bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Peggy Sito

Queues at McDonald's restaurants in Beijing are a familiar sight, yet the United States fast-food giant's path to profitability in China has been far from smooth.

In the eight years since it opened its first outlet in the capital, Beijing McDonald's Food oscillated between modest losses and marginal profits.

This year could mark a turning point for the company, however, as it finally starts to achieve the scale necessary for solid profitability.

Beijing McDonald's - a 50-50 joint venture between United States-based McDonald's Corp and Hong Kong-listed red-chip Beijing Enterprises (Holdings), has a target profit of 10 million yuan (about HK$9.36 million) this year on expected turnover of more than 700 million yuan.

That is a significant jump on the past two years' results, according to Beijing Enterprises executive director Bai Jinrong.

Having been in expansionary mode for the past eight years, the company's profits have been weighed down by the high start-up costs of opening new outlets.

Beijing McDonald's has more than 60 restaurants in Beijing and plans to open more than 100 in the next few years.

Besides Beijing, it also has rights to open restaurants in Shanxi and Hebei provinces.

Mr Bai said it was difficult to make big profits in the fast-food business with a network of fewer than 70 outlets - meaning Beijing McDonald's is close to reaping the benefits of its long-term investment.

The company is already winning the battle for market share. It achieved a 50 per cent share of the Beijing fast-food market within the first few years, and has since raised that further. The fast-food market was worth 700 million yuan in 1998, according to Mr Bai.

McDonald's biggest competitor is fellow US chain Kentucky Fried Chicken, the second largest fast-food operator in Beijing with more than 40 stores. Other operators are small.

McDonald's mainland fortunes have risen and fallen with the changing tastes of Chinese consumers and the political and business winds.

The opening of its flagship Beijing restaurant in 1992 was a landmark media event, widely reported around the world as an indicator of how China was opening up to the world.

Standing in the prime Wanfujing shopping district just off Tiananmen Square, it was the largest McDonald's in the world and attracted 13,000 people on the first day.

Curiosity ensured a high turnover at first, as consumers shut off from the world during much of the communist era queued for a taste of the West.

Business slowed as the novelty wore off and customers reverted to traditional Beijing fare such as dumplings, said Beijing Enterprises manager Zhao Jifeng. However, a new generation of Chinese was growing up who were keener on Western food, and this had fed into a new spurt of growth.

Beijing McDonald's was formed with an unlisted investment unit of the Beijing municipal government in October 1992.

It was one of the first mainland ventures by the US fast-food giant, which has also formed joint ventures in other areas including Shenzhen and Guangdong.

Beijing Enterprises took up the Beijing McDonald's stake from the municipal government when it listed on the Hong Kong stock exchange's main board in 1997. The venture's initial registered capital of US$6.5 million has since risen to more than US$20 million. McDonald's has had to contend with more than just consumer tastes to achieve success in the mainland.

In 1996, its flagship Beijing restaurant was knocked down to make way for Oriental Plaza, a huge and controversial commercial project controlled by Li Ka-shing's Cheung Kong (Holdings) and Hutchison Whampoa.

A new store was established the following year in Sun Dong An Plaza, also in Wangfujing district, a joint venture between mainland party Dong An Group and SAR-listed property developer Sun Hung Kai Properties.

As a highly visible emblem of United States' culture, McDonald's is also hostage to changes in Sino-US relations.

This was demonstrated most recently in May last year, when consumers boycotted the restaurants in the wake of the bombing of the Chinese Embassy in Belgrade by US-led Nato forces. Business volume plunged by almost a third amid a wave of anti-US sentiment.

'Mainland people vented their anger against US businesses, but they forgot Beijing McDonald's was also owned by a mainland firm,' said Mr Bai .

However, he did not see Sino-US relations as an important factor in McDonald's mainland fortunes. Beijing Enterprises was confident in the venture's future prospects, Mr Bai said.

'We [Beijing Enterprises management] are also customers of McDonald's. It is everywhere. It is so convenient,' he said.

Mr Zhao said Beijing McDonald's business had been underpinned by Beijing citizens' growing willingness to spend in an improving macro-economic environment.

China is expected to record economic growth of 7.5 per cent to 8 per cent this year.

He expected Beijing McDonald's growth to accelerate further once China joined the World Trade Organisation, which would enhance the volume of trade with foreigners.

China is expected to join the WTO by the end of this year or early next year.

Beijing Enterprises is sufficiently confident in the business outlook that it is proposing to take up to a 50 per cent stake in McDonald's Guangdong operations from original shareholder Guangdong International Trust and Investment Corp (Gitic).

Gitic, an investment arm of the Guangdong provincial government, was declared bankrupt last year.

A memorandum of understanding has been signed but no details have been unveiled to date. Analysts have estimated the acquisition price at US$9.9 million.

The Guangdong operation, started business in 1993 and comprises more than 30 McDonald's restaurants.

It is also expected to record a profit this year, according to Mr Bai.



McDonald's tastes success in Beijing