site allocation, though it differs from its U.S. real estate ownership model, as land ownership in China is not permanent. McDonald's real estate approach in the U.S. allows it to function as a landlord, but in China, it must operate more like a traditional franchisor.

📊 McDonald's Global Revenue and Regional Focus

McDonald's China business constitutes a small portion of its overall revenue, with the Asia-Pacific region contributing only 10% in 2021. By comparison, the U.S., Germany, the UK, and France are the company's largest revenue drivers. McDonald's structures its international operations into markets it owns, like Germany and France, and licensee markets like China. Despite slower same-store growth in the U.S., McDonald's stock price has climbed, and the Chinese market, with its massive population and untapped regions, remains a key growth opportunity.

🚀 McDonald's Growth Potential in China's Untapped Markets

With 1.4 billion people and many untapped markets in China, McDonald's sees significant growth potential outside major cities like Beijing and Shanghai, which currently account for much of its fast-food industry revenue. In 2023, McDonald's plans to open 900 new stores in China, averaging one new restaurant every 10 hours. The company is also embracing technology, using kiosks for ordering and leaning into digital delivery and payments, which have become the norm in China, driving future growth.

☕️ McDonald's McCafe Expansion and Digital Innovation

McDonald's is capitalizing on China's growing coffee market by launching 1,000 new McCafes by the end of 2023. These McCafes operate both as standalone stores and within existing McDonald's locations, offering coffee and snacks. This expansion mirrors Starbucks' success in China, where it plans to grow to 9,000 stores by 2025. McDonald's focus on digital integration, delivery services, and adapting to local tastes also positions it to learn from China and potentially apply these innovations back in its U.S. operations.

📈 McDonald's Capital Light Model and Labor Opportunities in China

McDonald's sees China as an attractive market due to its capital-light franchise model and the availability of a large pool of labor. Compared to the mature and competitive U.S. market, China offers greater expansion opportunities. The company's strategy of leveraging franchise partners for growth in secondary and tertiary cities, coupled with the potential in the coffee market, positions McDonald's for continued success. McDonald's also benefits from China's labor pool, allowing it to sustain its rapid growth without the operational challenges faced in other regions.

Keywords

💡Growth Potential

This refers to the capacity for expansion and increased market presence. In the context of the video, McDonald's identifies China as a market with significant growth potential due to its large population and untapped regions. The company plans to open 900 new stores, almost half of which will be in China, illustrating this opportunity.

💡Franchise Model

A franchise model is a business structure where the parent company licenses out its brand and operations to independent owners (franchisees). McDonald’s uses this model to grow in markets like China, allowing local owners to run stores while paying royalties to McDonald's. The video highlights how McDonald's sold its China business to CITIC and Carlyle, transitioning to a franchise model.

💡Digital Integration

Digital integration refers to incorporating technology into business operations. The video emphasizes McDonald's adoption of digital kiosks for ordering in Chinese stores, as well as digital payment systems which are more common in China than in the U.S. This shift enhances customer experience and operational efficiency.

💡COVID-19 Lockdowns

COVID-19 lockdowns represent restrictions on movement and business operations to control the pandemic. In the video, it is mentioned that McDonald's faced challenges during these lockdowns in China, leading to temporary store closures. Despite this, McDonald's has continued expanding aggressively in the country.

💡Food Safety Issues

Food safety issues refer to concerns over the quality and handling of food, which can damage a company’s reputation. McDonald's in China faced such challenges, notably in 2014 when a supplier was caught mishandling meat. This led to a decline in sales, illustrating how food safety is critical to McDonald's success.

💡Localization

Localization is the adaptation of products and business strategies to suit local cultures and tastes. In China, McDonald's had to adjust its menu and operations to align with local preferences, such as offering more chicken-based meals and partnering with local franchisees who understand the market. This is crucial for success in markets where Western food is not traditionally popular.

💡Supply Chain

A supply chain is the network of production and logistics involved in delivering products to customers. The video discusses how McDonald's built out its supply chain in China to support its rapid expansion. This included adapting to local regulations and ensuring the smooth distribution of its products across the country.

