Not fast enough

Chain wants a lot more of these

Last August McDonald’s franchisees in the United States accused the company of overcharging them in an effort to boost the company’s bottom line.

The franchisees – who operate about 90% of the chain’s 14,100-plus locations in the US – say that rising costs make them reluctant to open new restaurants or refurbish existing ones.

‘‘It is not as profitable a business as it used to be,’’ one McDonald’s restaurant owner told Bloomberg.

The fast-food chain will be hoping that potential franchisees in China are a lot more excited about joining the McEmpire, after it announced a new franchising policy to speed up its expansion plans.

What’s changed? In the past, McDonald’s has opened up some of its stores to franchising in China but they’ve largely been situated in second and third-tier cities. The chain has also chosen to partner only with larger enterprises (for instance, in Yunnan it granted the franchise rights to a company that runs restaurants, hotels and retail businesses).

But CBN says that future outlets can be run by individual franchisees and in first tier cities too (including Shanghai and Shenzhen, but not for the moment in Beijing).

As of today, franchisees contribute roughly 5% of McDonald’s total revenue in China, says Tencent Finance (KFC’s franchisees contribute about 10% of its sales). McDonald’s goal is for that percentage to reach 30% by 2015.

“Until recently, the franchising business model was not mature in China and the regulations also have plenty of loopholes. But more importantly, McDonald’s may not have realised the crisis that it’s facing in the Chinese fast-food market or noticed KFC’s rapid expansion, which is why it is in the situation it is in today,” franchising expert Li Weihua told China Enterprises News.

McDonald’s has tried to increase sales in China by adopting many of the business models that have worked best in the US. In 2012 it introduced drive-throughs (although the concept was so foreign to some consumers that they ordered from their cars, then parked up and brought their meals into the restaurant). The company has also introduced the McCafe and 24-hour dining. But so far, commmercial success has been moderate.

Little wonder, then, that the China Times sees the latest move as a last resort. “McDonald’s plan to accelerate its franchising process is probably because it has run out of options,” the newspaper speculated.

As reported in WiC previously, McDonald’s is often described as lagging behind its rival KFC in China. As of 2013, it operated 1,900 stores compared with KFC’s 4,400 (Dico’s, a homegrown chain – see WiC204 – has 2,100 outlets).

Beijing Times also suggests that business has taken a hit amid a slowing economy and renewed fear of avian flu. But McDonald’s still plans to add 300 outlets this year, compared with 275 restaurants in 2013.

Franchising is the fastest and cheapest way to grow, although some industry observers are sceptical that McDonald’s will attract a stampede of franchise buyers. For a start, a franchise is expensive. Each applicant is required to pay an initial fee of Rmb2 million ($330,000) – admittedly that’s significantly lower than the Rmb8 million minimum that was being demanded until 2010 (KFC dropped its franchising fee to Rmb2 million in 2006).

Even for those who have the cash, there is a further need to demonstrate a strong business background. Franchisees say that a lengthy application process requires a detailed outline of their commercial experience. And after all that, successful applicants still have to go through intensive training and evaluation for up to a year, says Southern Weekend. Franchisees are also required to run the restaurants themselves, and cannot delegate others to do the work for them.

“The selection process is like a multinational company looking to hire a senior executive,” complained one (failed) applicant.

Like the franchisees in the US, owners of McDonald’s restaurants must pay royalties, as well as a share of advertising and promotional fees. But the upside, CBN says, is that most of them can expect to break-even on the upfront investment within five years.

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