After selling a controlling stake (80%) of its China business to CITIC and Carlyle group earlier this year, McDonald’s ( MCD ) recently announced its growth plans in the region. With new partners now operating the company’s franchisees in China and all regulatory approvals in place, the company plans to add 2,000 new restaurants in the region by 2022 to drive double digit sales growth. Recently, the company entered into a deal with China’s second largest developer Evergrande to open restaurants in the residential complexes of the developer in China. This deal fits well into the company’s strategy to grow in mainland China focusing on tier 3-4 cities and opening nearly 500 restaurants per year in the region by 2022. Reports suggest that the company is negotiating with other developers who have existing relationships with CITIC for similar deals. McDonald’s competitors such as Starbucks and Yum Brands already have a strong presence in China and Starbucks is expanding aggressively in the region which is likely to drive its next wave of growth. Adapting to the requirements of the younger population in the region, McDonald’s is looking to bring its “Experience Of the Future” stores to China and provide home delivery service from most of its restaurants.
According to our estimates, the number of franchised and affiliated McDonald’s restaurants will increase steadily in our forecast period from around 32,000 in 2017 to nearly 36,000 restaurants in 2024.
A faster pace of expansion in the number of restaurants can impact our price estimate positively.
However, China remains a challenging market. With the younger population preferring healthy food, Euromonitor estimates that the fast food industry will grow at a CAGR (compounded annual growth rate) of 2% over the next four years. McDonald’s is banking on the expertise of its local partners and a focus on healthier menu items to drive growth in China. Further, Yum brands, which has a leading market share in China, spun off its Chinese operations last year, indicating that the company might not be expanding in the region anymore. McDonald’s can take advantage of this gap and drive growth in the region.
With its focus on a healthier menu and digital initiatives McDonald’s is well poised to capture a decent share in the Chinese fast food market. Strong local players as partners can help the company navigate through this difficult region and China could become a long term growth driver for McDonald’s in the next few years.
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