McDonald's (MCD) sells well in China. And, in the latest development, it is sold.
Corporate Mickey Ds is offloading 80% of its holdings in both China and Hong Kong to Citic (CTPCY) and its unit Citic Capital, the best-known private-equity company in China, and the Carlyle Group (CG) for HK$2.08 billion ($270 million).
Citic and its unit Citic Capital will then own a 52% controlling share of the Chinese and Hong Kong assets, with Carlyle holding 28%. McDonald's retains the remaining 20%.
The development meshes with my story yesterday about China's strong demand for milk and beef, only now we're moving on to the ultimate end product -- totally processed patties that bear only a marginal resemblance to the heifer or steer where they began.
Carlyle and Citic clearly see the opportunity for an overhaul of an operation that had seen heady growth during China's two decades of double-digit annual economic growth, but has lost its way. Growth has slowed and margins have tightened as McDs matured, tastes moved on to healthier food, and China's eastern coast became saturated with saturated fats.
Yum Brand (YUM) and its subsidiaries such as KFC and Pizza Hut are also going through tough times in China after a strong run, and have brought in deep-pocketed partners.
McDonald's has 2,400 stores in mainland China and 240 in Hong Kong. After the sale, the three partners said in a joint release that they would open another 1,500 restaurants in the next five years, with a push into smaller cities. The deal gives Citic and Carlyle franchise rights for 20 years.
Hong Kong has been phenomenally successful for McDonald's. As far back as 1992, seven of its 10 busiest stores globally were in the densely packed, fast-moving financial hub. Recently, in the city that has the world's highest prices for residential real estate, Hong Kong's homeless people have taken to spending their nights in 24-hour McDs, where the store workers kindly turn a blind eye.
Corporate McDonald's hopes to lean on its new Chinese partner, Citic, to improve its on-the-ground operations, while Carlyle also has extensive experience investing in the mainland. Citic meanwhile said it wants to tap into increased consumer-spending power.
The turnaround attempt will see the greater China operation convert 95% of its restaurants into franchises, leaving the "heavy lifting" of renovating and maintaining existing stores to the landlord-owners.
Similarly, corporate McDonald's has already moved extensively into an asset-light mode, with around 80% of its stores being franchises, where it does not own the real estate or store. It aims to boost that even closer to 90%.
The injection of capital from Citic and Carlyle will drive expansion into Tier 3 and Tier 4 cities in China. Those are more difficult markets for foreign companies to enter, because disposable income is far lower.
But of course, that may actually be a boon to fast-food operators offering quick eats that may appeal more, especially in terms of trendiness, over traditional dumplings and noodle shops. Yum Brands has already expanded into smaller cities, but McDonald's so far has not.
McDonald's in China has seen sales suffer after the 2015 discovery that one of its suppliers was using expired and contaminated chicken. Net profit margin was down 3% for the third quarter last year, the latest figures show.
Yum Brands in September sold a portion of its China operations to the Internet-sales platform Alibaba (BABA) and the Chinese private-equity investment firm Primavera Capital for $460 million.
