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A change in game plan

By He Wei in Shanghai | China Daily USA | Updated: 2017-02-10 12:56
A change in game plan

Faced with stern competition from local rivals, a slowing China economy and healthy dining trends, McDonald's and its fiercest rival

Yum Brands have been forced to rethink their strategies in the world's largest fast food market

Found at almost every major street corner across thousands of cities in China, McDonald's and fast food outlets under Yum Brands such as KFC and Pizza Hut have long enjoyed a run of super-sized growth as local consumers craved a taste of Americana.

The two fast food giants used to define China's fast food segment, with the duopoly accounting for more than half of the market share in a country that has the world's largest food service industry.

A change in game plan

It is hence unsurprising that both companies have now decided to shed their once lucrative Chinese assets at a similar timing, leaving people wondering whether their dominance over the past two decades has inevitably faded.

After a prolonged struggle to attract buyers, McDonald's announced in January that it would sell 80 percent of its shares in the Chinese mainland and Hong Kong to Chinese investment conglomerate CITIC Group, CITIC Capital and Carlyle Group. The move will give the buyers a controlling stake in the brand's chains in the region.

Phyllis Cheung, CEO of McDonald's in China, said the move would help unlock more capital as part of the company's turnaround plan. She sees the franchise model as an effective way to spur growth potential in China's third- and fourth-tier cities, and improve flagging performance in existing stores.

"Financial strength" and "unmatched understanding of the local market", said Cheung, were the reasons the fast food giant decided to pick the CITIC-led consortium.

"CITIC's real estate networks and strategic alliances with developers including Vanke and China Resources may potentially open up more opportunities," said Cheung.

Meanwhile, Yum has also decided to separate its Chinese entities, albeit using a different approach: initial public offering. In November, the fast food giant spun off its China business in a New York Stock Exchange listing, with Yum China being a licensee of its parent company.

The floating plan would give Yum China, which manages 7,500 KFC, Pizza Hut, Little Sheep and East Dawning stores, the flexibility to react to the fast-changing market, said CEO Micky Pant.

Despite their sizable businesses, both firms have felt the pinch as sales stagnate in a country that once boosted the balance sheets. Bloomberg data showed that Yum's China unit had accounted for half of the company's global sales by 2012, but growth has since stalled.

For McDonald's, its third-quarter operating income in high-growth markets, which includes China, registered less than 15 percent of total sales in 2016, according to its financial statement.

Yum's market share had also dropped precariously from 40 percent in 2012 to 30.2 percent in 2015. McDonald's share slid as well, from 16.5 percent in 2013 to 13.8 percent in 2015, said a consultant at Euromonitor International.

Meanwhile, upstart rivals have been quick to wrest market share by answering the call from consumers for fresher and healthier food in Asian flavors. According to market research firm Mintel, tangbao (steamed dumplings), Japanese noodles and steamed-rice meals are quickly gaining popularity in China.

Mintel also forecast that independent brands will experience a compound annual growth rate of 10.4 percent while fast food chains will register only 4.7 percent. It attributed this to the fact that independent outlets are able to faster adapt to the healthy dining trend.

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