I can't eat McDonald's in the county

As competition in the fast food industry becomes increasingly fierce, McDonald's plan to open 10,000 stores has become the focus of the industry. This article will explore in depth the challenges and opportunities McDonald's faces in achieving its goal of 10,000 stores, and how it adjusts its strategy to adapt to the changing market environment.

"When you drink coffee, you think of Starbucks and Luckin Coffee, not because their coffee is the best, but because their stores are everywhere. The intensive opening of stores is to promote brand and scale effects, so that 20% of people can see you every day," said venture capital queen Xu Xin.

Based on the advantages brought by 10,000 stores, such as brand influence, market share, economies of scale, and better implementation of localization strategies, more opportunities for experimentation and innovation are provided. For example, many popular dishes on KFC's Chinese menu, from "Old Beijing" chicken rolls to preserved egg and lean meat porridge, roasted chicken and crayfish burgers, durian chicken nuggets, etc., are infused with Chinese elements. 10,000 stores have become the goal pursued by many restaurant chain brands.

In 2023, McDonald's pointed out that the number of stores in the Chinese market needs to exceed 10,000 by 2028. Under the guidance of the strategy, McDonald's will accelerate the expansion of stores in the Chinese market in 2023. McDonald's 2023 fiscal year financial report shows that in the past year, McDonald's has added 1,374 new stores in the international market, and 925 new stores in the Chinese market, accounting for 67% of the new stores.

Chris Kempczinski, global CEO of McDonald's, pointed out: Overall, McDonald's performed very well in China in 2023. We are satisfied with the performance of our business in China. We see strong growth there. We are also building 1,000 restaurants in China, so our development aspirations are on track, and from this perspective, we hope to do something similar in 2024.

In 2024, McDonald's continued to optimize its supply chain management. In January this year, it cooperated with Cainiao on RFID chip technology. RFID is the third generation of identification technology after barcodes and QR codes. It can track product data in real time through built-in microchips and has been widely used in supply chain tracking.

In other words, the cooperation between Cainiao and McDonald's is actually to explore McDonald's digitalization and automation. This coincides with what Zhang Jiayin, CEO of McDonald's China, pointed out that digitalization and localization are important strategies for McDonald's China to sprint to 10,000 stores.

On the other hand, in order to optimize internal management, at the "2024 All-Star Night" event held by McDonald's recently, McDonald's released a new generation of restaurant employee uniforms based on the job requirements of different positions, covering exclusive styles for restaurant managers, business partners, chefs, baristas and other positions.

Image source: McDonald's

According to the Zhaimen Catering app, McDonald's opened 404 new stores in the first half of this year. As of July 22, McDonald's has closed 51 stores and has 6,886 stores in operation. In other words, if McDonald's wants to achieve its goal of 10,000 stores by 2028, it will need to add at least 692 new stores every six months in the future. However, regardless of McDonald's internal problems or the continuous changes in the domestic catering market and consumers, McDonald's goal of 10,000 stores is facing considerable pressure.

01 McDonald's is expanding to lower-tier cities, and quality locations in county towns are becoming increasingly scarce

At present, the restaurant chains that have exceeded 10,000 stores in China include Lanzhou Ramen, Mixue Ice City, Shaxian Snacks, Wallace, Luckin Coffee, Juewei Duck Neck, Zhengxin Chicken Steak, and KFC. Although the categories of the 10,000 stores are different, these categories all have a wide coverage of the population and a strong basis for repeat purchases.

Image source: Narrow Door Catering Mini Program (as of July 22, 2024)

For example, rice and noodles are the staple food of domestic consumers, and the strong rigid demand of Shaxian snacks and Lanzhou ramen means that they can sink to the township market, which cannot explain why the number of Lanzhou ramen and Shaxian snacks stores has reached 20,000 to 30,000. Judging from the 10,000 stores of Wallace and KFC, McDonald's does have the gene of 10,000 stores.

