In recent times, the ubiquitous American fast food corporation McDonald's (NYSE: MCD) has decided to "sell a controlling stake in its China business." McDonald's plans to sell to a "group of investors" involved with the "state-owned Chinese conglomerate, Citic." This decision has an estimated worth of roughly 2.1 billion US dollars, influencing a collective employment of "more than 120,000 people," according to the company.
In early January, McDonalds struck a deal with Citic (HKG: 0267) and Citic Capital (the associated investment management unit) that allowed the latter group to "acquire 52 per cent of the business." Another 28 percent will go to The Carlyle Group (NASDAQ: CG) a private equity firm based in Washington. McDonald's will hold onto the final 20 percent of its business operations in mainland China and Hong Kong. The agreement will last around 20 years, giving McDonald's "cash and new shares." Currently, the deal still requires regulators' approval--but expects to attain this by mid-2017.
McDonald's plans to expand their operations in China and Hong Kong in the next 5 years. The company aims to add 1,500 new restaurants in the two markets. McDonald's rationale hinges on an attempt to "capitalize on booming demand" from the growing Chinese middle class. The company has noticed a rise in the disposable income of this class, and predicts an increase in leisure spending (e.g. eating out). McDonald's specifically targets "tier three and four cities," for their "particularly great growth potential." Some examples of these "less-known provincial cities with large populations" include Wuxi, Guiyang, and Lanzhou. McDonald's hopes that, in these cities in particular, Western fast food will have a continuously enthusiastic reception, increasing the company's ubiquity in the Chinese market. Overall, McDonald's wants to reduce its number of stores, and increase its franchises. Hence, shifting ownership of the China region will "enable it to slash its company-owned stores by 1,750."
Recently, the two fast food giants McDonald's and KFC have both experienced setbacks in the China region, due to "food safety scandals." In particular, the KFC-parent Yum (NYSE: YUM) had to decide to "spin off its China division from the rest of the company." In late 2016, Yum China "began trading on the NYSE under the ticker symbol 'YUMC'." In response, McDonald's and Yum brands "reported improving results at their Chinese businesses last year until they were hit by anti-US protests in July."
McDonald's acquisition of new partners comprises the company's aim to attain a "better understanding of the Chinese market," according to the CEO, Steve Easterbrook. Easterbrook's strategy for McDonald's so far has included an "overhaul" of the fast food chain, including launching "more customized sandwiches with fancier ingredients," as well as "all-day breakfast" along with "touch screens and table service" in the US. For Easterbrook, "menu innovation," and "using digital technology" are also "priorities for the new Chinese business." Easterbrook insists that the new majority stakes held by Carlyle and Citic do not signify a pulling back by McDonald's in China--a region that is experiencing economic slowdown after "decades of rapid growth."