McDonald's Tries New Approach for China Success

McDonald’s China is loosening up its ownership structure and moving its stores upmarket to maintain growth in a rapidly changing market.

Last week McDonald’s agreed to let Kunming North Star Enterprise, a local catering firm, take over its 11 existing stores in Yunnan and open new ones throughout the province. The move reflects a change in strategy. Unlike in the U.S., where most stores are franchises, in China McDonald’s had been directly operating all stores.

A trial franchise program it launched six years ago produced only three franchisees running six restaurants. By taking on franchisees more aggressively McDonald’s hopes to expand to over 2,000 outlets in China by 2013. The expansion is badly needed. Fast-food competition has intensified dramatically in the two decades since McDonald’s made its China debut. Kentucky Fried Chicken now has about 3,200 locations to only 1,300 McDonald’s. And other new players are threatening even its second-place status.

Among them are Taiwan’s Ting Hsin Group with more than 1,000 Dicos fried-chicken stores and the homegrown Kungfu Catering Management Co with more than 300 Zhen Kungfu restaurants. California Pizza Kitchen and the upscale German seafood chain Nordsee GmbH are also set to enter the market.

The other part of McDonald’s new strategy is to move its store design upmarket with more of a bistro feel, featuring free WiFi, more comfortable seating, music and outdoor tables. A model for this new direction is the CITIC Square store in downtown Shanghai that just opened Tuesday. McDonald’s hopes to give the same look and feel to about 70 percent of its China stores by 2014.