McDonald's to add 2,000 new restaurants in China

by Erica Shaffer
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The company's "Vision 2022" strategy aims for double-digit sales growth in each of the next five years.
 
OAK BROOK, Ill. – McDonald’s Corp. has a new franchisee and ambitious plans for expansion in China.

McDonald’s signed a development agreement that includes the sale of 2,500 existing businesses in mainland China and approximately 240 restaurants in Hong Kong to CITIC Limited, CITIC Capital Partners and The Carlyle Group. The deal will make the new franchisee, called McDonald’s China, the quick-service restaurant chain’s largest franchisee outside the United States. The transaction already received approval from Chinese regulatory authorities on July 31.

“China will soon become our largest market outside of the United States. We are excited to join forces with CITIC and Carlyle for better localized decision-making to meet changing customer demands in this dynamic market,” Steve Easterbrook, McDonald’s president and CEO, said in a statement. “Mainland China and Hong Kong are leading the global system in capturing new consumer trends such as delivery and digitalization and its driving strong performance and growth momentum. I have great confidence in our new partnership to unlock the full growth potential of China. McDonald’s Corporation will continue to play an active part in the China growth journey through our remaining interest and participation on the China board.”

That journey is mapped out in a plan called “Vision 2022” in which McDonald’s and its partners set a goal of double-digit sales growth in each of the next five years by adding 2,000 McDonald’s restaurants, including delivery coverage of more than 75 percent of restaurants, by the end of 2022.

“What we’ve seen over time is really sustained growth on that business with double-digit growth year-on-year off a strong base to the point where a lot of our existing restaurant in China, about 10 percent of their sales overall are from delivery with their top-performing restaurants, in some cases, in the range of 20 percent to 40 percent even,” Lucy Brady, senior vice president of Corporate Strategy and Business Development, said during a recent conference call with analysts to discuss McDonald’s second quarter earnings. “So, [delivery is] a very strong contributor to the business in Asia.”

Also during the five-year period, a ramp-up in openings of new McDonald’s restaurants in mainland China will add 500 locations per year in 2017, up from approximately 250.

China drove positive results in McDonald’s second quarter. Comparable sales advanced 7 percent in the High Growth segment on strong performance in China, while operating income increased 28 percent primarily from lower depreciation expense due to the sale of the China and Hong Kong businesses.

Easterbrook said the Vision 2022 strategy will include expansion of “Experience of the Future” (EOTF) restaurants to more than 90 percent. In the conference call with analysts, Easterbrook said adoption of Experience of the Future was a factor in the selection of the franchisee partner.

“…they absolutely shared our appetite to transform the McDonald’s experience and the brands. So EOTF is proving to be — the customers are responding really well in China,” Easterbrook said. “I’ll give you just one anecdotal piece of evidence of that. Where we’ve introduced it, the self-order kiosks currently have 30 percent utilization already. So, you can see how the Chinese consumer actually embraces the technology and experience.”

Innovation hubs, which will be responsible for menu innovation and advancing the digital retail experience — will be established in Hong Kong and Shanghai.

“The partnership will strengthen McDonald’s China’s entrepreneurial spirit, driven by ownership at the local level,” Zhang Yichen, chairman of the new McDonald’s China, said in a statement. “It will also help us ensure first-class customer service and food safety while accelerating our growth in mainland China and Hong Kong. We believe this is a winning formula that fuses McDonald’s global quality standards and branding with CITIC and Carlyle’s extensive resources and market expertise in real estate, finance, supply chains, consumer and retail and technology.”

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