McDonald’s is finalizing a sale of the right to operate its China and Hong Kong restaurants. Prompted by stagnating market share and an increasingly challenging operating environment, the move allows McDonald’s to keep a presence in China without the burden of ownership.
The world’s biggest fast-food chain is considering final offers from three leading groups, believed to be U.S. private equity firm Carlyle Group and Chinese investment firm CITIC Group, U.S. private equity firm TPG Capital and Chinese retailer Wumart Stores, and a group led by Beijing Tourism Group and Chinese retail giant Sanpower Group, according to Reuters.
With the sale, McDonald’s Corp. joins fast-food rival Yum Brands Inc. in making the decision to sell its China business. Yum, which owns KFC, is the No. 1 fast-food chain in China; McDonald’s is a close second. Both arrived on the scene in the 1980s—KFC opened its first outlet in Beijing’s Tiananmen Square in 1987, and McDonald’s opened its first store a few years later in the southern city of Shenzhen.
Their decision to abandon one of the world’s biggest fast-food markets marks a dramatic about-face for the two fast-food giants, once hailed as prime examples of how American companies can succeed in the communist country.
But the companies diverge in their methods of exiting China.
Yum chose to spin off Yum China as a separately listed company on the New York Stock Exchange. Yum China recently secured prominent Chinese investors Primavera Capital and Ant Financial Services Group as anchor investors ahead of the listing in November. Primavera was founded by the former head of Goldman Sachs Group Inc.’s Greater China business, and Ant is a subsidiary of internet giant Alibaba Group. Well-known anchor investors are common in Chinese IPOs, and their presence can help drum up interest from retail investors ahead of the listing.
McDonald’s, meanwhile, chose a different path. Instead of selling the business altogether, McDonald’s is converting its corporate-owned outlets to the franchise model by selling a 20-year franchise operating agreement to run all of the stores to potential bidders. This ensures that McDonald’s will hold branding and product development rights over existing and new restaurants, similar to its relationship with franchisees in the United States.
The 20-year operating license for McDonald’s Chinese outlets could fetch as much as $3 billion, analysts predict.
Declining Market Share
Both McDonald’s and Yum have lost their early luster and are facing declining market share in China.
