McDonald's Joins the Line Looking to Expand in China

DECEMBER 16, 2010 By LAURIE BURKITT WALL STREET JOURNAL

BEIJING—McDonald's Corp. is planning its biggest expansion in China as the chain faces mounting challenges from competitors and higher food costs.

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Pedestrians walk past a McDonald's restaurant in Beijing, China, on Wednesday, Dec. 15, 2010. McDonald's Corp., the world's largest restaurant chain, may add as many as 200 stores in China next year to compete with Yum! Brands Inc.'s KFC Corp.

The fast-food giant said it plans to raise its capital spending in China by 40% next year from this year's level. It will build as many as 200 new stores across the country next year, more than in any previous year, and swap out the old red and yellow decor for a more relaxed, European-style bistro design.

McDonald's declined to say the value of its investment. It also plans by 2013 to remodel 80% of its existing outlets.

"We're committed to China, changing the face of the brand to become a place where young consumers want to come and stay," Kenneth Chan, McDonald's chief executive of China, said at a news conference Wednesday. The golden arches won't disappear, but their treatment will be made more subtle. The designs in China will mimic those under way in the U.S.

The company, which has been in China for 20 years, is throwing greater weight into the country as competition in the fast-food arena is becoming increasingly fierce. KFC, owned by Yum! Brands Inc., leads all restaurant chains in China, with about 3,200 locations. McDonald's has around 1,100.

Taiwan's Ting Hsin Group, operates more than 1,000 Dicos fried-chicken restaurants. Other companies, including California Pizza Kitchen Inc. and German upscale seafood chain Nordsee GmbH, plan to expand or enter the market. Starbucks Corp. recently announced it plans to better than triple the number of stores it has in China in the next five years to more than 1,500.

By introducing updated designs for the new and existing stores, the Oak Brook, Ill., company also hopes to gain more leverage to introduce premium products and raise prices. China's inflation, which reached 5.1% last month, is increasing costs for McDonald's.

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McDonald's a month ago raised the prices of nine items, including chicken McNuggets, pies and ice cream, by 0.5 yuan to one yuan (one yuan is 15 cents) to counter China's soaring food prices. The company also increased prices in July and said it doesn't anticipate additional increases this year.

The company next year plans to introduce menu items in China targeted toward health-conscious consumers.

In Europe, the U.S. and elsewhere, the remodeling efforts have helped boost sales in renovated stores by 7% above those of nonrenovated stores, McDonald's said. The makeover is part of a 2010 global capital-projects investment of $1 billion.

New restaurants, half of which will be drive-through outlets, are planned primarily for China's biggest cities, such as Shanghai and Beijing, but will also be built in less-developed cities. Mr. Chan said the company aims to expand service in cities where it already operates, before moving deeper into China's smaller cities. McDonald's will increase delivery services to 550 locations from 400, and accelerate the opening of McCafés and 24-hour restaurants.

According to analysts, KFC is benefiting from its locations in China's lesser-developed cities, where rent is lower than big cities and there is less competition. McDonald's, which operates in 150 cities in China, currently lacks distribution networks that would allow the company to expand, said Keith Siegner, a restaurant analyst for Credit Suisse. "There's a tremendous opportunity for McDonald's if they broaden out," he said, adding that the company has sufficient capital to invest.

Mr. Chan said the chain is exploring new franchise models that would give the company the ability to license restaurants within entire provinces in China, rather than city-by-city.

"It took us 19 years to get to 1,000 stores," Mr. Chan said. "Now it's time to pick up the pace."