VF Franchise Consulting

McDonald’s licensed for expansion. Fast food chain identifies Yunnan as target for more of its restaurants

Sep 26, 2011

BEIJING – McDonald’s Corporation China has announced that it issued its first developmental license in August to a mainland business in a move to further expand its presence in the country.

The license was granted to RenJianmei, vice-president of the Kunming North Star Group that runs restaurants, hotels and retail businesses. It is aimed at increasing the number of the fast food outlets in Southwest China’s Yunnan province.

“I look forward to helping expand the presence of McDonald’s in Yunnan while upholding the McDonald’s principles of quality, service, cleanliness and value. We will definitely contribute to this win-win partnership with extensive local resources and knowledge in Yunnan,” said Ren.

The developmental license model is a form of franchising that McDonald’s, one of the world’s leading fast food providers, has been using for more than 30 years around the world to grow the brand. Unlike conventional McDonald’s licensees, developmental licensees own or secure all assets, including property and buildings, and have the right to open new restaurants across a province or other geographical area.

McDonald’s collects a royalty based on a percentage of restaurant sales. The traditional franchise method requires the franchiser to rent an outlet and sublet it to franchisees.

“McDonald’s China will leverage the developmental license model to grow our brand and create opportunities for local entrepreneurs,” said McDonald’s China chief executive officer Kenneth Chan.

“As one of the top franchisers in the world, we believe in the value of local ownership and, as this market expands through the opening of new restaurants, it will create jobs and other economic benefits for the Yunnan province.”

After entering China in 1990, McDonald’s has more than 1,300 stores in 26 provinces, regions and municipalities on the Chinese mainland. It aims to expand its China network to more than 2,000 outlets by 2013.

The fast food chain currently has 11 stores in Yunnan province. A developmental licensee operation commits the license holder to open a minimum of 20 new stores during the first five years of ownership. They will open mostly in Kunming, the capital city of Yunnan, and other tourist spots, according to Ren.

Franchise operations are widely considered to be an efficient way to open more chains. About 80 percent of McDonald’s global outlets are operated by franchisees. They require less capital than self-operated stores.

McDonald’s relies heavily on franchises in more mature markets such as the United States, but has almost exclusively opened self-operated stores in China since entering the market two decades ago.

“The regional franchise program run by McDonald’s in China was launched as a strategy against its biggest rival, KFC Corporation, because franchising can be a very effective way to grow in China,” said GaoJianfeng, an analyst at Bogo Consultants.

KFC, which belongs to Yum! Brands, claims on its website to be the No 1 quick-service restaurant brand and the largest and fastest-growing restaurant chain on the Chinese mainland, with more than 3,200 restaurants across the country. It entered the market in 1987.

Unlike McDonald’s, KFC offers a range of Chinese-style fast foods, such as porridge and soup, to adapt to the tastes of local consumers. In 2007, McDonald’s started launching its franchise business in Shenyang, in Northeast China’s Liaoning province, Wuxi, in East China’s Jiangsu province, and Yiwu, in East China’s Zhejiang province, saying the company was “confident about the market’s future”.

Individuals, who have to put forward at least 2 million yuan ($313,000) to cover the purchase of equipment, a joining fee and other expenses, may apply to open a McDonald’s franchise after specific training. According to Euromonitor International, sales at all of China’s fast food chains rose 12 percent last year to 60 billion yuan. Yum! led the market with a 40 percent share, compared with 16 percent for McDonald’s, the London based researcher said.

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