McDonald's China counts on property-developer deals to catch KFC

[SHANGHAI] The new owners of McDonald's China are sealing deals with the country's biggest property developers to secure the best store locations in a bid to catch up with the rival KFC franchise.

McDonald's China Co, whose investors include state-backed Citic Ltd and Citic Capital Partners, has signed a strategic alliance with China Evergrande Group to get the first look at locations in 250 cities, Zhang Yichen, chairman of the Chinese franchisee, said in an interview with Bloomberg News. The company is in the midst of negotiating similar agreements with China Vanke Co and China Overseas Land & Investment Ltd, said Mr Zhang.

"All of these developers are very close to Citic. It's very easy for us to put them together," Mr Zhang, who is also chief executive officer of Citic Capital, said in Hong Kong Tuesday. "This is a strategy that you're not going to find in the US, and it's a strategic change that can only be made by people who understand how a market is shaped."

The partnerships are aimed at helping McDonald's meet a goal to almost double the number of outlets within five years in China, where competition among restaurant chains is heating up as an emerging middle class seeks higher-quality dining options. Citic would bring local market knowledge and local resources to the management of McDonald's in China, a lack of which caused it to fall behind Yum China Holdings Inc's KFC over the past decade, said Mr Zhang.

The executive said the various Citic businesses are exploring tie-ups with McDonald's to offer the group's myriad products, which can include credit card promotions and children's books from its publishing arm, Citic Press, as giveaways in Happy Meals.

The new management has accelerated its expansion plan to 500 new stores annually by 2022, from an increase of 250 this year, rivaling the pace of Yum China and Starbucks Corp.

McDonald's China, the chain's largest franchisee outside the US, plans to have 45 per cent of its outlets in less developed cities by 2022. Citic, which already has a presence in those cities through its network of bank branches, would help meet that goal, Mr Zhang said.

McDonald's has set a target of having 75 per cent of its China restaurants capable of home delivery by the end of 2022. Revenue from the fast-food chain's delivery business in China rose 81 per cent in the first half compared to the previous period, Mr Zhang said in a separate Bloomberg Television interview.

In January, Citic and US private-equity firm Carlyle Group LP agreed to acquire an 80 per cent holding in the China and Hong Kong operations of McDonald's in a deal that valued the business at as much as US$2.08 billion. The deal closed July 31. McDonald's currently has about 2,500 restaurants in China and 240 in Hong Kong.

The McDonald's China transaction is the first large-scale foray into the food and beverage sector by Citic, whose interests are primarily in steel and property development. McDonald's Corp agreed to sell control of the China business as part of a turnaround plan pursued by CEO Steve Easterbrook to revive the company from a sales and traffic slump in the US.

BLOOMBERG