After McDonald's raised its price, it increased its capital in the Chinese market and hit the target of 10,000 stores

McDonald's, nicknamed "McGate" by netizens, recently announced its decision to raise prices. On December 27, McDonald's China said that it had adjusted the prices of some products in combination with recent changes in operating costs, with an average increase of about 3%, and had clearly marked the prices on each ordering channel. This is also the second time that McDonald's China has adjusted the price of its products in 2023.

After the price increase of the main products across the board, nearly 90% of the listed prices of the main hamburger snack products will be increased by 0.5 yuan from December 27, and the price of the Maika set will increase by 1 yuan at the same time. However, the 13.9 yuan 1+1 all-you-can-eat meal that everyone calls the "poor ghost package" has not increased in price.

In the past year, McDonald's China has experienced a capital increase in the Chinese market, set the goal of 10,000 stores in the Chinese market, and can it achieve a jump in scale after eyeing the "golden arches" of the domestic market and the "price increase turmoil"?

Price increases and operating costs

In January this year, the price of McDonald's 1+1 all-you-can-eat set meal increased by 1 yuan, from 12.9 yuan to 13.9 yuan. This is also the first time that McDonald's China has raised prices this year. The brand said at the time that due to the continued impact of the epidemic on various costs, the prices of some single items and packages for dine-in and McNugget delivery have been adjusted.

McDonald's also said that the price increase across the board was a change in operating costs. In the past month, at least 11 listed companies in the food industry have announced price increases, ranging from 3% to 35%. According to the data, in March this year, in terms of chicken raw materials, the average price of large-sized pipa legs was 13.86 yuan/kg, up 3.61 yuan/kg from the average price in March last year, and the average price of large-size wings was 39.17 yuan/kg, 0.9 yuan/kg higher than the average price in February this year, and 4.65 yuan/kg higher than the average price in March last year.

McDonald's, which is under pressure on costs, has also raised prices in the global market. In 2022, the price of McDonald's products in the U.S. market increased by about 10% for the whole year. In the third quarter of this year's earnings call, McDonald's predicted that McDonald's in the U.S. market may increase prices by more than 10% this year.

McDonald's China has revealed that it purchases nearly 300 kinds of ingredients every year, of which more than two-thirds of the purchase volume is provided by these leading suppliers. They have a certain scale advantage, so they are relatively strong against cost fluctuations. Compared with the global market, McDonald's China's price increase is even smaller.

What forms a price wall for McDonald's is McDonald's asset-light business model. As of September 30, 2022, McDonald's operated 39,980 fast-food restaurants worldwide, of which 37,930 were franchised stores and only 2,050 were self-operated stores, with a franchise rate of 94.87%. Among them, in the largest market in the United States, the McDonald's franchise rate has reached 95%.

The McDonald's Corporation invests in land and buildings, buying land to build or lease real estate to franchises, and franchisees invest in trademarks, finishes, and equipment. Through the franchise business, McDonald's derives its main income from rent. Specifically, in the third quarter of 2022, McDonald's revenue from franchised stores was $3.671 billion, of which revenue from ground rent reached $2.358 billion and revenue from licensing was $1.301 billion. Of course, the more direct reason is that McDonald's has optimized the overall cost structure through refined operation.

McDonald's recently released results show that in the third quarter of this year, McDonald's operating income and net profit increased by 14% and 17% year-on-year, respectively. McDonald's global same-store sales grew 8.8 percent, while international growth franchise markets, including China, maintained double-digit same-store sales growth of 10.5 percent.

Increased capital in the Chinese market

Another major event of McDonald's China this year is a large increase in the Chinese market.

On the evening of November 20, McDonald's Global announced that it had agreed to acquire a minority stake held by The Carlyle Group in McDonald's strategic partnership companies in Chinese mainland, Hong Kong and Macau. After the completion of the transaction, McDonald's Global's shareholding in Golden Arches (the abbreviation of McDonald's operating entity in China) will increase from 20% to 48%.

Sorting out the timeline of McDonald's entry into China, it entered the mainland as early as 1990. At the end of 2016, there were more than 2,400 McDonald's restaurants in Chinese mainland, employing more than 120,000 people.

In January 2017, CITIC announced that it had acquired control of McDonald's Chinese mainland and Hong Kong operations with CITIC Capital and Carlyle, a global alternative asset manager, for US$2.08 billion (about HK$16.141 billion), which at that time valued McDonald's Greater China business at US$2.6 billion. Upon completion of the transaction, CITIC, Carlyle and McDonald's International will hold 52%, 28% and 20% interests respectively, and McDonald's China will be recognized as an indirect non-wholly owned subsidiary of CITIC Shares. This was the birth of the company "Golden Arches".

But in 2023, McDonald's, which is optimistic about the Chinese market, has finally regained its equity share in the domestic market. Carlyle dives its stake in McDonald's China, and after the transaction closes, the CITIC consortium will continue to maintain a controlling position with a 52% stake.

The main reason why McDonald's reduced its stake in McDonald's China in 2017 is that its activist shareholders asked McDonald's to squeeze out cash to increase the return to shareholders, and at the same time, in order to expand the Greater China market more rapidly at a lower cost, which requires the assistance of capital and capital giants familiar with local operations, CITIC and Carlyle are undoubtedly ideal partners.

After cooperating with CITIC Group and Carlyle to establish the "Golden Arches" company, McDonald's has also reaped a lot of "benefits", such as using the resource advantages of CITIC Group to establish cooperation with a series of real estate companies, so that McDonald's can open in residential communities at lower prices. According to Jihai data, among the current McDonald's stores in China, the distribution of residential stores and shopping places has been comparable, accounting for 30% and 34% of the total respectively.

In 2017, McDonald's proposed the "Vision 2022" accelerated development plan in Chinese mainland, proposing to maintain double-digit annual sales growth in the next five years. The goal is to increase the number of McDonald's restaurants on the mainland from 2,400 at the end of 2016 to 4,500 by the end of 2022, and the pace of opening new restaurants will gradually increase from about 250 per year in 2017 to about 500 per year in 2022, including 45% of restaurants in third- and fourth-tier cities, and more than 75% of restaurants providing delivery services. At the same time, it also realizes the digital operation of McDonald's in the mainland.

According to McDonald's latest financial report for the third quarter of 2023, as of September 30, the number of McDonald's system restaurant stores in China was 5,582. The achievement of the target and the gratifying growth rate of the Chinese market have made McDonald's choose to increase its capital in the domestic market this year.

Now, McDonald's in the Chinese market has put forward a new goal. According to the annual plan for 2023, this year, McDonald's plans to open about 1,900 new stores around the world, including about 900 in China, and about 1,000 new McCafe stores in China. At present, the number of McDonald's restaurants in China has exceeded 5,500, doubling from 2017. At a media conference in August this year, McDonald's China said that it will also achieve the goal of 10,000 stores by 2028.

Linghexun Plus members, watch more exclusive content for free: 8 major financial columns, exclusive market interpretation of the latest and hottest information, and grasp the market investment trend one step faster.