It eyes taking advantage of the growing middle income population.
McDonald's has announced its plan to break into China's Tier III and IV cities, as consumers in these areas become wealthier and have greater levels of disposable income to spend within the food service sector. It is doubling its number of restaurants in the country from the current 2,500 in 2017 to 4,500 by the end of 2022 which makes China the largest market outside of the US.
The new strategic partnership announced a series of development initiatives termed "Vision 2022" that aims to achieve double-digit sales growth annually through the opening of 500 stores per year. Vision 2022 includes plans to increase McDonald's portfolio mix in Tier III and IV cities to form approximately 45% of all McDonald's restaurants in China, while boosting delivery capacity and introducing a "digitalised and personalised" dining experience.
BMI’s analysis noted that McDonald's focus on China is wise, considering the growing number of households entering the middle income bracket who will be able to afford dining out. The middle income segment of the population is forecast to grow by 47.3mn over 2017-2021, reaching 181mn households in 2021. This is leading to higher discretionary spending among the Chinese consumer.
Furthermore, a large component of the population that is inclined to eat out is the young adult segment which will account for approximately 30% of China's total population in 2017, according to BMI’s forecasts . Another age segment that will be attracted to McDonalds is the 5-19 years age range that is estimated to form 17.2% of the total population in 2017. BMI projects Restaurant and Hotels spending in China to benefit specifically from increased income levels and a large young adult population with growth in spending in this segment forecast to expand by 7.6% per annum in 2017-2021.
“Looking at China's existing footprint, we believe the company will expand into the Southwest and Northwest regions, while increasing their penetration in South Central region. In the Shaanxi province in the Northwest region, we see strong potential in the cities of Hanzhong, Weinan and Yan'an based on the population size, while in Yunnan province, the cities of Chuxiong, Dali and Yuxi would also offer expanision opportunities for McDonalds,” said BMI.
McDonald's China expansion will reportedly enable the company to continue to grow, as it faces slowing demand in its domestic market of the US, as growing numbers of American consumers embrace the 'healthification' trend. Its comparable guest counts experienced a 2.1% drop in 2016, and the demand for McDonald's core product offering is weakening as meat and poultry consumption continues to slow year on year, dropping from 40.2% of total consumption in 2007 to 38.0% in 2017.
However, McDonald's China expansion will place the company in further competition with the country's biggest fast food company, Yum China Holdings, a subsidiary of Yum Brands.
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