food / travel

Supersize The Franchise: McDonald's New China Strategy

Mini McDonald's in Shanghai
Mini McDonald's in Shanghai
Li Juan and Cui Dan

BEIJING — McDonald’s is planning to expand franchising in China’s biggest cities, such as Shanghai and Shenzhen, for the first time since its entry into the country.

Since its founding in 1955, McDonald’s has relied on its franchisees to play a major role in the company’s global success. Franchisees account for 80% of the 30,000 McDonald’s restaurants in 120 countries all over the world, and they create more than 70% of the fast food giant’s profits.

Unfortunately, this model has not been successfully replicated in the Chinese market. When McDonald’s first entered China in 1990, it chose to operate its own restaurants, judging that its high operating costs wouldn’t give franchisees much of a profit margin and that China also had few regulations about franchising.

The company began seriously recruiting franchise partners in certain provinces of China in 2010, but McDonald’s franchises account for less than 5% of all its outlets China, and they are mostly located in smaller cities.

Now McDonald’s plans to change the situation. It hopes to double the number of its Chinese restaurants — to more than 4,000 stores — in the next three years. “Developing the franchise business will become an important factor for achieving rapid growth in China for our company in the years to come,” one of its senior executives says.

It is interesting to compare McDonald’s strategy with rival Kentucky Fried Chicken (KFC). “Compared with McDonald’s, KFC is a lot more open in this aspect,” says Kang Jianhua, a researcher who follows hotels and catering at CIConsulting. “Not only has KFC extended its regions allowing franchising, it has also lowered the entry threshold in certain regions so as to boost the retailer’s number of franchisees. Increasing the franchisees is KFC’s important tactic in raising competitiveness.”

From 1990 to 2010, the number of McDonald’s restaurants in China grew at an annual pace of 17% — far lower than in certain other Asian-Pacific markets such as Japan. But by 2013, China had become the company’s third-largest market in the world.

McDonald's Chinese New Year set meal — Photo: HenryLi

Though McDonald’s restaurants outnumber KFCs globally, the latter has more stores in the Chinese market, with nearly 5,000 outlets. Even Dicos, a local chain offering Western-style food in 2,000 stores, outnumbers the American giant.

Supersize it

“Size advantage plays an important role for chain store operation,” says Li Weihua, a franchising expert and professor at China University of Political Science and Law. “In a competition the value of the number of stores is not to be underestimated.” In Li’s view, McDonald’s is under enormous pressure to be more competitive in China.

Much of this pressure comes from McDonald’s itself. The company’s global income comprises three parts — earnings of its direct sales stores, service fees from franchisees, and the real estate operating income (property rental payments from franchisees). The latter two revenue streams are particularly crucial.

In 2012, as the company’s annual report showed, the franchisees had a $7.4 billion gross profit, more than twice the $3.4 billion of direct sale stores. Meanwhile, of the $8.9 billion of the franchisees’ turnover, $5.8 billion came from rentals.

“People usually think that we sell hamburgers. But in fact we are a real estate dealer,” the fast food empire’s founder Ray Kroc once said. That’s the secret to the company’s long success. Through long-term leasing or by purchasing land and then building, the retailer sublets the stores to the franchisees to help generate profits.

But this profit model didn’t work for McDonald’s in China. Because of China’s restrictions on land purchases and buildings with foreign funds, the food giant owns less than 10% of the properties its stores operate in China. In the United States and Europe, this figure is around 60%.

At the same time, rental costs in China’s first- and second-tier cities are rising sharply. Most McDonald’s stores are located in bustling commercial districts, and most of them have signed a lease for 10 or 20 years. Because many of these stores’ leases are about to expire, McDonald’s will be hit with soaring rental costs.

In Kang Jianhua’s opinion, expanding franchises will reduce pressure on the company in terms of rental costs and create more reveune with franchise fees.

Of course, challenges will follow too. The first question is whether McDonald’s current management and overall operational capability in China are strong enough to support the franchising expansion. After all, the food giant’s development in China hasn’t been all that smooth, and China is still a less-than-ideal legal environment for franchising.

