McDonalds Quickens Franchising Drive

McDonalds steps up franchising drive

Fast food leaders McDonalds (NYSE: MCD) and KFC (NYSE: YUM) have unveiled major China overhauls in the last few weeks, as each tries to reignite stalling growth in one of their biggest and most profitable markets. Such retrenchments are long overdue, more than 2 decades after each company first came to China and  achieved huge success by opening stores that offered not only good food at affordable prices but also friendly service and a comfortable eating environment.

But much has changed since KFC arrived in China in 1987, followed 5 years later by McDonalds in 1992, including the entry of more international rivals and also the rise of domestic competitors. And yet despite the rising competition, KFC and McDonalds have done surprisingly little to alter their local strategies over the years until now.

Each company is trying a slightly different approach, although more localization is a strong element of their plans. While localizing elements like menus and restaurant décor are important, both companies should also think strongly about doing more to localize their top management and business models to better understand and serve their Chinese customers.

After 2 decades of breakneck growth, KFC and McDonalds have both struggled in China over the last year as the country’s economy slowed and they faced growing competition from domestic and foreign rivals. McDonalds China same-store sales fell 3.6 percent in 2013, while KFC’s were down an even sharper 15 percent, partly due to negative effects from an outbreak of bird flu that dampened consumer demand for its core chicken products.

McDonalds was in the headlines last week when China chief Kenneth Chan disclosed the fast food giant was accelerating its drive to add more franchised restaurants to its local operations. (Chinese article) Such franchisees are common in McDonalds strategy in most of its other markets, and typically see local partners open and operate stores while paying licensing fees and following strict guidelines from the parent company. The franchising push was part of a broader overhaul announced by McDonalds, which will also retrench its designs and other elements of its China stores.

McDonalds has historically prided itself on the franchising model, which encourages innovation at the local level by thousands of entrepreneurial franchisees. Some of the company’s most successful new products and market concepts have historically come from those local partners, including McDonalds’ signature Big Mac hamburger and its Ronald McDonald clown mascot.

And yet despite that focus, only about 12 percent of McDonalds’ 2,000 China restaurants are now owned and operated by franchise partners, Chan disclosed. In a bid to bring more innovation from such partners and lower costs, the company has accelerated its drive to add more franchisees to its network and is aiming to roughly double the number to 20-25 percent of its total China restaurants by next year. Even then, the figure would still be well below the company’s global average that has around 80 percent of its stores run by franchisees.

Meantime, KFC is also embarking on its own China shift with the announcement last month of its first-ever relaunch for the market. (previous post) Much of KFC’s relaunch is focused on overhauling its food options and store design, with 15 new products entering its menu and stores set for a major new look. Like McDonalds, KFC is also hiring a big celebrities to act as brand ambassadors as part of its relaunch. Unlike McDonalds, however, KFC rarely uses the franchising model in China, and hasn’t announced any plans to change that practice.

These types of overhaul are widely practiced in the west, where companies realize it’s important to refresh a brand every decade or so to prevent it from becoming outdated and stale. Thus these overhauls are long overdue, coming more than 2 decades after each company first entered the market.

But equally important, both McDonalds and KFC should think more about bringing more Chinese partners into their operations to get them more in sync with local tastes. Both companies still have large numbers of non-mainlanders at the top of their top China operations, each of which is headed by a non-Chinese national.

Among the 2 ongoing overhauls, McDonalds franchising strategy could have the best chances for success by focusing not only on cosmetic but also structural changes. That could bring in important input and innovation from local partners to make the company more competitive.

Bottom line: McDonalds drive to boost its franchising in China could help the company restart growth by drawing on innovation from local partners.

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