(Chinese Version)

After KFC China was acquired by Ant Financial and Primavera Capital from Yum China, McDonald’s was also recently acquired by Chinese capital, becoming the second foreign fast food chain that was sold to China.

On January 9th, CITIC Group officially announced that CITIC Capital and THE CARLYLE GROUP had reached a strategic agreement to form a joint venture. It’s said that the new company would be main franchise of McDonald’s business in mainland China and Hong Kong (McDonald’s Chinese name belongs to the new joint venture).

According to the official statement, the cooperation will mainly operate under the share purchase agreement, with CITIC Group and THE CARLYLE GROUP as the buyers and McDonald’s and Golden Arches Investments Ltd(GAIL) as the sellers. The deal states: CITIC Group, CITIC Capital and THE CARLYLE GROUP would take over McDonald’s China’s business with a price of no higher than US$2.08 billion. Part of the transaction will be completed in cash while the rest will be completed through new stocks issued from the new company. After the transaction, CITIC Group and CITIC Capital will hold 52% of the new company’s stocks, while THE CARLYLE GROUP and McDonald’s will possess 28% and 20% respectively.

McDonald’s denied that the strategic cooperation is a sign of McDonald’s exiting the Chinese market: “It’s not the story at all. The Chinese market is the world’s economic engine, and McDonald’s China’s business continues to progress with steady growth. This recent decision is based on our commitments to the licensed franchise. McDonald’s will accelerate the development of local properties and boost our decision making efficiency and learning ability. And we will open up more restaurants steadily. Under the current cooperation framework, McDonald’s Global will hold 20% of the joint venture’s stocks. It really shows McDonald’s faith in the development prospect of the Chinese market, and the determination to get involved in this process.”

“The market in Mainland China and Hong Kong has immense potential. Our partners are excellent in market performance and have a comprehensive understanding of the Chinese market. The cooperation of different parties can further boost our competiveness and achieve fast business growth,” Steve Easterbrook, CEO of McDonald’s, said. “It will allow McDonald’s to become the leading force in the fast food chain sector in mainland China and Hong Kong.”

As China continues to push the development of urbanization and the middle class group further expands with the disposable household income growing steadily, China’s consumption power is now growing at a rocket speed. China’s labor force is greater than that of U.S and Europe combined, but the consumption level of the middle class in China still lags behind developed countries’.

According to McDonald’s, its business in China is very healthy, and that the sales has been growing for five consecutive quarters. “The Chinese market is the world’s growth engine. McDonald’s business in China is developing steadily. The deal with CITIC will accelerate the development of local properties and boost our decision making efficiency and learning ability,” Xu Yingting said, stating that McDonald’s will open another 1,500 restaurants in mainland and Hong Kong.

For CITIC, this deal is the group’s first step entering the consuming market, which is another essential part of its strategic plan of balancing finance and real businesses.

An insider told Caixin that CITIC Group might enter the bidding for asset allocation: “Currently CITIC Group’s asset and businesses are affected by periodic influences and that’s why the company needs to find a mean period or conversion period business to balance and allocate the asset structure. And McDonald’s is the mean period business.” Aside from that, CITIC Group also believes in China’s consumption growth.

After the deal, CITIC Capital’s board chairman and CEO Zhang Yichen will be the joint venture’s board chairman. “McDonald’s has great potential in the Chinese market. We will work closely with the current management team and other parties including Beijing Capital Agribusiness Group to further improve our business to meet Chinese consumers’ demand,” Zhang said.

Earlier this time, besides CITIC Group and THE CARLYLE GROUP, consortium consisted of Beijing Capital Agribusiness Group, Wu Mart and TPG also participated in the bidding. Eventually CITIC Group and THE CARLYLE GROUP won.

But why now? Zhu Danpeng, researcher at China Brand Value Research Institute, said that the past decades had been the golden era of western fast food chains and through direct company-owned model these fast food giants could make sure they have the profit. However, Zhu said, under the franchise model, the licenser can only charge the operator annually, and therefore the company-owned model can bring more profit during fast growth period. “After the fast growth period, the franchise model comes in handy because it can bring low-cost expansion,” Zhu concluded.

Ministry of Commerce’s statistics show that Chinese fast food chains account for 90% of the Chinese market while western chains only has 10%. However, CITIC Capital’s market research shows KFC, McDonald’s, Dicos and Burger King are the top chains in mainland China. This shows although Chinese fast food chains are numerous and have most of the market share, they are extremely scattered and there is no single brand that can compete with western brands.

By December 31st 2016, McDonald’s owns over 2,400 direct and franchise restaurants in mainland China and 240 restaurants in Hong Kong. At present, McDonald’s has around 120,000 employees in China that serve over a hundred million customers annually. McDonald’s is the top one fast food chain in Hong Kong and the second in mainland. In May 2015 McDonald’s announced that it planned to turn 4000 restaurants into franchise restaurants by the end of 2018. Its long-term goal is increase the proportion of franchise restaurants to 95%.

After years of fast growth, McDonald’s market performance started to decline after 2013. Although McDonald’s hasn’t revealed the details of the market performance in mainland and Hong Kong, the fiscal report shows in 2013 McDonald’s revenue in high growth markets (including China) fell by 5.5%, and in 2015 the revenue fell by nearly 10%.

Besides that, third, fourth and fifth-tier cities have always been McDonald’s bottleneck, where McDonald’s loses to KFC in China. If McDonald’s wants to gain fast development while insuring quality, it will need lots of resources. As its strategic partners, CITIC and THE CARLYLE GROUP state that they will use McDonald’s revenue to support expansion instead of jus taking the bonus. CITIC Pacific Limited also states that it will provide support for McDonald’s with its commercial real estate business. CITIC Bank, boasting over 1,400 banks, also set to penetrate third and fourth-tier cities in the future, moving alongside McDonald’s.

CITIC Group’s shareholder Tencent also promises support for the joint venture in mobile Internet technology, payment and gaming resources etc.

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[The article is published and edited with authorization from the author @Zhu Taowei, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.