MacDonald Sells Its Equity in China and Prepares for Fresh Progress

Since MacDonald declared to transfer its franchising in the Chinese market in March， more and more Chinese companies have joined the camp of competing forthe China franchising of MacDonald. Reported by Reuters， MacDonald planned to sell its shops in China mainland and China Hong Kong by providing a twenty-year franchising， and it has received more than six bids including BTG （Beijing Tourism Group）， SanPower Group， and ChemChina， where auction value might reach 3 billion US dollars.

MacDonald also declared in endMarch that it would introduce strategic mainland， China Hong Kong and South Korea. Why would such a giant of chains as MacDonald hurry to sell its shares and introduce strategic investors？ In fact， over 80% of its shops over the globe belong to franchising and more profits have been gained from its franchising business. Although MacDonald started its franchising business in China as early as in 2008， it hasn`t taken effect as it was originally expected. Many industry insiders commented that， “no matter whom MacDonald has finally chosen to cooperate with， it is always its hope to expend its business in China by realizing localization. After introducing strategic partners， it also should engage in adjustments of administrative modes and product combination.”

Until June 22nd， MacDonald had received bids from six companies. Besides BTG， SanPower Group， and ChemChina， Beijing Capital Agribusiness Group （CAG） had already submitted its tender for thefranchising and it would launch more business cooperation with MacDonald in the future if it could finally win the tender.‘

Spokesman from SanPower said to local media that， it had submitted the tender jointly with BTG for the franchising in China mainland and China Hong Kong， and its main reasons were to add new brand elements to its existingbusiness profile.After journalists reaching insiders from BTG， they declined to comment and the same responses were received from New Hope Group.

Department of Public Relations of MacDonald China said， MacDonald China would be to sell most of its equity and plan to bring in strategic investors without any comments as they thought no decision had been made.Global director and CEO of MacDonald Steve Easterbrook said， “More capital input will also propel shops to expand and upgrade， and increase market shares. Introducing strategic partners is part of flourishing MacDonald globally， investors may hold majority of shares in one certain market even hold 100% shares and MacDonald business will leave its administration to these investors` devices. Eventually we could reach the target of dominating the local markets and promoting strategic efficiency.”endprint

Industry insiders expressed that，“Key performance indicators in recent years are also reasons that have propelled MacDonald to sell its equity. For BTG， SanPower Group and Beijing Capital Agribusiness Group， they bid for the equity mainly because they want to involve in international catering chains and expand their profitability room， and at the same time reach synergetic effect.”

However， publicly released documents show that， since the scandal of Fuxi when MacDonald`s food supplier Shanghai Fuxi Food Company supplied expired meat， same store sales of MacDonald in China experienced slips for four straight quarters. According to its financial report， MacDonald`s turnover and revenues in 2015 were 25.41 and 4.53 billion US dollars respectively， down 9.6%and 19% from 2013.

One researcher from the catering industry Mr Yan commented that，“without selling its equity， it will be very difficult for MacDonald to increase its turnover and realize its ambition of rapid expansion in China； by doing so， MacDonald could reduce its operating cost and risks. The catering industry providing overseas food services has been in the saturation state and emerging catering services ofChinese food has shocked greatly overseas food services. Besides， the negative impact of the Fuxi scandal haven`t been gone completely.”

MacDonald is not ready to lose any chance of expanding its market shares. At present， it has more than 2800 shops in China mainland， China Hong Kong and South Korea， and most of them are directly managed by itself. All of these three markets have great growing potentials； that means they have relatively rapid developments and have relatively high potential of franchising. In the next five years， it is expected that more than 1500 shops are to be newly established. In other words， MacDonald has never planned to slow down its expanding speed despite of sliding turnover.

The problem is that MacDonald`s turnover hasn`t grown in correspondence with its increasing shops. Beijing MacDonald Food Co.， Ltd. is jointly owned by Beijing Sanyuan Food and MacDonald with equal shares. Estimates show that Sanyuan Holdings` total incomes from investment is around 400 million yuan from 2006 to 2015. Nevertheless， Sanyuan Holdings were able to earn profits of 77.95 million yuan in 2009 but the figure was only 6.76 million yuan in 2015； it has greatly obvious slides in recent years.endprint

MacDonald disclosed to journalist that， since last year， it has been assessing the ownership structure over the globeand progressing to cut shop quantities under direct management， letting more shops be owned and managed by local franchisers. Introducing strategic partners in Asian markets is one part of this goal.

According to MacDonald`s annual report， its profits of franchised shops over the globe were 7.28 billion US dollars in 2015， nearly three times over its direct-sale shops with profits of 2.51 billion dollars. Especially for recently years， profits from direct-sale shops have shrunk rapidly and we can see huge contrast from its 2013 profits of 3.3 billion dollars， which enlarged its distance from franchised shops.

In China， there are over 2200 MacDonald branches， which is fewer than half of KFC`s counterparts and is even fewer than Docos`s 2300 shops. Observed from MacDonald`s office web- site， its shops are mainly concentrated in East China， and the Central and West China accounts of very few percentages. As MacDonald doesn`t attach enough importance to the Chinese market， its franchised shops are fewer that KFC`s and its team operation is actually comparatively bad. Franchising expert Mr Li hold that， by introducing strategic partners， MacDonald could quickly reduce its risks and more effectively realize its expansion.

Shop rentals and staff operating costs are becoming higher and higher； it directly impacts profitability of each MacDonald shop. Market insider said that， “approximately one third of MacDonald`s profits is from its direct- sale shops and the remaining is from its franchised shops， while 90% its profits is from rentals. Judging from MacDonald`s current developments， it is more inclined to become landlords as its developments in China has been constrained. If it becomes landlord， its operating risks will be smaller and its expanding speed will be faster.”

Last year， MacDonald`s competitor Yum Group， the parent company of KFC declared to spin off its Chinese business. After spinning off， Yum China will be independent from Yum Group as the Group`s largest franchised branch. It would upset MacDonald if it doesn`t spin off the Chinese business as this is what its competitor is doing.endprint