💡Real Estate Costs

Real estate costs refer to the expenses involved in acquiring or renting property for business operations. In the video, McDonald's faced higher real estate costs in China compared to the U.S., which influenced its decision to sell its China business and focus on franchising. Unlike in the U.S., where McDonald's owns much of its property, Chinese laws limit land ownership.

💡Competition

Competition is the rivalry between businesses for market share. In China, McDonald's faces strong competition from other fast-food chains like KFC and local businesses offering cheaper alternatives, such as noodle stands. The video highlights that KFC, which entered China earlier and focuses on chicken, has a larger presence in the market than McDonald's.

💡McCafe

McCafe is McDonald's coffee shop brand. The video mentions McDonald's plans to open 1,000 new McCafes in China by the end of 2023, tapping into the growing coffee culture in a traditionally tea-drinking nation. McCafe offers an additional revenue stream, appealing to urban consumers and helping balance McDonald's menu offerings across different times of the day.

Highlights

McDonald's plans to open 900 new restaurants in 2023, with almost half in China.

China's growth potential for McDonald's is described as 'absolutely massive'.

McDonald's started in China in the early nineties and now has over 4500 restaurants.

China is considered a nascent market with room for significant growth.

McDonald's has faced challenges in China including COVID-19 lockdowns and food safety issues.

Cultural differences in China present a challenge for McDonald's menu offerings.

McDonald's first restaurant in China opened in Shenzhen in 1990.

The world's largest McDonald's at the time opened in Beijing in 1992.

McDonald's had to adapt its supply chain and menu to succeed in China.

McDonald's was playing catch-up with rivals KFC and Pizza Hut in China.

KFC's success in China is attributed to its early entry and chicken-based menu.

McDonald's faced a decline in sales in China due to food quality concerns.

The fast food industry in China is worth $184 billion.

McDonald's sold its China business to CITIC and Carlyle Group in 2017.

McDonald's retained a 20% stake in its China business after the sale.

China's real estate laws limit McDonald's ability to own land like in the U.S.

McDonald's China business is a small portion of the parent company's revenue.

McDonald's aims to be seen as a local brand in each country it operates in.

Sales in McDonald's international licensee market increased 16% in 2022.

McDonald's plans to open a new restaurant in China every 10 hours in 2023.

McDonald's has heavily invested in digital technology and delivery services in China.

Almost 90% of transactions in China are digital compared with about 25% in the U.S.

McDonald's plans to launch 1000 new McCafe locations across China by the end of 2023.

Chinese coffee consumption is growing, presenting an opportunity for McDonald's McCafe.

McDonald's benefits from a large pool of labor in China compared to the U.S.

Transcripts

With 60 million customers daily, more than 40,000

locations in over 100 countries and 1.9 million

employees. Mcdonald's is one of the world's largest

restaurant chains, and it is about to get even bigger.

The fast food giant said it plans to open 900 new

restaurants in 2023.

Almost half of those locations will be in China.

The growth potential in China is absolutely massive.

There's definitely a massive opportunity for

growth and really their key priority market for for

store development.

Mcdonald's got its start in China in the early nineties.

Today, the chain has more than 4500 restaurants in

mainland China and Hong Kong with considerable room

for growth.

China is still in a nascent level of growth.

They have 4000 stores.

They are aiming to double that number, you know,

within the next decade or two and add, you know, tens

of dozens of stores on on on a monthly, if not yearly

basis.

But it has faced headwinds along the way, including

lockdowns due to COVID 19 food safety issues and

competition from rivals whose menus may be more

suited to the Chinese palate.

In China, it's a little bit more of a difficult market

culturally. You know, they don't eat as many

hamburgers, so having a local franchisee helps in

terms of determining what's on the menu, what's the best

way to operate, you know, navigating some of the

regulatory things and cultural things that make it

so different from McDonald's in the US.

Every business is under greater scrutiny than at any

time before. And, you know, social media allows that to

happen. And also public expectations of how big

companies behave are heightened.

And that's fair enough.

China's McDonald's second largest market by store

count behind the U.S..

