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McDonald's set to playfranchise game
By Jiang Yan (Business Weekly)
Updated: 2005-01-15 09:47

McDonald's, one of the world's largest fast-food chains, is stepping up its China expansion efforts through franchising.

The US-based hamburger maker is trying to increase its market share in China where competition among foreign fast-food chains is intensifying, industry analysts said.

KFC, McDonald's closest rival here, has over 1,000 outlets throughout the country, compared to McDonald's over 600. But the hamburger giant seems determined to catch up. According to Tim Lai, McDonald's managing director for North China, the company expects to increase the number of outlets in China to more than 1,000 by 2008.

More importantly, Lai said, McDonald's will adopt a new expansion strategy in China -- at least some of the new outlets will be franchised to local partners.

This strategy, which has played a pivotal role in the company's growth in many other markets, became applicable in China after the change in franchise regulations by the Ministry of Commerce late last year as part of commitments to the World Trade Organization.

"The legal environment for franchising has been greatly improved in China," Lai said in an interview with China Business Weekly.

The new regulations, to be effective in February, apply to all companies in China including foreign-owned enterprises. They will all be subject to the same set of regulatory requirements, including financial reporting and advertising standards.

"China is standardizing its franchising market, which provides great opportunities for McDonald's, who owes its global dominance partly to this business mode," said Wu Ruiling, vice-secretary-general of the China Chain Store and Franchise Association.

Since it opened its first outlet in China 15 years ago, McDonald's has been expanding in the country mainly through joint ventures with various local partners. In contrast, about 70 per cent of its outlets worldwide are franchised.

Beginning this year, McDonald's will be looking for franchise partners to help drive its expansion in addition to opening new directly-run outlets, Lai said.

The lifting of franchise restrictions comes at a time when the company is shifting its focus more to China while its demand in the United States and Europe has been on a persistent decline.

"China has been and will surely continue to be our major focus, as its economic growth momentum remains strong," Lai said.

McDonald's moved its China headquarters from Hong Kong to Shanghai late last year to better monitor its expansion progress in the mainland.

"Our new batch of franchisees (in China) are expected to begin operation in 2006," Lai said.

Wu said the move will undoubtedly sharpen McDonald's competitive edge in the Chinese market. "It can play this (franchise) game better than most of its competitors," she said.

Lai added many Chinese entrepreneurs are keen to sign up as franchisees as "people are becoming increasingly rich in the fast growing Asian economy and they see the potential of becoming our franchise partners." But only a few of the thousands of applicants are expected to be selected, Lai added. "We set very strict criteria (in selecting franchisees)," he said. And it's not all about money.

The successful candidate will not only have to demonstrate a commitment to the McDonald's way of doing business, he or she will also have to attend a one-year professional training course before taking over an outlet from McDonald's.

The initial investment required of a McDonald's franchisee ranges from 2.5 million yuan to 4 million yuan (US$301,900-483,000). Much of that will be spent on furnishing the outlets, equipment and advertising.

Industry sources said that despite the McDonald's allure, the franchisee still faces considerable risks arising from the high initial investment and expected slow returns.

"It (franchising) is quite different from investing in shares or real estate," Wu said. "It's a full-time job to manage a McDonald's outlet, " she said. "Any slip-up could send the franchised owner into trouble. "

Lai contended: "For starting one's own business, the initial investment requirement of a franchisee is actually quite low. What's more, we provide the outlet in a carefully selected location with proven sales performance. In addition, the franchisee is backed by our time-proven operational model, staff training facilities and global supply chain."

McDonald's has established staff training centres in Beijing, Guangzhou and Shanghai.

Also it has secured long-term supply contracts with 52 growers and processors which have invested a combined US$1.6 billion in facilities dedicated to meeting the needs of McDonald's.

Currently, there is only one McDonald's franchisee in China. In August 2003, a Chinese woman called Sun Meng secured a franchise to run a McDonald's outlet in Tianjin. KFC has had franchisees since 1993 and now has more than 20.

McDonald's will also team up with companies to expand its franchising business in the years to come, but currently "our major efforts are with Chinese individuals, " Lai said.

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