McDonald's, which didn't lie to the fat cat, is taking away my burger freedom

Chief Business Review

2024-05-11 14:50Posted on the official account of Shanghai Chief Business Review

"I don't want to eat vegetables, I want to eat McDonald's." Recently, the deeds of the fat cat have been swiped, and he is only 21 years old, with a longing for love, he plays games day and night, saving money, just to build a future with his beloved girlfriend. But after being squeezed 510,000 yuan by his girlfriend and breaking up coldly and violently, he collapsed and jumped into the Yangtze River Bridge in Chongqing, ending a short and difficult life.

Sadly, the "fat cat" was PUA by his girlfriend before his death, but after his death, he was ruthlessly deceived by the merchants, and some well-known brands sent out empty takeaway packages, exposing the ugly side of the merchants' desire for profit. This kind of indifference and greed exposes the dark side of human nature.

Fortunately, McDonald's, beloved by "Fat Cat", lived up to him. On the Yangtze River Bridge in Chongqing, none of the scattered McDonald's takeaway packages were empty packages, and netizens praised "McDonald's is good" and "McDoor lasts forever". McDonald's also caught this wave of traffic well and launched the "Ten Yuan Eat Burger" campaign for two consecutive weeks.

However, behind the warmth, McDonald's is getting more and more difficult. Last year, McDonald's raised the price twice, and even the "poor ghost package" increased by 1 yuan, but the burger is getting smaller and smaller. ”

Is the price increase a helpless move?

Last year, McDonald's raised prices twice, once at the beginning of the year, called the "poor ghost package", McDonald's "1+1" rose from 12.9 yuan to 13.9 yuan. At the end of the year, McDonald's raised the prices of its main products across the board, with nearly 90% of the main hamburger snacks increasing their listed prices by 0.5 yuan to 2 yuan, and McCard packages increasing by 1 yuan at the same time.

In response to this year-end price increase, McDonald's said that in combination with the recent changes in operating costs, McDonald's China has adjusted the prices of some products today, with an average increase of about 3%, and has clearly marked the prices in various ordering channels.

However, rising prices are not the only problem. Many consumers are also discovering that the size of burgers is also quietly shrinking. In the past, a single burger was enough to fill a stomach, but now you need to eat two or three.

According to a poll on Weibo, 492,000 netizens participated, of which 333,000 thought it was "much smaller than before", 73,000 thought it was "a disguised price increase", and less than 9% thought that "it hasn't become smaller, it's because we've grown up."

Not only the burgers, but also the wheat whirlwind has been pointed out to be decreasing, and the texture has become thinner. This has left some McDonald's loyalists frustrated, who say that their wages are not even rising as fast as the burgers are shrinking.

In fact, McDonald's has no choice but to raise prices. Domestic raw material costs, labor costs, and rents are all rising. Taking chicken as an example, according to the National Development and Reform Commission, from 2006 to early 2023, the retail price of chicken in 36 cities rose from 5 yuan per catty to 14 yuan per catty, an increase of nearly 200%, far exceeding the price increase of McDonald's classic burgers.

Not to mention rent, water, electricity, and labor, the speed is skyrocketing, and even with efficient supply chain management, McDonald's can hardly withstand inflation and rising prices.

It is worth mentioning that since McDonald's China was acquired by the CITIC consortium and the Carlyle Group for HK$16.141 billion in 2017, "McDonald's America" has become the "Golden Arches of China", with CITIC, The Carlyle Group and McDonald's Global holding 52%, 28% and 20% of the shares respectively.

But at the end of November last year, the "Golden Arches" ushered in a new shareholding structure.

McDonald's Global announced that it will acquire 28% of McDonald's China's shares held by Carlyle, McDonald's global shareholding will increase from 20% to 48%, CITIC Consortium with CITIC Capital as the main body accounts for 52%, and remains the controlling shareholder, and The Carlyle Group will withdraw from McDonald's China. This also means that McDonald's Global will have a stronger say in the Golden Arches in the future.

The gap between McDonald's and KFC is getting wider?

Behind the high growth of revenue and net profit, McDonald's China is also in the dilemma of slowing down same-store sales. As a key performance indicator of the chain industry, same-store sales are an important reference for measuring the performance trend of chain enterprises.

McDonald's 2023 financial report data shows that McDonald's China's international franchise market division (IDL) same-store sales increased by 9.4%, although it is the fastest growth among all segments, but it is still lower than the growth rate of 16.0% in 2022. In the fourth quarter of 2023, McDonald's China's international franchise market segment grew by 0.7%, which is undoubtedly weaker than the 16.5% growth rate in the same period last year.

At the same time, McDonald's main rival, KFC, is showing a very different dynamic. In 2023, KFC China same-store sales increased by 7%, significantly higher than the negative growth in the same period in 2022 (-7%). What's more remarkable is that KFC China's full-year operating profit in 2023 reached a record high of $1.2 billion, and 1,202 new stores were added, also hitting a record high.

Once upon a time, kids were hesitant between KFC and McDonald's. Today, however, the two brands have taken very different paths.

