American iconic brand McDonald’s wants to take a bigger bite of China. Kenneth Chan, CEO of McDonald's China, shares his recipe for growth amid the country’s tightening policies and increasing competition from rival, Yum! Brands.
Q: What does it take to really crack the Chinese market, in your opinion?
A: I think it is really focusing on long-term strategy. McDonald's is committed and will continue to be committed to that.
In the 20 years we've been here, we've actually spent a lot of time building the infrastructure to allow us to grow. Funnily enough, when we were here way back, people criticized or commented on how we wanted to build this state-of-the-art distribution network system and manufacturing plants. Today, I say that's our competitive advantage. It allows us to really grow the business in a safe and efficient manner. At the same time, we've invested in the rest of our systems, operationally and people systems, to allow us to maintain our foundation of the business and grow rapidly.
Q: You increased capital spending by 25 percent and are overhauling all your stores to attract more customers. Why do it at a time when there's just so much talk of a slowdown happening in China?
A: McDonald’s is really here in China for the long term. We see that we can get to the next 1,000 restaurants within three years. So for us, that's really quick. We were the fastest market outside the US to reach 1,000 restaurants. I think by 2013, we will be the third-largest market within the McDonald’s system. We have the right format of restaurants to open within transportation hubs and residential neighborhoods, but we also see a great opportunity to open drive-thru restaurants in china.
Q: That’s your sweet spot?
A: It’s our sweet spot. It's been our sweet spot all over the world. As far as the re-imaging is concerned, our consumers are changing and the environment is changing. New competitors are coming in with new formats as well. We want to stay not just with the game, we want to stay one step (ahead) of the game.
Q: The Chinese Central Bank recently hiked interest rates. It is the first time it has done so in three years. Is this going to have any pressure on the Chinese consumer and thereby impact sales at your outlets?
A: You know, with interest rates we've also talked about some inflation in terms of wages. I think on the one hand, this obviously puts some pressure on our cost structure, but at the same time, it also continues to generate overall consumer wealth, which enables consumers to be able to be accessible to our category as well. So it's going to come, it's going to continue as a developing market, and we are well prepared for that.
Q: Your rival is Yum! Brands, which controls KFC among other brands. It has 3,500 outlets in 650 Chinese cities. You say you're aiming at 2,000 stores by the end of 2013. How exactly do you deal with such a formidable competitor?
A: They are a great competitor. But as I said, we're really focused on our own business. If you look at the overall “informal eating out” market, it’s a 300 billion dollar market. The western “quick service restaurant” categories are actually only a small fraction of that market, so there's room enough for everybody to grow. What we're more concerned about is that we expand in a very disciplined manner, with some flexibility to move faster of course. Disciplined in terms of making sure that our restaurants are positioned in the right cities so that we win and expand. So that our distribution networks can support them and that our resources are well placed. So we've been doing that for the last few years. We actually significantly improved our unit economics in these cities so now we've started to increase the pace of our acceleration.
Q: You're localizing the menu for the mainland Chinese market. But you haven't done it in a big way like KFC has done. By keeping to your core menu, aren’t you afraid that McDonald’s might risk being marginalized?
A: Well, I think as long as we continue to innovate, and we show them new things and build new categories. For example, we’ve entered into the McCafe category, the coffee category. Today, coffee is a small market. But in 20 years, it’s going to be a thriving market. The question is who is going to start growing the category. So I think it's a balance between offering the products that can sustain throughout the next 20 years, and offering local options today. But we also got to be careful. If you offer too (many) local options, everyone else down the street offers the same products and they can probably serve it better and they probably can do it at a cheaper price than you can. So I’m not sure that's also the best sustainable model.
McDonald’s opened its first Chinese outlet in Shenzhen in 1990 and now has over 60,000 employees across 1100 outlets. Its store “re-imaging” strategy is just one item on the menu aimed to tap China’s massive consumer market, which expects the “informal eating out sector” to expand at 10 per cent a year, compared with 2 to 3 per cent in the United States.
Catch the full interview on CNBC's Managing Asia.