McDonald’s entered the Chinese market in 1990 and initially experienced rapid growth and success. By 1997, it had 174 restaurants across China and was opening a new restaurant every three days. However, since the early 2000s, McDonald’s has struggled in the Chinese market. Sales have declined and many restaurants have been closed. There are several factors that contributed to McDonald’s struggles in China:
Reason 1: Failure to Understand Chinese Consumer Tastes and Preferences
When McDonald’s entered China, it essentially transported its entire American menu and business model to the new market. This proved to be a mistake. Chinese consumer tastes and preferences were very different than those of Americans. Key differences included:
- The Chinese were not accustomed to eating cold foods. They preferred hot meals.
- The Chinese palate was not used to cheese or dairy products which were staples of many McDonald’s menu items.
- The Chinese preferred more soup, rice, noodles, and vegetables than beef and potatoes.
- Eating out was viewed as more of a communal, social experience in China compared to the convenience-focused American model.
McDonald’s was slow to adapt its menu and dining experience to Chinese cultural preferences. By largely maintaining its American menu, McDonald’s struggled to gain traction with local consumers. Products that succeeded in America flopped in China. This includes the Big Mac, which Chinese customers complained was too expensive and not appealing to local tastes.
Reason 2: Increased Competition From Domestic Rivals
When McDonald’s entered China in the 1990s, it was the first major foreign fast food chain to do so. For years it dominated the landscape. However, since the early 2000s it has faced surging competition from domestic Chinese chains. These local chains were faster to adapt their menus and business models to Chinese preferences. Major competitors included:
- Yum China – Parent company of KFC and Pizza Hut. By 2021, Yum China had over 10,000 restaurants in China compared to McDonald’s 3,000. Yum adapted its menus by introducing items like congee and dough sticks for breakfast.
- Dicos – A Chinese fried chicken chain with nearly 2,500 restaurants nationally. Dicos allowed customers to dine-in and stay as long as they wished, aligning with Chinese cultural norms.
- Real Kung Fu – A fast-growing Chinese fast food chain known for its steamed rice dishes and Chinese-style menu.
These domestic chains with localized menus and customer experiences were able to chip away at McDonald’s market share. McDonald’s went from controlling 50% of the Chinese fast food industry in the 1990s to only 13% by 2013.
Reason 3: Food Safety Scandals
McDonald’s China suffered some major public relations crises stemming from food safety scandals:
- In 2014, a Chinese TV report showed workers at a McDonald’s supplier repackaging expired meat. This resulted in many customers avoiding McDonald’s.
- In 2016, a expired meat scandal at another McDonald’s supplier in China caused sales to drop by 20% that July.
These food safety scandals, amplified on social media, reinforced perceptions among Chinese consumers that American brands like McDonald’s were not as safe or reliable as local chains. This eroded consumer trust in the brand.
Reason 4: Over-Aggressive Expansion
In the 1990s and early 2000s, McDonald’s pursued an aggressive expansion strategy in China, opening new locations rapidly often in second and third tier cities. By 2013, McDonald’s had over 2,000 restaurants in China.
This rapid expansion strategy was problematic for several reasons:
- It decreased oversight and consistency. Opening so many new restaurants made it harder to adequately train employees and maintain standards.
- Many second tier cities lacked the big populations and high incomes needed to support McDonald’s high-cost model.
- It increased supply faster than demand. There were too many McDonald’s competing in some cities, cannibalizing each other’s sales.
This overly aggressive expansion contributed to declining same-store sales. Many locations failed to generate adequate traffic and revenue to be viable.
Reason 5: Increased Real Estate and Labor Costs
McDonald’s business model relies heavily on consistency, affordability, and efficiency. Two rising costs in China made it harder for McDonald’s to maintain this model:
- Real Estate Costs – The prices of good restaurant locations skyrocketed in many Chinese cities as the economy boomed. McDonald’s rent and property costs surged, hurting profitability.
- Labor Costs – Rising prosperity in China drove up wages. McDonald’s tried maintaining profits by increasing prices. But this made them less competitive and affordable compared to domestic rivals.
McDonald’s unique system dependent on operational efficiency was threatened by these escalating costs.
