McDonald’s announced on Monday that the business operations in China and Hong Kong will be sold to Citic and Carlyle group for a total sum of $2.08 billion. This will allow Citic and Caryle group to enjoy franchise rights for the next 20 years. According to the deal, Citic Capital will get 52% of stake control while Carlyle group will take 28%. The remaining 20% stake will lie with McDonald’s.
The chief executive of McDonald’s, Steve Easterbrook said that McDonald’s has excellent growth opportunities in China and Hong Kong. The new partnership will enable McDonald’s to take advantage of the local market knowledge of the consortiums. Ever since 2015, McDonald’s is experiencing growth at a very slower pace, but there is no problem with the finances known so far. The franchise deal is preferred by McDonald’s to minimize the cost of modernizing the stores. The popular international brand is hoping to earn profits through franchise fees while the local groups take care of running the business operations in mainland China and Hong Kong.
Chang Zheming, the chairman of Citic said that the McDonald’s deal is an opportunity for the consortium to invest rapidly in the ever-growing consumer sector. The focus of the group is to open new restaurants in several third and fourth tier cities to reach more consumers. Market experts welcome this change as the presence of an international brand in third and fourth-tier cities will help in the economic growth of the region. Yum, is another fast food group that currency owns KFC and Pizza Hut. The deal will be profitable for McDonald’s because Yum has already reached the third and fourth tier cities while McDonald’s is still on the verge of expansion.
In the 1990s, the demand for western fast food chains increased rapidly as these restaurants had air conditioning and clean bathrooms. These were luxuries in China in those times. However, the interest in fast foods declined in recent years as the Chinese restaurants have picked up quick-service chains to cater to the demands of the locals. There is also more emphasis on healthy eating, which is also against the fast food giants. For some time now, major international brands like KFC and McDonald’s are struggling to find their ground in the Chinese markets.
Yum separated its Chinese operations in 2015 as it had to deal with declining sales and food safety problems. The customer tastes continued to change and the competition simply intensified. The Chinese people are known for their love for chicken and meat, but they are not avid burger eaters. The expansion of McDonald’s could prove to be positive for the international brand, but nothing can be predicted at this moment. The hands of McDonald’s reaching the third and fourth tier cities is certainly a threat to the local restaurants and McDonald’s too should face a lot of resistance from more conservative Chinese who are not used to burgers and fast food.