Research Assignment on Management: McDonald's in China (Essay Sample)
Group project only need 3 pages
Management Concepts (MANGT 420)
Fall 2016 Group Project – McDonald’s in China
This project is intended to encourage you to apply the concepts presented in this class to some current management issues. Together with your teammates, you are to write a paper explaining and discussing the happenings outlined in the article indicated below.
The issues you are to write about were discussed in an article which ran in the Wall Street Journal recently, entitled “McDonald’s China franchise Deal Could Fetch Up to $2 Billion Up Front” Your group assignment is to prepare a brief (5-6 page) paper analyzing this article and arguing in support of your analysis. Describe the events and trends discussed in the article, and offer your ideas about the causes and effects of these events and trends.
The following list addresses specific elements of the assignment:
1. Gather information from the article, the internet, and/or other appropriate sources regarding the topic at hand. Develop a realistic understanding of the opportunities and difficulties and the causes of the trends and events discussed in the articles.
2. Collect information from the library, internet, and other sources sufficient to allow you to analyze and understand the issues and make meaningful comments.
1. Remember that this is a management class. The object is to apply management techniques to these real issues. Justify your assumptions, but do not get bogged down in marketing, finance, or accounting.
2. Limit your report (50 points possible) to 5-6 pages, plus exhibits, appendices, and citations, Remember to use and cite at least two sources in your individual paper other than the textbook.
3. Use the concepts taught in this class.
4. Your group grade will be based upon both your application of management principles and techniques and the clarity and organization of your report.
5. The papers are due by midnight of the days specified on the first page of these instructions. The grade will be reduced by one full letter grade for each day that a paper is late up to a maximum delay of two days. After the second day (i.e.- starting with day three), the paper will not be accepted and a grade of zero will be recorded.
McDonald’s China Franchise Deal Could Fetch Up to $2 Billion Up Front
Updated Oct. 4, 2016 2:06 a.m. ET
By Wayne Ma in Beijing and Rick Carew and Kane Wu in Hong Kong
McDonald’s Corp. Chief Executive Steve Easterbrook, aiming to slim down the Golden Arches and boost profit, has turned to the market where he can do something big, fast: China.
The Oak Brook, Ill., chain is looking to cut a deal to turn its 2,200-store empire in China—65% of which it owns and operates—into a cash machine through all-out franchising. The move, for which a partner could be determined before the end of the year, is expected to fetch between $1.5 billion and $2 billion up front from investors, people familiar with the matter said.
McDonald’s would also rake in an estimated 5% to 7% of sales for the 20-year life of the deal. It would keep a minority stake in these far-flung stores, while slashing its operational costs and preserving capital.
The timing of the initiative also reflects the maturing of the fast-food business in China, where McDonald’s and Yum Brands Inc.—owner of Kentucky Fried Chicken and Pizza Hut—have operated for a quarter-century.
As big consumer chains move from the familiar streets of Beijing, Shanghai, Guangzhou and other metropolises to smaller cities, they need Chinese partners with knowledge of the country’s real estate and market demographics to know where to put new stores and how to supply them.
“In the lower-tier cities, we want to accelerate, and a local partner would have more local wisdom and more local resources,” Phyllis Cheung, chief executive of McDonald’s China, said in an interview. “The whole idea of franchising is that you have more flexibility and speed to market—and are more able to answer to consumer needs.”
There appears to be a healthy appetite for the deal. A clutch of at least six bidders has shown interest in a McDonald’s China franchising deal, including U.S. private-equity giants Carlyle Group LP, TPG and Bain Capital LLC, according to people familiar with the situation. The three private-equity firms have teamed up with local Chinese partners, such as Citic Ltd. and Wumart Stores Inc., who know local market conditions. McDonald’s is also looking to cut a similar deal with outside investors for its South Korea stores.
In China and Hong Kong, McDonald’s is asking its potential partner to take over its more than 1,400 company-owned restaurants and build 1,300 new stores. It still has room to grow in China, the only major market where the number of Kentucky Fried Chicken stores—5,000 and counting—outstrips the number of McDonald’s stores.