So how did the Illinois based Burger joint find

success in a country known for its love of pork?

Mcdonald's first restaurant opened in China in Shenzhen

in 1990.

But it wasn't until two years later when the chain

moved into Beijing opening what at the time was the

world's largest McDonald's in the globe's most populous

nation. The restaurant had 700 seats, 29 cash

registers, and served 40,000 customers on opening

day.

The novelty in the newness was something that

immediately gravitated a lot of consumer interest in

China, and people in the early days queued up and

lined up to partake in what was in essence, a slice of

American culture, albeit in a hamburger.

And it was quickly expanding into other locations, too.

In 1994, McDonald's opened its 20th restaurant 80 miles

east of the capital, Beijing. In 2010, it

announced plans to double its footprint to 2000.

Building out its supply chain and adapting to the

Chinese market were key to its early success.

Despite those investments, McDonald's was still playing

catch up with rivals KFC.

China's first Western fast food restaurant opened in

1987. Pizza Hut launched in 1990.

Kfc had over 8100 restaurants in China

compared with Pizza Hut that operated over 2500

restaurants and McDonald's China with 4642 stores.

The reason that Yum is larger, the reason that KFC

is larger in China versus McDonald's is really

twofold. The first is that Yum!

Owned the distribution business in China, so it

just allowed them to access smaller cities first and get

that first mover advantage.

And the second piece is that chicken as a part of

KFC is just naturally more appealing in China, where

chicken is a larger protein than beef.

As the company continued to grow at its operation.

It faced other hurdles as well.

In 2014, McDonald's, along with KFC parent Yum!

Brand, faced concern over food quality after reporters

secretly filmed workers picking up meat off the

floor of a local supplier.

Mcdonald's China business reported a decline in sales

that year. One bad branch with a bad food supply.

Or just a CCTV exposé showing a dirty kitchen.

Right. That can matter.

The chain also faced rising competition from local

rivals. China has about 2.6 million fast food

restaurants.

And they're actually competing against these

noodle stands that will sell a hot bowl of noodles

for a fraction of what it costs for a McDonald's meal.

The fast food industry in China is worth $184 billion.

Yeah, I think the big problem for McDonald's is

whether or not they were committed to using their own

balance sheet to building out a market the size of

China. Real estate costs and site acquisition costs

in China are considerably larger than they are in the

United States.

Embracing its franchise model with an eye toward

slashing operating costs.

Mcdonald's sold its China business for a little over

$2 billion in 2017 to Chinese state owned

enterprise CITIC and US private equity firm Carlyle

Group. As part of the agreement, the burger

chain's partners would be responsible for providing

capital for the business, including pricey real

estate, and McDonald's would receive royalties

based on sales, as well as fees for opening a new

restaurant. Mcdonald's retained a 20% stake in the

business. Citic owned 52%, and the Carlyle Group had a

28% stake.

Certainly the long term opportunity for growth in

China was not something that was under review, but

the fact that just the volatility of owning China

and just what the challenging planning that

came around, that was really the key reason why

McDonald's chose to refranchising that market

back in 2017.

Having a state owned entity as a partner really conveys

a lot of benefits to McDonald's in terms of site

allocation. But they know that they can't they can't

play the real estate game in China in the same way

they can play it in the United States.

Mcdonald's has more than 4500 restaurants in China

and Hong Kong, compared with over 13,000 in the

U.S.. Beyond the number of stores, one key difference

between its U.S. operations versus its China business is

the ability to own real estate.

They are, in essence, a real estate company, and they're

one of the largest holders of commercial real estate in

the United States. When you collectively add it all up,

you can't do this in China because, again, you can't

own land 100%.

You're only entitled to the land if you purchase it for

a hundred years and that reverts back to the

government.

Mcdonald's CEO Chris Kempczinski, on its most

recent earnings call, even said that, you know, while

some might think that they sell burgers and fries, what

they really sell is the business, the brand, to

franchisees, because they're in charge of the

rents. They're effectively a landlord.

But outside of the US, one, they don't have the ability

to hold on to that model.

It really changes things and they become more like a

traditional franchisor in that respect.

