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.
