14 November 2018
By 2022, 45 percent of McDonald's outlets will be located in third and fourth-tier cities. Photo:
By 2022, 45 percent of McDonald's outlets will be located in third and fourth-tier cities. Photo:

Should McDonald‘s change its China menu?

Fast-food giant McDonald’s has announced an ambitious plan to add 2,000 restaurants in China over the next five years, mostly in third and fourth-tier cities. That would almost double the number of its existing outlets in the country.

The move came after McDonald’s decided to sell the majority of its China and Hong Kong business to state-owned conglomerate Citic and global asset manager Carlyle in a US$2.08 billon deal.

Under the deal, Citic holds a 52 percent stake in the business, Carlyle owns 28 percent, while McDonald’s still holds a 20 percent stake. That means Citic is now in the driver’s seat.

Citic on Tuesday said the transaction was completed on July 31, after having been approved by Chinese regulators.

The Chinese conglomerate also unveiled a five-year blueprint to accelerate the pace of store openings in mainland China.

By 2022, McDonald’s will have 4,500 outlets in the mainland, up from 2,500 at present.

According to the plan, 45 percent of its restaurants will be in third and fourth-tier cities, and over 75 percent will offer delivery service.

McDonald’s will also increase the proportion of its “Experience of the Future” outlets to over 90 percent. The new dining model involves the use of technology like self-order kiosks, mobile ordering, online payment and the adoption of robots.

Despite McDonald’s global dominance, KFC, owned by Yum China, is way larger than the Golden Arches in China. KFC has 5,138 restaurants across the mainland, more than double the number of McDonald’s outlets.

McDonald‘s opened its first restaurant in Shenzhen in 1990. But its expansion pace in the mainland market has been less than satisfactory. That’s probably the reason why it decided to divest 80 percent of its business in mainland China and Hong Kong.

The fast-food chain has been very successful in Hong Kong. There is one McDonald’s restaurant for every 30,000 people in the city, one of the highest penetration rates globally. By contrast, it has much lower penetration in mainland, where one outlet covers around 550,000 people at the moment.

Because Hong Kong has a more global taste, McDonald‘s is doing well in the city without having to make any big adjustments to its traditional menu. But it is quite different in the mainland, where the majority of consumers still prefer local cuisine.

A key to KFC’s success in the mainland market is its willingness to offer Chinese food such as porridge, noodles and fried dough stick to cater for customers craving local dishes.

Its mixed offering is also more appealing to those who like American fast-food from time to time but also value Chinese alternatives.

If most of the new McDonald’s outlets are going to be located in small cities, the company will have to think seriously about the localization of its menu; otherwise the expansion plan may not work at all.

Citic, which is now in charge, should know Chinese customers better.

This article appeared in the Hong Kong Economic Journal on Aug. 9

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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