Image source: Zhaimen Catering Mini Program

In addition, the efforts to sink into the lower-tier markets are also an important reason why these brands can break through the 10,000-store mark. Mixue and Wallace, which took the route of surrounding the city from the countryside, went down to the township market. KFC broke through the 10,000-store mark earlier than McDonald's, which is also related to its earlier sinking. In other words, how to sink better has become a must-answer question for chain restaurant brands. Zhang Jiayin also pointed out that the sinking market will be one of the breakthrough points for McDonald's China to achieve the goal of 10,000 stores.

Image source: Hydrogen consumption

It is undeniable that McDonald's has certain advantages in sinking into the county market. On the one hand, McDonald's official website shows that McDonald's has stopped recruiting franchisees. But after Haidilao announced the opening of the franchise policy, the official franchise phone was flooded with calls in a short period of time. The influence brought by the well-known brand is still very attractive to franchisees.

Image source: McDonald's official website

On the other hand, those born in the 1980s, 1990s and some 2000s have gradually become the main force of raising children in county towns. Compared with their parents' parenting concepts, this group of people pay more attention to scientific and healthy parenting. It can even be said that their parenting concepts are almost the same as those of parents in high-tier cities.

Zhao Dan, a post-95s mother from Linquan County, Anhui Province, told Hydrogen Consumption that when her children want to eat hamburgers and fries, she is worried whether the fries, hamburgers, and fried chicken sold at roadside stalls are made with expired or overnight ingredients. Based on this, she often takes her children to eat at the local Tustin and KFC. The fries and hamburgers sold at these stores may be a few yuan more expensive than those sold at roadside stalls, but after all, these products are high-calorie products, and her children eat less of them. If she eats them once in a while, she naturally needs to choose relatively healthy products.

As Zhao Dan said, when we visited local KFC and RT-Mart stores, we found that local KFC stores were not short of customers. If it was Saturday, Sunday, winter or summer vacation, the customer flow would increase to a certain extent. KFC's early education of county consumers also helped McDonald's to expand to the lower levels.

Image source: Hydrogen consumption

However, McDonald's, which has adopted the large-scale store model and is located in high-quality business districts, faces the core problem of lack of high-quality locations when entering the county market. Take the KFC RT-Mart store in Linquan County as an example. The business district also gathers many chain restaurant brands such as Luckin Coffee, Gu Ming, Haidilao, and Mixue.

Image source: Hydrogen consumption

As many formats such as snack discount stores, new energy vehicles, and restaurant chain brands have moved down to the lower-tier cities, there is not only a shortage of high-quality locations in county towns, but some formats often sign exclusive agreements with landlords around business districts or stores to hedge against competitive pressure, requiring that other brands are not allowed to enter within a certain range.

Take Jieshou, Anhui Province, for example. Laiyoupin, based on its first-mover advantage in the county, has taken over all the core locations at the crossroads of the county, which directly led to the snack chain being unable to open stores and had to open stores in the more down-to-earth township markets. To hedge against this problem, new tea and coffee brands such as Mixue Bingcheng, Guming, and Luckin Coffee have reduced the third social space and optimized the store model, thereby ensuring the number of new stores.

Image source: Hydrogen consumption

The problems that Snacks is busy with at this stage will also appear in McDonald's in the future. In May this year, KFC launched mini stores for the sinking market. By simplifying the menu and optimizing the equipment, the investment of a single store was reduced to 500,000 yuan. This is also the KFC store with the lowest investment cost so far.

In comparison, ten years ago, it took at least 3 million yuan to open a KFC, and it also required strong resource connections, and the payback period was usually 7 to 8 years. This not only snatched more potential franchisees in advance, but also won more high-quality locations in the county in advance.

In other words, McDonald's expansion into lower-tier cities in the future will not only face difficulties in finding quality locations, thus affecting the speed of store opening, but will also face excessively high store rents, leading to a substantial increase in single-store cost investment. This will undoubtedly pose a huge challenge to how McDonald's optimizes its single-store profit model.

