Growth-Hungry McDonalds Explores Risky Franchising Route
Fast food giant McDonald’s (NYSE: MCD), clearly worried about its perennial second-place status in China to Yum Brands’ (NYSE: YUM) KFC, looks set to launch a major new drive on the franchising front, a move fraught with risk that could easily do more harm than good in this immature market. McDonalds managers are most likely frustrated by the fact that despite entering the market just a few years after Yum, they now have just 1,300 stores in China, all self-owned, compared with nearly 3 times that amount, or 3,200 stores, for Yum. In an effort to accelerate their growth, the company is stepping up its franchising program by turning over its 11 self-owned stores in southwest Yunnan province to a local franchise partner, Kunming Northstar Enterprise Co, which will also be allowed to open new stores on its own under a franchise license. (English article) That would mark a major expansion of its experimental franchise program in China, which has seen it open just 6 franchised restaurants with 3 partners over the last 6 years. People who follow McDonalds know that the vast majority of its restaurants in its home US market are owned and operated by franchisees, giving the company more flexibility to focus on its core business of product development and marketing while letting franchisees run the day-to-day show. But while this model works great in developed markets like the US, I would be very worried about using it in China, where managers are famous for cutting corners. I can just imagine a franchised store selling french fries or hamburgers that are no longer hot, in violation of company policy, being reluctant to waste food even if itl ultimately leaves customers with a bad impression when they get served cold food. If it’s not very careful, this new program could seriously harm its image in China, hurting rather than helping its expansion hopes.
Bottom line: McDonalds’ plans to boost its franchise program in China to accelerate growth is a high-risk proposition that could easily harm its prospects more than it helps.
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