Today, McDonald's China business makes up a small

portion of revenue for the parent company.

More than 30% of McDonald's revenue came from the U.S.

in 2021, followed by Germany, the UK and France.

The entire Asia-Pacific region made up just 10% of

McDonald's revenue in 2021.

Mcdonald's does not break out revenue for every

country.

Be Part of the way we structure ourselves is we

always have local management run the local

countries and I think that helps just localize us as a

brand because rather than just being seen as a

dominant global behemoth, we just want to be the local

McDonald's, We want to be the French McDonald's and we

want to be the Chinese, McDonald's or the US

McDonald's.

The company structures its overseas business in two

categories an international operated market which

includes Australia, France and Germany that it owns and

operates in an international licensee

market that includes China, where it licenses out its

ability to own and operate stores.

Mcdonald's seems to have sales in its international

licensee market increased 16% in 2022 from the year

prior. Compare with U.S.

same store sales. That's on uptick of just 5.9%.

Mcdonald's stock price has continued to climb, reaching

$266 per share in February 2023.

With a population of 1.4 billion in about 100 urban

areas with over a million people.

The Chinese market is a massive opportunity for

McDonald's owners.

While Beijing, Shanghai and Guangdong account for about

45% of fast food industry revenue in China.

Much of the rest of the country remains untapped.

Most of their stores in what we call first tier cities

along the eastern seaboard of China and the large

industrial cities like Shanghai and Beijing and

Guangzhou. But now they see opportunity in secondary and

tertiary cities, which means there's a lot of

runway for growth for McDonald's ahead of them.

But despite China's zero COVID policy that resulted

in some temporary closures, McDonald's has continued to

expand, opening over 700 new restaurants in China in

2020 to an all time high.

The company also has plans to open an additional 900

stores in 2023.

In other words, the burger giant is planning to open a

new McDonald's in China about every 10 hours in

2023. And perhaps more importantly, it is leaned

into digital delivery and adapted its menu.

The other thing that's most striking about McDonald's in

China is the amount of technology that resides in

the store. So almost universally, when you go

into a McDonald's, you don't step up to a line and

wait to talk to the person at the register to place

your order. You walk to a giant electronic kiosk and

you enter all of your order electronically.

Making adjustments to cater to the tastes of Chinese

consumers in terms of the menu options.

It has been an important development, but also the

manner in which they portray themselves through,

you know, through either communications or

advertising.

In 2007, with a fleet of over 300 motorcycles,

McDonald's launched its delivery service in

Shanghai. Today, in China, delivery and digital

payments, as in paying with your smartphone, are the

norm. Almost 90% of transactions in China are

digital, compared with about 25% in the U.S..

Mcdonald's can actually learn things in the China

market, and then at some point, you know, sort of

have those things migrated back to the United States

and serving the United States market, It's a very

wise move strategically on the part of McDonald's to to

to get complete digital integration, which also

gives them a treasure trove of data.

And it has an opportunity in China's burgeoning coffee

market, too. With plans to launch 1000 new McCafe

across China by the end of 2023.

Mc Cafes operate both as standalone stores and within

existing restaurants and offer fresh ground coffee

from around the world as well as hot snacks.

Starbucks has over 6000 stores and plans to reach

9000 by 2025.

Chinese coffee consumption in the traditionally tea

loving nation is only about nine cups a year, but

growing. By contrast, in the U.S., more than half of

18 to 24 year olds have had a cup of coffee in the past

24 hours.

That they've had successful McCafe operations in the

United States. And transporting that to China

makes a lot of sense because people will use

their dining rooms as a place to socialize, you

know, over a cup of coffee so.

That McDonald's pursues this, given the high margin

nature of coffee offerings, as well as the fact that

these beverages do skew to breakfast.

So you get more of a daypart balance as well.

Another advantage for McDonald's business in China

versus its U.S. counterpart is the availability of a

large pool of labor.

The United States is very mature at this point, highly

saturated with competition.

And so if there is a marketplace that's still has

opportunity and also utilizing this sort of

capital lite model and then China makes a lot of sense.