Reason 6: Perceptions as an “Outdated” Western Brand
When McDonald’s entered China in the 1990s, Western brands were viewed as modern, high-quality and aspirational. However, over the decades McDonald’s came to be associated with traditional mass production and even imperialistic American culture by some Chinese.
Younger generations viewed McDonald’s as outdated. They were drawn to cooler new domestic chains, as well as Starbucks and other Western brands perceived as more modern. McDonald’s brand identity as an iconic American symbol became a liability rather than strength in modern China.
Reason 7: Failure to Develop Menu Innovation Capabilities Locally
McDonald’s struggled to adapt its menu and products to Chinese tastes. A key reason was that menu innovation was tightly controlled from the corporate headquarters in America. Local franchisees had little say in the menu.
Domestic Chinese chains were far more nimble at innovating regionally popular menu items. They didn’t have to work through slow, bureaucratic processes like McDonald’s. The lack of menu innovation capabilities and autonomy at the local level prevented quicker adaptation.
Reason 8: Reliance on Franchising Hampered Control
Nearly all of McDonald’s locations in China are operated by local franchisees. McDonald’s owns very few of its own stores. While franchising enabled rapid expansion, it came at the cost of reduced oversight and control.
Franchisees made their own decisions on issues like menu offerings, hours of operation, and customer experience. This led to inconsistencies and deviations from the company ideal. Quality, service levels and cleanliness varied widely between franchised locations. Unlike wholly-owned stores, McDonald’s had limited ability to enforce standards. Reliance on franchising contributed to brand degradation over time.
Summary of Reasons for Failure in China
To summarize, the main reasons for McDonald’s struggles in the Chinese market included:
- Failure to understand local consumer preferences and adapt its menu
- Surging competition from more responsive domestic chains
- Food safety scandals that undermined consumer trust
- Overly aggressive expansion that decreased oversight and lead to oversupply
- Rising real estate and labor costs that hurt profitability
- Brand perceptions as outdated and too classically American
- Lack of menu innovation capabilities locally
- Reliance on franchising that reduced control and consistency
Lessons Learned for McDonald’s
McDonald’s challenges in China represent an important case study in the need to understand local markets and adapt branding and products appropriately. Key lessons include:
- Do not assume products and business models that work in one market will automatically translate to another.
- Deeply research and understand local customer preferences and cultural norms.
- Be willing to significantly adapt menus, store designs and branding to align with local market needs.
- Do not overlook the competitive threat from domestic competitors. Maintain agility to respond to market rivals.
- Develop local menu innovation capabilities rather than relying solely on globalcorporate decisions.
- Balance standardization and control with flexibility for regional customization.
McDonald’s Recovery Strategy in China
In recent years, McDonald’s has taken steps to recover and regain relevance in China:
- Introduced mobile ordering and pay-and-pick up services to align with Chinese digital lifestyles.
- Accepted WeChat and Alipay mobile payments to meet consumer preferences.
- Partnered with Chinese tech giants like Tencent to drive digital innovation.
- Added more rice, chicken, soup and veggie items to menus to suit local tastes.
- Launched regional menu specials like Curry Ketchup Chicken Wings and Cube Congee.
- Opened smaller locations in downtown and transportation hub areas rather than relying on large suburban units.
- Invested in modernizing designs and creating hip in-store experiences.
- Increased marketing via China’s major social media platforms.
Early results suggest a modest turnaround may be slowly taking root. After peaking at 2,073 locations in China in 2013, McDonald’s had reduced its footprint to just 941 by 2018. Sales finally rebounded in 2019 and have continued gradually improving. While still facing challenges, McDonald’s seems to be making slow progress revitalizing its brand appeal.
Conclusion
McDonald’s rapid early growth in China quickly reversed as the company failed to adapt to local market conditions. Competition from domestic brands, rising costs, food scandals, and misaligned menus and experiences with local preferences led to lost revenues and restaurant closures. McDonald’s learned difficult lessons about understanding Chinese consumers and adjusting strategy. It still faces challenges but has started to recover through tech partnerships, menu innovation, store revamps and digital engagement. McDonald’s struggles provide an important case study for international brands on the critical need for localization.