KFC has shown strong growth potential through the rapid expansion of the number of stores and the sinking of a wider market. By the end of 2023, the number of KFC stores has reached 10,296, while the number of McDonald's stores in China is only 6,420. Especially in third-tier cities and below, KFC has more than 3,000 stores, almost three times the number of McDonald's.

According to the "2023 Research Report on the Potential Value of China's Consumer Market" released by the Consumption Growth Research Institute, the total population of China's sinking market is about 1 billion, accounting for more than 71% of China's total population. Compared with first- and second-tier cities, consumers in lower-tier markets show a stronger willingness to spend. In the context of the current catering industry sinking as a growth keyword, KFC obviously occupies the lead.

At the same time, while McDonald's is raising prices, KFC has chosen a "price reduction" strategy. In FY2023, KFC's average order value decreased by 11% year-over-year, and transaction volume increased by 16% year-on-year.

Half a month before McDonald's price increase, KFC launched the "KFC OK three-piece set" priced at only 19.9 yuan. Yum China CEO Qu Cuirong emphasized at the earnings conference that the price of this product is very competitive, and revealed that the company plans to launch more promotions and products under the pressure of customer traffic, and the delivery fee may also be further reduced.

Under the current general trend of consumption downgrading, Chinese consumers have become more rational and more price-sensitive. McDonald's price increase strategy has undoubtedly made it lose its head start in this environment. Coupled with the lack of the total number of stores and the number of sinking stores, the gap between McDonald's and KFC may further widen in the future.

Cheap burgers "encircle" McDonald's

McDonald's is facing an increasingly severe challenge in the Chinese market, not only in the competition with KFC in the sinking market, but also in the strong challenge of local burger brands.

Local burger brands led by Wallace and Tustin quickly came out of the circle with extremely low prices and full portions, and won a group of loyal fans. Wallace started the three-piece set, the lowest price is only 10.5 yuan, and the Tustin supper spicy burger three-piece set, the price is 15.9 yuan, and there are often discounts, promotions, buy one get one free and other preferential activities.

In terms of taste, local brands have also innovated, such as Tustin holding high the banner of "Chinese burger" and launching Peking duck burger and sauerkraut barbecue burger, making the burger more in line with the taste of Chinese consumers.

Driven by the franchise model, these homegrown burger brands have expanded rapidly. Taking Wallace as an example, by the end of 2023, the number of Wallace's stores nationwide has exceeded 20,000, exceeding the number of McDonald's and KFC stores combined; Tustin has opened more than 6,000 stores in the past three years, and the number of stores nationwide has approached 7,000, which is comparable to McDonald's.

In addition to Wallace, Chinese burger brands such as Chu Zheng, Limburgburg, Oddington and Running Panda have also been favored by the capital market and have received investment one after another. Most of these brands started from small towns, county towns and lower-tier cities, and gradually encroached on McDonald's market share in second- and third-tier cities. 

According to Meituan's big data, the number of Wallace stores in first-tier cities has exceeded 1,400, and the average growth rate of orders and users has exceeded 50%. Tustin also officially entered the Beijing market in August last year and was warmly welcomed by consumers.

It can only be said that McDonald's did not expect that the hamburger market, which it had worked hard to educate for many years, was finally picked by its peers at a low price. The apprentices flocked to the top, but the master was in danger.

McDonald's also had a premonition that the situation was critical and began to fight back. On the one hand, McDonald's is accelerating the opening of stores in China, hoping to drive performance growth through scale effect. In 2023, McDonald's will have 925 net stores added in China, accounting for 59.8% of the total number of net stores added globally, and in 2024, McDonald's is expected to open 1,000 stores in China in an effort to expand its business to lower-tier cities.

McDonald's CEO Chris Kempczinski mentioned again on the conference call that he expects the number of stores in the Chinese market to reach 10,000 by the end of 2028. KFC is also frantically expanding stores, and Yum China CEO Qu Cuirong said that he hopes to expand the number of stores in China to 20,000 by 2026.

On the other hand, McDonald's also crossed over to the coffee business and established Mc Café to enter the coffee track with a higher gross profit margin, looking for a second growth curve. Indeed, in terms of gross profit margin, the gross profit margin of the coffee track is as high as 50%, while the Western-style fast food to which McDonald's and KFC belong is only about 18%.

Despite its deep feelings, "Maimen Forever" cannot be sustained by nostalgia alone. In the face of the aging of the core fan base of the post-80s and post-90s, McDonald's also has a "mid-life crisis".

In this diverse and highly competitive F&B market, how can we continue to attract the attention of a new generation of young people? This is something that McDonald's needs to think about, and it is the key to its continued growth in the Chinese market. Adjusting the size and price of the burger alone is clearly no longer enough to meet the current challenges.

Resources:

1. "McDonald's, Workers Can't Afford to Eat" 36kr

2. "McDonald's has also learned to "pick the door"? IQ Tax Research Center

3. "KFC McDonald's burgers are getting smaller and smaller? >> City boundary

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Personal opinion, for reference only