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Society

What It Means When The Jews Of Germany No Longer Feel Safe

A neo-Nazi has been buried in the former grave of a Jewish musicologist Max Friedlaender – not an oversight, but a deliberate provocation. This is just one more example of antisemitism on the rise in Germany, and society's inability to respond.

At a protest against antisemitism in Berlin

Eva Marie Kogel

-Essay-

BERLIN — If you want to check the state of your society, there's a simple test: as the U.S. High Commissioner for Germany, John Jay McCloy, said in 1949, the touchstone for a democracy is the well-being of Jews. This litmus test is still relevant today. And it seems Germany would not pass.


Incidents are piling up. Most recently, groups of neo-Nazis from across the country traveled to a church near Berlin for the funeral of a well-known far-right figure. He was buried in the former grave of Jewish musicologist Max Friedlaender, a gravesite chosen deliberately by the right-wing extremists.

The incident at the cemetery

They intentionally chose a Jewish grave as an act of provocation, trying to gain maximum publicity for this act of desecration. And the cemetery authorities at the graveyard in Stahnsdorf fell for it. The church issued an immediate apology, calling it a "terrible mistake" and saying they "must immediately see whether and what we can undo."

There are so many incidents that get little to no media attention.

It's unfathomable that this burial was allowed to take place at all, but now the cemetery authorities need to make a decision quickly about how to put things right. Otherwise, the grave may well become a pilgrimage site for Holocaust deniers and antisemites.

The incident has garnered attention in the international press and it will live long in the memory. Like the case of singer-songwriter Gil Ofarim, who recently claimed he was subjected to antisemitic abuse at a hotel in Leipzig. Details of the crime are still being investigated. But there are so many other incidents that get little to no media attention.

Photo of the grave of Jewish musicologist Max Friedlaender

The grave of Jewish musicologist Max Friedlaender

Jens Kalaene/dpa/ZUMA

Crimes against Jews are rising

Across all parts of society, antisemitism is on the rise. Until a few years ago, Jewish life was seen as an accepted part of German society. Since the attack on the synagogue in Halle in 2019, the picture has changed: it was a bitter reminder that right-wing terror against Jewish people has a long, unbroken history in Germany.

Stories have abounded about the coronavirus crisis being a Jewish conspiracy; meanwhile, Muslim antisemitism is becoming louder and more forceful. The anti-Israel boycott movement BDS rears its head in every debate on antisemitism, just as left-wing or post-colonial thinking are part of every discussion.

Jewish life needs to be allowed to step out of the shadows.

Since 2015, the number of antisemitic crimes recorded has risen by about a third, to 2,350. But victims only report around 20% of cases. Some choose not to because they've had bad experiences with the police, others because they're afraid of the perpetrators, and still others because they just want to put it behind them. Victims clearly hold out little hope of useful reaction from the state – so crimes go unreported.

And the reality of Jewish life in Germany is a dark one. Sociologists say that Jewish children are living out their "identity under siege." What impact does it have on them when they can only go to nursery under police protection? Or when they hear Holocaust jokes at school?

Germany needs to take its antisemitism seriously

This shows that the country of commemorative services and "stumbling blocks" placed in sidewalks as a memorial to victims of the Nazis has lost its moral compass. To make it point true north again, antisemitism needs to be documented from the perspective of those affected, making it visible to the non-Jewish population. And Jewish life needs to be allowed to step out of the shadows.

That is the first thing. The second is that we need to talk about specifically German forms of antisemitism. For example, the fact that in no other EU country are Jewish people so often confronted about the Israeli government's policies (according to a survey, 41% of German Jews have experienced this, while the EU average is 28%). Projecting the old antisemitism onto the state of Israel offers people a more comfortable target for their arguments.

Our society needs to have more conversations about antisemitism. The test of German democracy, as McCloy called it, starts with taking these concerns seriously and talking about them. We need to have these conversations because it affects all of us. It's about saving our democracy. Before it's too late.

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