Morton, McDonald’s Taste Sweet And Sour In China
Two new headlines are casting a spotlight on the very different tastes that China can hold for foreign food firms, including the sweetness they often feel on entering the huge market for the first time. That particular taste is quite strong in the latest announcement from US salt giant Morton, which has just gained major new access to the market through a joint venture.
But the taste can often be far more sour for companies that have been in China for a while, as they experience the many challenges of doing business in the complicated market. That particular taste is in the latest headlines for global fast food leader McDonald’s (NYSE: MCD), which has reportedly hit a speed bump due to a dispute with a local partner as it tries to reignite its growth through a new franchising drive.
This sweet-and-sour combination is all too common for foreign firms in China, as newcomers salivate at the market’s huge potential due to the nation’s 1.3 billion consumers and its rapid economic growth. But realities on the ground are often quite complex due to vast bureaucracy, anti-foreign biases and China’s inexperience in handling many commercial matters. As a result, many companies launch China business with big expectations and hype-filled announcements, only to quietly shutter those operations several years later due to frustration and lack of progress.
The optimism is quite apparent in the latest announcement from Morton, whose new agreement with the Shanghai unit of China National Salt Industry Corp makes it the first big global brand to get major access China’s lucrative salt market. (company announcement; Chinese article) The deal includes trademark and technology licensing agreements, which will see the pair import Morton’s finished salt products for sale into China. They will also import raw salt products, which will be packaged and sold in China.
The pair have worked together on a much smaller basis since 2001, and this latest partnership represents an expansion of that pairing. That history should help Morton in its efforts to tap the vast market, where regular table salt is already widely available but more differentiated and premium products aren’t very common. Morton should ultimately do well in the venture due to its previous experience with China National Salt, though I do expect it will probably hit occasional problems due to differences in strategy and perhaps also on technology issues.
Next let’s look at the beleaguered McDonald’s, which is already struggling in China after a major food safety scandal over the summer involving one of its largest meat suppliers. McDonald’s and rival KFC (NYSE: YUM) have both seen their growth slow sharply in the last 2-3 years, and McDonald’s has embarked on a big push into franchised stores in a bid to revive its prospects. (previous post) Both McDonald’s and KFC avoided such partnerships previously due to worries about disputes with potential partners, even though such a franchising model is quite common in the west.
McDonald’s discussed plans back in April to quicken its franchising drive (previous post), and the rapidly quickening pace could be a factor behind the latest reports of an embarrassing dispute involving a franchisee in central Hunan province. (Chinese article) This particular case appears to involve a larger company that signed a franchising deal with McDonald’s for Hunan in 2012, and then sold shares in one particular store to a smaller local investor.
The case saw the unhappy local investor blockade the restaurant’s entrance and create an unpleasant spectacle over the matter involving a shareholding issue. This kind of dispute certainly isn’t unique to China, though this particular case does seem a bit complex and probably wouldn’t happen in the west. Such cases will ultimately create negative publicity and headaches for McDonald’s, and reflect one of the biggest risks associated with its franchising expansion drive.
Bottom line: Morton’s new China venture should do relatively well due to previous experience with its partner, while a new conflict for McDonald’s in Hunan highlights risk associated with its aggressive franchising expansion.
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