Flipping burgers

Time to sweat those assets

Last April netizens in Guangzhou alerted millions of other Chinese that authorities in their city had forcibly removed “an American with red hair” from a busy shopping thoroughfare. However, this was not the sort of arrest likely to get human rights lawyers energised.

In fact, the ‘American’ in question was a seven-foot statue of Ronald McDonald. It had stood outside McDonald’s flagship Guangzhou restaurant for years, but local authorities had belatedly taken the view it encroached on a public pavement, along with other advertising hoardings from the US chain. Accordingly, government officers took a hacksaw to Ronald’s ankles, leaving only the clown’s shoes (which were bolted to the ground).

Back in McDonald’s Illinois headquarters this proved a metaphor of sorts. The food giant had been in China for decades – its first outlet opened in Beijing in 1992, seated 700 and served 40,000 on its first day. But in more recent years the brand had felt less welcome and suffered from food safety scares and anti-American boycotts.

Indeed, early last year rumours began to circulate that McDonald’s senior management was keen to lessen its exposure to the country and sell a controlling stake in its China business, which currently comprises 2,400 outlets on the mainland and 240 in Hong Kong, according to the South China Morning Post. After lengthy negotiations with various interested parties, it was announced on Monday that McDonald’s had sold an 80% stake to Citic Groupand private equity giant Carlyle Group. The deal values the China operation at $2.08 billion, though in some respects it’s more like a lease than an outright sale, since the Sino-US consortium will only get to operate McDonald’s Chinese fast food business for 20 years.

Indeed, the term being used in the agreement is ‘master franchisee’, with McDonald’s retaining 20% in the new entity and the right to between 5-7% annually of the China franchise’s sales. However, what is clear about the transaction is that the iconic US brand is now under Chinese ‘ownership’ with Citic controlling 52% of the new entity and Carlyle the remainder.

Citic has relatively little experience in the restaurant industry, but Sina Finance says it plans to coordinate closely with the similarly state-owned conglomerate Beijing Tourism Group, a longstanding partner of McDonald’s and supplier of foodstuffs. This tie-up will see a greater localisation of management at McDonald’s China operation, which may be no bad thing given the expansion plans slated.

As WiC has reported before, McDonald’s has suffered from competition from cheaper and more fleet-of-foot local fast food rivals such as Dico’s (see WiC204), and more recently from the easy availability of healthier home-delivered food courtesy of China’s O2O app revolution (which Starbucks is taking advantage of, see WiC346). Aside from a meat safety scandal (see WiC248), McDonald’s has more recently suffered setbacks after nationalist consumers shunned its burgers – the Wall Street Journal reports that the firm admitted that US opposition to China’s claims in the South China Sea had led to protests outside its China outlets.

Consequently McDonald’s has been losing market share in recent years, and the new ownership will seek to reverse that by opening 1,500 new outlets in third- and fourth-tier cities. The rationale for bringing in a domestic owner was earlier voiced by Phyllis Cheung, chief executive of McDonald’s China: “In the lower-tier cities, we want to accelerate, and a local partner would have more local wisdom and more local resources.”

Carlyle, meanwhile, will be hoping that its fast food investment in China will replicate the success of its 2005 punt on Dunkin’ Donuts in the US, whose fortunes it helped to turnaround. That seven-year investment saw Carlyle and its partners exit with nearly $2 billion of profit.

McDonald’s hiving off its China exposure mirrors that of market leader Yum Brands, which spun out its Chinese operations last year and brought in Alibaba’s Ant Financial as a strategic investor. This has led some netizens in China to draw some bearish conclusions, mind you. “With so many foreign investors withdrawing, do not tell me that the investment environment is not deteriorating,” wrote one.

That said, Yum is keen to emphasise it too is returning to expansion mode. After a decade-long absence it has just reintroduced its Taco Bell brand in Shanghai. This will add to more than 7,300 KFC and Pizza Huts in China, though Yum admits the Taco Bell menu is heavily influenced by local tastes.

“Let’s be honest, it’s not Mexican food; its Mexican-inspired food,” Yum CEO Greg Creed told Wall Street Journal this week.

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