Wednesday, 2024 April 24

After 33 years, McDonald’s is finally accelerating its expansion in China

2023 marked a year of rapid growth for McDonald’s. On February 5, the globally renowned fast food chain announced its financial results for Q4 and the entirety of last year. For the fiscal year 2023, McDonald’s total revenue reached USD 25.49 billion, a 10% increase from the previous year, with net profits soaring by 37% to USD 8.468 billion. Throughout 2023, its global same-store sales also grew by 9%, with the international developmental licensee (IDL) segment, particularly in China, demonstrating the fastest growth.

Zooming in on the fourth quarter ending December 31, 2023, McDonald’s revenue was USD 6.4 billion, an 8% increase year-on-year, with net profits reaching USD 2.039 billion, approximately 7% higher than the previous year. Global same-store sales for McDonald’s also grew by 3.4% in Q4, with growth observed across all segmented markets.

China emerged as the market with the highest number of new store openings in the fast food giant’s financial reports. Over the past year, McDonald’s opened a total of 1,374 new stores in international markets, with China contributing 925 of them, accounting for 67% of the new stores.

During a conference call, Ian Borden, CFO of McDonald’s, expressed his gratitude, thanking the employees who contributed to the establishment of over 1,000 restaurants in China in 2023, which he said was a historic high. Chris Kempczinski, global CEO of McDonald’s, also added that “overall, [the company] had a very good 2023 in China. We were happy with how our business performed in China. We’re seeing strong growth there. We also built a thousand restaurants in China, so we’re very much on track from our development aspirations and we would expect to do something similar in 2024 from that standpoint. [We] feel good about what we’re seeing in China and the progress and growth.”

Despite the flourishing Chinese market, the majority of profits on McDonald’s global income statement are not contributed by the Chinese market, given the nature of international franchising partnerships. However, the situation is shifting as McDonald’s globally doubles down on China, initiating accelerated growth.

Doubling down on the Chinese market

With the topic of foreign businesses withdrawing from China currently top of mind, McDonald’s has interestingly demonstrated its willingness to continue committing to China, taking concrete actions to invest in the domestic market and the world’s second-largest economy.

In November 2023, McDonald’s agreed to acquire the minority stake of Carlyle Group in its China business, increasing its stake in the local business from 20% to 48%, with Citic Capital’s consortium holding the remaining 52%. According to Kempczinski, this transaction was completed in January this year.

Investing in China not only reflects the confidence of the American company in the country’s growth trajectory but also brings practical benefits. For instance, venturing into the Chinese market has facilitated the development of localization expertise. An exemplary case is the “McSpicy” chicken burger, specifically designed for the Chinese market in response to the local preference for chicken drumsticks and spicy cuisine. According to a “fun facts” series released by McDonald’s in 2020, it was reported that an average of six of these burgers were sold per second. Some of such products also get exported globally to other markets upon further validation.

In addition, China’s localized supply chain can provide McDonald’s with more significant cost advantages, enabling deeper cooperation with local Chinese companies in the future. Currently, over 90% of the ingredients and toys utilized by McDonald’s in China are procured and produced locally, with the data and IT teams in the Chinese market fully localized.

Zhang Jiayin, CEO of McDonald’s in China, said in a media interview that “the stake increase in Golden Arches (the officially registered name of McDonald’s in China) not only reflects confidence in the domestic market’s potential to spur revenue growth but also the cost advantages of manufacturing in China, as well as the ability of Chinese operations to export innovative ideas and practices globally.”

Jiayin Zhang, China CEO of McDonald’s. Image courtesy of McDonald’s

Since McDonald’s announced an increase in its stake in Chinese operations, the target of reaching 10,000 stores in China has been repeatedly mentioned. In December last year, the company shared during an investor event that it plans to expand its global store count to 50,000 by the end of 2027, with restaurant numbers in the Chinese market anticipated to increase from 6,000 to 10,000. Kempczinski said that China could ultimately become the largest target market for McDonald’s, ahead of the US.

Rivalry with KFC in China

Compared to McDonald’s, KFC, another well-known international fast food chain, has already achieved its goal of establishing 10,000 stores. In December last year, KFC opened its 10,000th store at Wulin Square in Hangzhou, becoming the first foreign fast food chain to achieve the milestone in China.

KFC’s ability to reach the goal of opening 10,000 stores ahead of McDonald’s is largely due to its more thorough localization and expansion strategy.

Before Western brands began promoting “Chinese-style hamburgers,” KFC was largely the brand most active in adjusting its offerings to match Chinese tastes. From its “Old Beijing” chicken roll to preserved egg and lean meat congee, grilled chicken and crayfish burgers, durian-infused chicken nuggets, and more, numerous popular items on KFC’s menu in China incorporate Chinese elements.

Photo of a KFC restaurant in Chengdu, China.

Furthermore, KFC has a much higher frequency of new product development compared to the industry, resulting in extremely high levels of attention and customer stickiness. According to research data collated by Huachuang Securities, in 2019, KFC developed over 1,900 new dishes and introduced approximately 400 new products, with items introduced almost every day, while product launches by McDonald’s and Burger King were seemingly more improvised.

In terms of site selection, KFC’s strategy is also more focused on lower-tier cities. According to statistics from Canyan Data, McDonald’s stores are predominantly located in tier-one cities, accounting for approximately 50%, while KFC’s percentage is at 41%.

KFC is likewise more aggressive in its store opening plans. In September last year, Yum China, the owner of KFC in mainland China, revealed that it plans to increase the fast food chain’s total store count to 20,000 by 2026, far exceeding McDonald’s current goal of 10,000 stores.

It is foreseeable that as McDonald’s accelerates its penetration of the Chinese market, the two fast food giants will compete more intensely. But they won’t be the only rivals competing, with local brands quickly emerging as well. With only 500 stores in 2020, local fast food brand Tastien has grown its store count to nearly 7,000 in just over three years.

Considering the aggressive pace of expansion across the board, they will hope that China’s appetite for fast food will continue unabated.

This article was written by Yang Dian in chinese and was originally published by 36Kr.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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