02 County hamburgers are involved in low prices, and the taste of people born after 2005 and 2010 has become more picky

In addition to the difficulty in finding good locations, Wallace, Tustin, and KFC are dragging the county's Western fast food into a low-price era and are encircling the sinking McDonald's.

KFC's 2023 fiscal year showed that its average customer unit price fell 11% year-on-year, and its transaction volume increased 16% year-on-year. Yum China CEO Joey Wat once emphasized that under the pressure of customer flow, the company plans to launch more promotional activities and products, and delivery fees may also be further reduced.

In addition to KFC, Wallace not only launched a 1-cent burger promotion for new users on Douyin group buying, but also lowered the price of a single chicken burger to 5 yuan per piece. Tustin also launched a 9.9 yuan single and 18.8 yuan double meal.

Image source: TikTok

As mentioned above, with the high investment costs faced by opening stores in county towns in the future, the low prices of Western fast food in county towns will put a big test on the profitability of McDonald's county stores. In other words, how to continuously optimize supply chain costs while ensuring food safety, and thus better participate in internal competition, is another problem that McDonald's needs to solve in order to expand its 10,000 stores.

The reason behind the low prices of Western fast food in county towns is not only that county town consumers are more concerned about cost-effectiveness and are more rational, but also that the continuous changes in county town consumers are making Western fast food brands face pressure on customer flow.

Generally speaking, minors are the largest and most core consumer group of Western fast food in county towns. However, those born in the 2000s and 2010s, who grew up in the era of smartphone explosion, are much more mature than the outside world imagines.

Chen Zihan, a second-year junior high school student from a middle school in Shenqiu County, Henan Province, told us that, on the one hand, her classmates now pay attention to body management, for fear of being laughed at by their classmates for being fat. So they eat less fried and high-calorie foods such as French fries, fried chicken, and hamburgers, or even avoid them altogether.

On the other hand, whether it is the increasing convenience of express delivery in the county, the increasing ease of buying food on e-commerce platforms, or the increasing number of restaurants of various types and tastes in the local area, they are now more and more picky about taste. If they think a restaurant is unpalatable, it is basically equivalent to sentencing the restaurant to death, and they will basically not ask their parents to take them to this restaurant again.

As Chen Zihan said, Tustin, which is famous for its hand-rolled and freshly baked food, satisfies the increasingly picky taste of this group of consumers, which is why Tustin has grown rapidly from more than 500 stores in 2020 to more than 7,000 stores in 2023. But compared with KFC, McDonald's has always had problems.

Data from Huachuang Securities research report shows that in 2019, KFC developed more than 1,900 new dishes and launched about 400 new products, with new products almost every day, while the speed of new product launches at McDonald's and Burger King was more random.

As the number of KFC stores increases, it will not only be able to launch more products based on regional taste differences, but also continuously meet the taste differences of consumers born after 2005 and 2010, which will undoubtedly bring greater pressure on McDonald's customer flow.

03 Is McDonald’s ready to open 10,000 stores?

The 10,000-store brands mentioned above are almost all realized through the franchise model. For example, KFC’s official website mentioned that Yum China has opened franchises for KFC, Pizza Hut, Little Sheep, and Huang Jihuang.

Image source: KFC official website

The reason why chain restaurant brands choose the franchise model is not only because of the high operating costs and relatively slow store expansion brought by the direct operation model. On a deeper level, the lower the channel, the more it competes with circles and relationships, the more complicated the political and business relations are, the heavier the gangster atmosphere is, and the more it looks like a makeshift team. In addition to requiring franchisees to have financial strength and verify capital, many restaurant brands also focus on requiring franchisees to have relevant resources in the local market.

However, the franchise policy is also a double-edged sword. In addition to Haidilao's unique features, the market is concerned about whether franchisees can continue to use this service model. With the current intensified competition in the catering industry, the high cost of operation has led to a continuous extension of the payback period for franchise stores. In order to shorten the payback period, the food safety issues caused by franchisees using expired ingredients have become a common concern in the market.

