McDonald's targets China growth

23 November 2010

BEIJING: McDonald's is balancing global and local strategies in China, which could soon become the fast-food firm's third largest market worldwide.

The company first entered China two decades ago, and now operates 1,100 stores across the country.

Latest estimates show the domestic informal out-of-home dining industry is growing by around 10% annually, measured against 2-3% in the US.

But Kenneth Chan, ceo, McDonald's China, argued quick gains were less important than detailed future planning.

"McDonald's is really here in China for the long term," he told CNBC.

The US multinational intends to unveil another 1,000 sites in the next three years, including expanding the nascent drive-thru channel.

"For us, that's really quick," said Chan. "We were the fastest market outside the US to reach 1,000 restaurants. I think by 2013, we will be the third largest market within the McDonald's system."

"We have the right format of restaurants to open within transportation hubs and residential neighbourhoods."

McDonald's has also been overhauling many of its branches, a move proving to be a "sweet spot" in most countries, but enjoying particular relevance in China.

"Our consumers are changing and the environment is changing," said Chan.

"New competitors are coming in with new formats as well. We want to stay not just with the game, we want to stay one step [ahead] of the game."

Although rising interest rates and wages pose certain challenges, they might yield equal benefits.

"This obviously puts some pressure on our cost structure," said Chan.

"At the same time, it also continues to generate overall consumer wealth, which enables consumers to be able to be accessible to our category."

"So it's going to come, it's going to continue as a developing market, and we are well prepared for that."

Yum Brands, parent of KFC, Pizza Hut and Taco Bell, runs roughly 3,500 restaurants in 650 Chinese cities – three times as many as McDonald's – but Chan predicted the potential opportunity currently diminishes the threats from rivals.

"If you look at the overall 'informal eating out' market, it's a $300bn market," he said.

"The Western 'quick service restaurant' categories are actually only a small fraction of that market, so there's room enough for everybody to grow."

McDonald's has differentiated itself by showing customers "new things" and promoting untapped sectors.

"We've entered into the McCafe category, the coffee category. Today, coffee is a small market. But in 20 years, it's going to be a thriving market. The question is who is going to start growing the category," said Chan.

While adapting goods to suit domestic tastes constitutes a widely-utilised model in China, Chan asserted it may not always be the correct approach.

"I think it's a balance between offering the products that can sustain throughout the next 20 years, and offering local options today," he said.

"If you offer too (many) local options, everyone else down the street offers the same products and they can probably serve it better and they probably can do it at a cheaper price than you can."

Data sourced from CNBC; additional content by Warc staff