Chinese businesses will benefit from stake in McDonald’s

With a controlling share in franchises in Hong Kong and the mainland, much will be learned about quality control

PUBLISHED : Wednesday, 18 January, 2017, 2:47am
UPDATED : Wednesday, 18 January, 2017, 2:47am

McDonald’s is surely the most recognisable US brand in the world. The opening of the first branch of the fast-food restaurant in Beijing in 1992 was symbolic: its location two blocks from Tiananmen Square made clear China was open to world business. It may come as a surprise, then, that on the mainland and in Hong Kong, operations have now become majority Chinese-controlled under a deal in which 51 per cent has been sold to the state-owned investment firm Citic. Such agreements are commonplace in a global economy, though, so perceptions of the chain, its food and service need not change.

Citic, Carlyle to buy McDonald’s franchise in Hong Kong, China in a deal worth US$2.08 billion

Under the US$2.08 billion agreement, McDonald’s will retain a 20 per cent interest, with the US private equity firm Carlyle holding 28 per cent. The partnership plans to open more than 1,500 new restaurants on the mainland and in Hong Kong over 20 years. The mainland’s fast-food industry has been annually growing by double digits for several years, so such optimism makes good business sense. It will also give the Chinese side valuable experience and insight.

But for all its brand recognition, McDonald’s lags US rival KFC for market share among Western chains on the mainland. KFC has more than twice as many outlets. A strained relationship with former Chinese partners on menus, procurement and marketing and in 2015, a food scandal involving tainted meat from a supplier, have been among the challenges for McDonald’s. The headquarters in Illinois perceived a chance for greater profitability and growth through changing the franchise deals.

Chinese firms have for years been on a buying spree in the West, snapping up companies ranging from hotels to cinema chains. Shuanghui International in 2013 bought a slice of Americana with its purchase of pork producer Smithfield Foods and the following year, technology company Lenovo took over British-owned Pizza Express. But overseas governments at times restrict what are perceived to be strategic assets, while pressure on the yuan and a drop in the mainland’s foreign exchange reserves has led to restrictions on outbound foreign investment. Citic’s deal fits China’s new investment environment.

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Mainland product scares and scandals have led to a perception among some that Chinese goods are inferior in quality. A Chinese-owned fast-food chain may, for some, cause concern about food safety. But the standards and requirements of McDonald’s surely allay any such worries and provide a learning experience for all involved in such a deal.