Although restaurant chain brands will manage through regional supervisory inspections, store monitoring, strict material management systems, etc., it is difficult to truly eliminate such problems due to the game of human interests. This is also the reason why many restaurant chain brands have been repeatedly exposed for food safety issues in recent years.

The same problem also occurred in McDonald's. According to the Beijing News, McDonald's Zhengzhou Excellence Nonglian Restaurant and McDonald's Jinan University Restaurant both had problems such as changing the labels of expired ingredients to "extend life", using excessive frying oil, and cutting corners. The former is a McDonald's franchise store, and the latter is a McDonald's direct-operated store. In McDonald's internal food safety announcement, the restaurant's comprehensive grade in 2023 is the highest level A.

Image source: Beijing News

Although McDonald's apologized for the incident afterwards, the exposure of food safety issues essentially shows that McDonald's is not ready to expand its 10,000 stores in the Chinese market. McDonald's daily store assessments in the Chinese market include sales revenue, cost control, profit margins, customer satisfaction, promotional activities, etc.

Usually, the income of front-line store employees, restaurant managers, and store managers is linked to the store's profit margin. Although this can motivate them to manage the store on a daily basis, the profit-driven approach cannot explain why food safety problems also occur in McDonald's directly-operated stores.

Zhang Jiayin once pointed out that 50% of McDonald's China stores are located in third- and fourth-tier cities, and new stores are in high-tier and low-tier cities equally. Beijing has a (permanent) population of 23 million, and it is not enough to have only 400 McDonald's. Australia, with a population of 23 million, has 800 restaurants. From the perspective of population size affecting site selection and store number, it is indeed as Zhang Jiayin said.

However, as the number of McDonald's stores increases in the future, whether the existing management model can mobilize the enthusiasm of stores remains to be discussed.

On the one hand, the catering industry in high-tier cities is in a state of internal competition, and the customer flow of a single store is easily diluted, which is why many chain restaurant brands are either sinking or going overseas to find growth. In addition, McDonald’s price increase last year directly affected the revenue growth of McDonald’s single stores.

In the fourth quarter of 2023, the international franchise market where McDonald's China is located grew by 0.7%, which is undoubtedly weaker than the 16.5% growth rate in the same period last year. The growth rate of single-store revenue has declined, and the number of stores in high-tier cities continues to grow, which means that the interests of McDonald's existing franchisees and employees of directly-operated stores are affected. Under the game of human interests, McDonald's is facing a big test.

At the same time, in order to ensure the profitability of each store, McDonald's will also face the problem of optimizing costs, especially since the catering industry is a typical industry with heavy labor costs. Relevant data shows that labor costs usually account for 22%-26% of the domestic catering industry, and Haidilao, which is famous for its service, has a cost as high as 31.5%.

Source: Haidilao financial report

Manner's management method is to adopt the model of acting store manager instead of setting up store managers for individual stores. An acting store manager is responsible for at most 7-8 stores. The acting store manager and the store staff only have a KPI game relationship, rather than managing a single store, managing store staff and serving customers.

Generally speaking, daily KPI management, regional coordination, material management and loss control, employee management and appeasement, store promotions, customer complaint handling, etc. of a catering store are the main responsibilities of the store manager/boss.

However, if the store manager/boss only issues KPI assessment indicators and lacks human management, it is easy to cause dissatisfaction among store employees. This cannot explain why Starbucks and Luckin Coffee, which have far more stores and produce more coffee daily than Manner, have almost no cases of employees beating customers. In other words, McDonald's needs to adjust its internal system a lot more if it wants to break through the 10,000 store mark.

Conclusion

It is not easy to enter the county market. KFC and Tustin continue to seek change. The industry is involved in low-price competition. People born after 2005 and 2010 are becoming more picky about food. Food safety issues have been exposed. The internal management system needs to continue to change. With a series of problems, what can McDonald's rely on to truly break through the 10,000-store mark?

Written by CC Edited by Yang Yong