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McDonald's hungry for China franchises

McDonald's Corp is counting on China legalizing franchise outlets next year, hoping the business strategy that made it the world's largest hamburger chain will help it dominate the country's US$48 billion fast-food market.

"Franchising will be a big part of who we will be in China," chief executive James Cantalupo said in an interview. "The Chinese are great entrepreneurs, and so they will make great franchisees."

About three out of four of McDonald's 30,000 outlets worldwide are franchised. The Oak Brook, Illinois-based company opened 130 of its 560 Chinese outlets last year, and expects to add "about 100" more this year, Cantalupo said. He declined to say how many franchises the company plans next year.

Offering franchises may help McDonald's catch up in China with Yum! Brands Inc's KFC and Pizza Hut. Yum spent 1.3 billion yuan (US$157 million) opening 850 KFC fried-chicken outlets in China since it entered the country in 1987, the company said in a statement last week. McDonald's was the second foreign fast-food chain to enter China, after Yum.

Yum has restaurants in more than 200 cities in China and in all of the country's 32 provinces except Tibet, while McDonald's has outlets in 19.

The Chinese government is likely to allow franchisees to start operating in the country "early next year," said Peter Tan, head of McDonald's operations in China. McDonald's helped the government draft the franchise rules, he said.

"The franchising system lends itself extremely well to the development of the more remote areas in China" because they would allow management to have better relations with local authorities, Tan said.

Except for a pilot franchise, located in Tianjin, about 100km southeast of Beijing, all McDonald's outlets in China are wholly owned or jointly owned with Shanghai-based Hualian Group Co or Beijing Sanyuan Foods Co. McDonald's owns outlets jointly with Hualian in markets in and around Guangzhou, in southern China, and in Shanghai. It owns outlets in Beijing with Sanyuan.

McDonald's plans to focus more on markets along China's east coast, where incomes are higher, as it opens more outlets, Tan said. The company also plans to expand in western China, in places such as Sichuan Province and Chongqing municipality, and is aiming to open its first outlet in Inner Mongolia Province, which borders Mongolia and Russia, "soon," he said.

China, the world's most populous nation, has a patchy record with Western fast-food, in a fast-food industry estimated by AC Nielsen Co to be worth 400 billion yuan (US$48 billion) in annual sales.

Allied Domecq Plc closed all seven of its Dunkin Donut outlets in Beijing in March 2000, because it found that Chinese consumers did not develop a taste for the sweet American pastry.

Starbucks Corp is thriving in China, opening 38 stores in the country in two years. The coffee chain even owns an outlet in the Beijing Forbidden City, the former imperial palace of Chinese emperors.

Yum's KFC outlets now offer menus that include chicken rolls in the style of Beijing's famous roast duck, and rice porridge, to cater to the Chinese palate.

McDonald's has followed the move. Its outlets now sell spicy chicken wings to cater for consumers who like spicy food from the southwestern Sichuan province.
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