Unhappy meals

Not lovin’ it in Taipei

In 1978, during a trip to Las Vegas, Taiwanese businessman David Sun tried McDonald’s for the first time. The experience was so exciting that the owner of Quanta Foods and his brother decided to buy the franchising right to open an outlet in Taiwan. So the Golden Arches opened its first restaurant in Taipei in 1984, introducing the Taiwanese to American fast-food.

Ten years later, Quanta Foods decided to sell the franchising rights in order to raise cash (a series of property investments had turned sour). So in 1994, McDonald’s purchased Quanta’s stake in the venture and made the Taiwanese operation a wholly-owned unit. Twenty or so years of solid growth followed. The fast-food giant now operates 413 restaurants in Taiwan, including 350 company-owned stores.

Last week McDonald’s announced that its business in Taiwan will be changing hands again. The fast food giant is looking to sell all of its stores on the island to a franchise operator. The hamburger company has said its new goal is to concentrate on developing just a handful of key markets.

Like mainland China? “At present, China is McDonald’s third largest market in the world. It has huge potential for development, especially in second- and third-tier cities. Local consumers very much look forward to the arrival of a McDonald’s restaurant in their neighbourhood,” a McDonald’s spokesman told International Finance News.

But it doesn’t mean McDonald’s is completely withdrawing from the island. “McDonald’s will not pull out of Taiwan, nor will our commitment to high standards of food safety change with the new business strategy,” the company said in a statement. “Franchising is about growth and economic efficiency.”

Industry observers are not surprised by the move. Globally, McDonald’s is struggling. While sales reached $27.4 billion last year, that was a mere 1.5% growth from three years ago. Net profit, meanwhile, dropped 13% to $4.8 billion. This year, analysts predict that sales and net profit are expected to slide by 9% and 6% respectively. McDonald’s is now pinning its hopes on Chinese diners for a turnaround.

The American firm opened its first store in mainland China (in Shenzhen) in 1990. Now it aims to add 1,000 new stores to bring its total to 3,000.

In contrast, the Taiwan business is no longer quite as important as it once was. Oriental Morning Post reported that late last year McDonald’s quietly shut down several outlets on the island to rein in costs. “Rental costs continue to climb and other costs like wages and health insurance have also gone up dramatically. On the other hand, it is not easy to raise prices, which result in operating losses. McDonald’s is in a difficult position, and the only option they have is to sell the operation,” says Taiwan’s Apple Daily.

Others say McDonald’s problems in Taiwan have more to do with the company itself. “All along, McDonald’s strategy, execution and leadership are all very problematic. This has nothing to do with the downturn of the Taiwan market. McDonald’s biggest weakness lies in the refusal to change, lack of product localisation and innovation,” Wu Yun, an industry insider told International Finance News.

Meanwhile, Taiwanese consumers are not too thrilled about the news. Many are worried that mainland investors will snap up the franchising rights to the fast food giant. Given China’s patchy track record with food safety, such an outcome could jeopardise the food quality on the island, says Taiwan Times. Some pleaded with McDonald’s to sell to a fast-food operator with a “conscience”.

Nevertheless, the chances of McDonald’s selling its Taiwan unit to a mainland buyer look high. Since last year, most acquisitions on the island have been made by companies across the strait. Last October, China’s Ansteel Group acquired a 60% stake in E United Group’s stainless steel mill business. More recently, E-da United, the largest theme park and hotel operator in Taiwan, has been in negotiations to sell to Hong Kong Carnival Group, which is backed by mainland Chinese money. A hotel property in Taipei that’s managed by Mandarin Oriental is also rumoured to be selling to a Shanghai-based company.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.