Deutsche Bank Shares Rise After Shakeup

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McDonald's Plans to Add More Than 1,000 Restaurants in China

With nimble local rivals and increasing health-conscious consumers, the China market has been particularly thorny for McDonald’s, industry watchers say. ENLARGE
With nimble local rivals and increasing health-conscious consumers, the China market has been particularly thorny for McDonald’s, industry watchers say. Photo: Bloomberg News

BEIJING— McDonald’s Corp. MCD 0.52 % is adding more than 1,000 restaurants in China despite a rough recent history in the country, joining a number of companies that have made bullish bets on Chinese consumption.

Over the next five years, the Oak Brook, Ill., company is hunting for an investment partner to help build out its franchise business in China, and plans to add 1,300 restaurants to its current 2,200, it said Thursday.

The fast-food giant’s is betting that population growth and urbanization rates will continue to propel sales even as China’s economy slows, said Chief Executive Steve Easterbrook in an interview.

He said while larger discretionary items are taking a hit amid the slowdown, smaller splurges like fast-food meals will stay strong. “For everyday affordable spends like us, we’re confident in the consumer,” he said.

McDonald’s expansion plans mirror those of several other multinationals, especially in the entertainment, sports and casual-dining sectors. Starbucks Corp. SBUX 0.08 % aims to open 500 stores in China a year for the next five years, while Adidas AG ADDYY -0.51 % is planning to add 3,000 stores in China over the same period for a total of 12,000 stores.

That contrasts with travails for auto and luxury companies. General Motors Co. GM 0.61 % ,Ford Motor Co. Hyundai Motor Co. and Mazda Motor 7261 1.69 % Corp all posted steep sales declines in China in February, year-over-year. Both German retailer Hugo Boss AG BOSS 1.11 % and Kering SA KER -2.26 % ’s boutique brand Bottega Veneta closed stores in China last year, according to consultancy Bain & Co., which said total luxury closures, ranging from Armani to Hermès, reached 58.

McDonald’s expansion plans in China come after a bumpy few years for its Chinese sales after problems with one of its suppliers in 2014 left some of its restaurants without chicken or hamburgers. It is still struggling to regain consumers’ trust, industry watchers say.

”It isn’t getting back more loyal customers,” said James Roy, associate principal at the Shanghai-based consultancy, China Market Research.

McDonald’s said last year it was closing 350 restaurants in China, Japan and the U.S.

Chinese consumers are also increasingly health conscious and skeptical of fast food. In addition, Western chains face more competition from Chinese fast-food rivals. In a survey of 10,000 consumers across China, 51% said they consumed Western fast food in 2015, down from 67% in 2012, according to consultancy McKinsey & Co.

McDonald’s is launching healthy menu items in its China restaurants this year, like apple slices, veggie cups and multigrain muffins, Mr. Easterbrook said. He said McDonald’s has assured consumers of its quality and has been regaining customers.

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Compared with Chinese rivals, McDonald’s and Yum Brands Inc. YUM -0.43 % have been slow to adapt to Chinese consumers’ needs. Yum, which runs the KFC and Pizza Hut chains, announced last year plans to split off its China division, in part to address those problems. Mr. Easterbrook said franchising and local licensing are aimed at making McDonald’s more nimble in local communities.

McDonald’s hopes to make China the company’s No. 2 market, said Mr. Easterbrook, up from the third-largest now behind the U.S. and Japan. In the next five years, McDonald’s will open at least 250 restaurants a year in the country and boost the rate of its franchised outlets beyond 30%, closer to the U.S. rate of 90%, he said.

Outside its more mature markets, McDonald’s has largely relied on a more costly model of operating its own restaurants to oversee their quality and growth. McDonald’s operated all its restaurants in China for more than two decades, but turned to franchising in the mid-2000s as China streamlined franchising rights.

Under Mr. Easterbrook, McDonald’s has been overhauling its U.S. business, selling more restaurants to franchisees. Now it is turning to the international market, aiming for 95% of its outlets world-wide to be franchised, which would entail selling 4,000 restaurants to franchisees by 2018.

Many multinationals have steered clear of franchising in China so that they could have more control of their brands and profits. Starbucks bought out its Chinese joint-venture partner Maxim’s Caterers Ltd. in 2011 to give it full ownership of retail outlets Maxim had owned in six Chinese regions.

Companies also feared franchising would make their brands more susceptible to counterfeit. Chains have said that imitators come to franchising fairs in China every year.

”The risk factors are lower now than they have been,” said Mr. Roy of China Market Research.

McDonald’s, which is aiming for China to be fully franchised, has had trouble finding collaborators in Asia. It announced last year plans to sell its restaurants in Taiwan and Japan to a franchise operator but hasn’t yet closed a deal. Mr. Easterbrook said McDonald’s is in the early stages of identifying the right partners.

Write to Laurie Burkitt at [email protected]


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