McDonald's in China Is a Tall Order
(Bloomberg Gadfly) -- McDonald's Corp. looks like it's gotten itself a happy meal in China. The consortium purchasing the assets, however, risks a bout of indigestion.
The world's biggest fast-food chain couldn't have done much better than locking up Citic Group Corp. and Carlyle Group LP as buyers of its franchise in Asia's largest economy. The $3 billion price tag that's being bandied about isn't insignificant either given McDonald's high-growth markets business -- which includes its China stores -- reported operating income of just $841.1 million last year and $320.1 million for the quarter ended Sept. 30.
With the sale, McDonald's gets out of running a difficult business in a country where tainted food scandals are par for the course and politics can hobble income. McDonald's blamed "temporary protests related to events surrounding the South China Sea" for denting its sales in the nation last quarter. Like rival Yum China Holdings Inc., it was an early entrant to China's fast-food scene but has seen its market share slip.
Offloading its some 2,800 restaurants in China and Hong Kong means the issues of growing competition from local players and how to appeal to digital-savvy, and increasingly health-conscious, consumers become someone else's problem. With a franchise model, McDonald's also stands to gain generous royalty fees.
The path ahead for Citic and its private-equity partner is less clear.
In theory, Citic, being Chinese, can help with menu changes that should appeal to local tastes. The financial-services firm is also extremely well connected -- the conglomerate was set up by Deng Xiaoping to attract foreign capital in the late 1970s, after all.
But beyond a stake in car dealer Dah Chong Hong Holdings Ltd., Citic has very little in the way of retail, and its experience in food is limited.
Japan's Itochu Corp. and Charoen Pokphand Group Co., the agribusiness firm owned by Thai billionaire Dhanin Chearavanont, did take a 20 percent stake in Citic last year. Itochu has some retail presence in China through its part-owned FamilyMart convenience stores, while Charoen Pokphand has a handful of consumer assets, including hypermarket chain CP Lotus. Leveraging that experience to run and expand McDonald's in China may be a stretch, though.
Carlyle, meanwhile, owns some Chinese consumer plays, including Tenwow International Holdings Ltd., which produces and distributes packaged food and beverages throughout the mainland. But after selling Babela, a chain of Italian-style outlets in Shanghai in 2012, it doesn't have a restaurant presence.
Taking on McDonald's in China, a business whose reputation is yet to fully recover from an expired meat repackaging scandal, won't be easy. For both Citic and Carlyle, it's a tall order.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story: Nisha Gopalan in Hong Kong at firstname.lastname@example.org.