McDonald's (MCD 1.70%) recently announced it is selling control of its Chinese business to a joint venture controlled by CITIC and Carlyle Group (CG). China has been one of the fast-food king's bright spots, providing growth that has been offsetting declines in its core U.S. business. Here are the particulars, and some insight on what McDonald's is thinking.
Image source: McDonald's.
What will happen to the McDonald's in China?
The golden arches will be controlled by a new franchisee in China going forward. While McDonald's is retaining a 20% interest in the new company, 52% will be owned by China's largest conglomerate, CITIC, and 28% by asset manager Carlyle Group.
The deal is valued at nearly $2.1 billion. McDonald's will receive cash for ceding its 80% and Bloomberg puts that at $1.7 billion. The deal also gives the new partnership franchise rights to McDonald's in mainland Chin and Hong Kong for 20 years. The new joint company will take over operations of some 2,600 operated and franchised locations in mainland China and Hong Kong.
When selling out doesn't mean giving up
While the move may have made big headlines, it comes as no surprise to those who follow the company. In March 2016, McDonald's management announced it was looking for strategic partners to help leverage growth in Asia, a region it has identified as a high-growth market.
Big Mac lovers in China can rejoice, as the goal of the newly formed venture will be expansion. The 2,400 restaurants in China and 240 in Hong Kong may sound like big numbers for one single chain, but those figures pale in comparison to the more than 36,000 McDonald's restaurants worldwide.
A McDonald's Happy Meal from Hong Kong. Image source: McDonald's.
The company sees white space for its brand of American fare in Asia. In the next five years, McDonald's sees the new venture adding an additional 1,500 restaurants in the region. Playing catch-up to Kentucky Fried Chicken, which has more than 5,000 locations in China, is a priority for McDonald's, while simultaneously fending off homegrown Chinese upstarts looking to cash in.
By opting for a royalty cut rather than doing the dirty work itself, McDonald's is hoping that CITIC's knowledge of the Chinese market and Carlyle Group's expertise as an asset manager can propel growth to levels McDonald's couldn't accomplish going it alone.
An altered plan of attack
Giving up control of operations in the world's most populous country is in line with what the burger megachain has stated is its new master plan: rely heavily on franchisees. In 2015, the company made it a goal to have 90% of all locations franchised, with 95% being the longer-term target.
The reason? Transferring operations to partners and taking a licensing cut simplifies McDonald's sprawling global business and alleviates having to manage all of that overhead expense. Sales have been stagnant overall for the last few years, led by the company's home-turf U.S. market, so something different was needed. The hope is that moving the model to franchise partners will kick-start the business once again, especially in Asia and Eastern Europe, where the company is still looking to expand.
During the most recently reported quarter, global comparable sales notched a 3% increase, offset by lower revenue from the refranchising effort. However, the company was still reporting that "more than 80% of restaurants" are under the franchise model, still short of the 90% minimum goal. More work lies ahead on executing that plan, so shareholders will want to keep an eye out for updates.