The winner will operate in a country where the novelty of burgers, fries and shakes has long since faded. It will need to find new ways to satisfy Chinese consumers demanding healthier, more upscale and personalized alternatives.
Bessie Wang, 33 years old, began eating at McDonald’s in grade school soon after the fast-food chain entered China 26 years ago, becoming a fan of the company’s fried-chicken sandwiches. On a recent weekday, Ms. Wang was dining on a spicy chicken sandwich at the McDonald’s on Beijing’s Wangfujing shopping street. But her visits have declined. “Taste isn’t the issue; it’s health reasons,” said Ms. Wang, an office administrator. “I don’t need to go as often anymore because other restaurants offer fried-chicken dishes.”
Sales from established McDonald’s stores in China have bounced back from a supplier issue that led to shortages of hamburgers and chicken at some restaurants in 2014. Same-store McDonald’s sales in the country shrank for four consecutive quarters before they began recovering in the middle of last year, according to figures provided on the company’s earnings calls.
And competition is rising. Dicos, a Taiwanese-owned chain, for example, offers chicken sandwiches at more than 2,000 restaurants in China, matching the scale of McDonald’s. Another growing Chinese fast-food chain, known as Real Kung Fu, sports a Bruce Lee logo, offering bowls of Chinese noodles with beef and pork.
The growing competition, Ms. Cheung said, is one reason McDonald’s is looking for a Chinese partner with a “deep understanding” of China’s market, rather than one that can simply bankroll new stores.
Yum announced a similar move last year to spin off its KFC and Pizza Hut operations in China and maintain a foothold in the country through royalty payments.
For companies such as McDonald’s and Yum, moving toward a franchise-only model in China makes sense now because the market has matured to the point where there are more people with experience running fast-food chains and fast-casual restaurants, according to Ben Cavender, director at China Market Research Group.
“There’s a stronger talent pool, and they have the capability to operate a franchise and operate it well,” he said. “Brands are also clamoring to try to grow into new markets, and they might not be able to do it quickly by themselves, and they need help.”
McDonald’s in China
McDonald’s in China
The article titled McDonald’s China Franchise Deal Could Fetch Up to $2 Billion Up Front by Wayne Ma, Rick Carew and Kane Wu talks about why the McDonalds franchise deal in China is likely to succeed. On the surface, the claims by these authors might appear farfetched due to the competitive nature of the fast food business in the world. However, a clear examination reveals the Chinese market is open for franchising and that big companies such as McDonalds are likely to reap full benefits for such deals. This paper supports the claim made in the article about the likely success of the McDonald’s deal in China.
According to Wayne, Rick and Kane (2016), McDonald’s is likely to fetch between $1.5 billion and $2 billion upfront from investors who are interested in the deal. In addition to this, the company would also reap an estimated 5% to 7% of sales for the two decade life of the deal. While this claim might appear wild to some skeptics, it presents a lot of truth especially considering that western franchise brands have grown significantly in the country over the last ten years.
The growth of discretionary income among Chinese consumers means that the demand for quality, brand and convenience that is associated with western brands is likely to grow up significantly. The current trend shows that most Chinese middle class prefer to purchase goods and services from stores and restaurants that are franchises. For this reason, McDonalds will help in filling the needs of the Chinese middle class that is fast growing. The Chinese middle class is largely young and highly mobile and as such McDonald’s will perfectly fit into their needs due to the convenience that they offer to their clients. With this understanding in mind, it is evident that investors will be fighting to take hold of the McDonalds deal due to the profits that it presents to them. In addition to this, the claim made in the article that the fast-food business in China has matured is correct. According to research, the Yum Brands as well as KFC Corp which were among the first US franchises in China have grown very well. Following this trend, McDonalds is likely to reap in more benefits from franchising as opposed to running the business on their own (Edwards, 2011).
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