McDonald’s Assumes New ‘Golden Arches’ Name in China

McDonald’s name change became an online joke after its announcement on October 25. Records from the Administration of Industry and Commerce show McDonald’s changed its Chinese business name to “Golden Arches (China) Co. Ltd” on October 12.

 The former McDonald’s (China) told China Entrepreneur that after its strategic cooperation with CITIC and Carlyle, McDonald’s (China) had decided to change the name of its Chinese headquarters to Golden Arches (China) Co. Ltd. The change would be limited to its business license and not affect day-to-day business. McDonald’s will continue to serve customers with enthusiasm, and the name of McDonald’s, its food safety standards, and operating process will remain unchanged, it said.

Golden Arches: Understanding the name

Readers began to speculate on the name’s origin as soon as news broke. Some Internet users reported that CITIC had decided to rename McDonald’s (China) early on in the acquisition process and the company hired a fortuneteller to make the name. That story had not been confirmed. Almost all netizens shared the same opinion about McDonald’s new name. Wang Guanxiong, a commentator, said “Golden Arches” sounds too rustic.

McDonald’s (China) said the “Golden Arches” name was not selected on a “whim,” and the company has a long history with the name. In addition to its similarity to a capital M, the McDonald’s logo can be viewed as a pair of golden arches. In America, the chain has been colloquially called the Golden Arches for decades, and the literal translation is exactly the same as McDonald’s (China) new name.

It’s not the first time that McDonald’s (China) has been referred to as the Golden Arches. The appeared in the title of Golden Arches East, a book about McDonald’s Asian business. Two decades ago, Thomas Friedman, a New York Times columnist, put forward “the Golden Arches theory of conflict prevention.” In Thomas’ view, any two countries with McDonald’s would not go to war with each other. This theory depicts a world based on the “economic man” at the end of cold war, which means human will have Big Mac and fries instead of desire for war.

It’s fair to say that McDonald’s and the Golden Arches have always been And this time, when McDonald’s (China) decided to change its name, perhaps, it didn’t imagine there would be such a heated discussion among netizens.

History Between McDonald’s and CITIC

The change took place after McDonald’s became a Chinese capital controlled company in August 2017. The origin of cooperation between McDonald’s and CITIC’s dates back many years. Before selling its stake in China, McDonald’s stumbled in the Asian market and sold off its stake in regions such as Japan and Latin America.

In 2013, McDonald’s began selling Chinese food. Just like KFC, it launched takeout service. The change helped the business to localize.

In March 2016, McDonald’s announced plans to “introduce strategic investors” and sell 2,800 stores on Chinese mainland and Hong Kong. By way of franchising, McDonald’s transferred ownership of the restaurant to its franchisees. In 2016, McDonald’s opened 250 new stores on the Chinese mainland. McDonald’s holds its investors to a standard of honesty, financial stability, and in-depth understanding of the Chinese market. At the time, New Hope Group, ChemChina, and other companies were interested in purchasing McDonald’s domestic business.

McDonald’s chose CITIC.

On January 9, CITIC Limited, CITIC Capital, and Carlyle Group, which are all affiliated with CITIC Group, announced a strategic cooperation with McDonald’s and formed a new company. The new company would become McDonald’s franchisor in Chinese mainland and Hong Kong for the next 20 years.

On August 8, McDonald’s (China) was officially established and announced its receipt of strategic investment by CITIC Capital and Carlyle Group. The new company paid $2.08 billion to acquire McDonald’s business on the Chinese Mainland and Hong Kong. CITIC held a 52 percent stake while Carlyle and McDonald’s held 28 percent and 20 percent respectively. CITIC became the largest shareholder in McDonald’s (China).

Why McDonald’s Favors CITIC

In 1990, when KFC opened its first store in Beijing’s Qianmen, McDonald’s entered the Chinese market in Shenzhen, near Hong Kong. McDonald’s knew nothing about mainland market and hoped to learn from Hong Kong’s experience. Today, McDonald’s has more stores than any other fast food chain, but only half as many Chinese locations as KFC.

There are two reasons why McDonald’s failed to expand rapidly in China: first, McDonald’s insisted on making hamburgers its main product; second, it had high standards for its supply chain. Caijing News reported on McDonald’s supply chain issues: the company asked suppliers to enter the market before it arrived, but it took three to five years to complete the preparations. Consider the potato, one of McDonald’s core ingredients: McDonald’s has strict requirements for the soil, water quality, environment, species, and size, and the company searched for suitable farms years in advance. The same held true for other ingredients such as beef and chicken. After selecting a Chinese supplier, McDonald’s had to build a cold shipment system. Cold shipment was extremely hard to achieve high in third- and fourth-tier cities, which limited McDonald’s expansion.

Compared with other options, CITIC was the best choice. First of all, CITIC Capital’s investment in SF Logistics could help McDonald’s with its logistical and cold shipment problems. Second, CITIC Pacific’s commercial real estate could provide convenient locations for McDonald’s stores. Compared with other catering enterprises, McDonald’s operates more like a real estate company. It owns the world’s most valuable corners and intersections in the United States and other countries. One-third of McDonald’s income comes from direct sales and two-thirds from franchises. One important potion of the income from franchise is a return on the value of the property.

In addition, CITIC has pledged to rely on existing management and to pursue the concept of “professionals do professional stuff,” so McDonald’s is expected to maintain operational independence. This is certainly one of the most important changes for McDonald’s China.

Localization can also be risky

McDonald’s once announced plans to boost double-digit sales growth in the next five years after working with CITIC and Carlyle. And it is expected by the end of 2022, McDonald’s restaurants in Chinese Mainland will increase from 2500 to 4500 and its speed of opening a new restaurant will gradually increase to 500 in 2022 from 250 in 2017. So in 2022, China will become the second largest market for McDonald’s behind the U.S. About 45% of McDonald’s restaurants in Chinese Mainland will be located in third-and-fourth tiered cities, with more than 75% of restaurants offering delivery services.

These may mean that McDonald’s has finally met turning point in its transformation road. And its expansion in China will pick up speed. However, everything may change, and the localization is at risk.

First on the product, marketing guru Milton kotler once said that one of the problems McDonald’s encountered in China was “mechanical damage by identical products”. McDonald’s brought American products to the Chinese market without any change. At first, McDonald’s food in China was the same as that in the United States. Today, when we go to McDonald’s, we could see diverse products. Kenneth Chan, McDonald’s former CEO in China, constantly promoted new products in China, including McCafe, Dessert Station and Drive-Thru, which were launched by him in 2009 and 2015. Such moves undoubtedly helped boost sales, but in the long run, too broad expansion damages the value of burger, which is McDonald’s core product.

Second, by operation, after the franchise strategy, McDonald’s may lose control over risks of intellectual property rights, the source of food and the service quality. And these unstable factors certainly impact the stability of the enterprise. McDonald’s must consider how to better control a franchisor.

In fact, it’s not the McDonald’s alone that brought in strategic investors. Its longstanding rival Yum! Brands is doing the same. For many western fast food companies, it is crucial to adapt quickly to China’s market changes and to make effective responses. But at any rate, the bottleneck is followed by watershed, and McDonald’s seems to have a long way to go.

This article originally appeared in China Entrepreneur and was translated by Pandaily.