Millions of first-time car owners present a compelling case to build more McDonald's drive-through outlets in China - in time to profit from Beijing's 2008 Olympic Games.

Two years before the upcoming Olympics feed McDonald's sales, the fast-food giant entered into a strategic alliance to build McDonald’s outlets at choice Sinopec gas stations. China's number two oil company, Sinopec owns more than 30,000 gas stations.

In January 2007, McDonald’s launched its first drive-through restaurant in Beijing. McDonald’s had already opened 15 other drive-throughs including those in Shanghai and in the southern Guangdong Province.

Jeffrey Schwartz, McDonald’s China’s top executive, says that drive-throughs represent the future for Asian fast-food consumption. Boasting some 850 McDonald’s China restaurants, Golden Arches management plans to add 100 more outlets annually. More than half of the new restaurants will be drive-throughs which both produce high profits and boost sales during extended operating hours.

The growing popularity of drive-throughs and fast-food in China couldn’t accelerate at a better time.

Big Macs Become China Macs

August 7 next year is opening day for the 2008 Beijing Games.

Millions of Big Mac enthusiasts from around the globe will converge on the Olympic Village, hungry for both sports entertainment and fast food. To mark the occasion, McDonald’s has introduced the China-Mac, a Sichuan spicy menu item.

What better way to capture local and foreign customers than to have McDonald’s drive-through restaurants strategically located on travel routes to and from the Olympic stadiums? The potential customer base includes 1.3 billion Chinese residents plus millions of Olympic participants and fans from other countries. Large groups of spectators will commute to and from athletic battlefields each day.

Fast-Growing Asian Revenues

McDonald’s China is already reaping the rewards of the buildup to the upcoming XXVIX Olympics in Beijing.

In mid-October, the company known for its Golden Arches reported that third quarter 2007 sales from China rose almost 12% for the 3 month period ending September 30 – more than double last year’s growth rate.

Because the company reports its financial results in the softening U.S. dollar, some critics argue that favourable exchange rates for revenues from foreign territories like China inflate McDonald’s results.

Still, while China generates less than 10% of McDonald’s total revenues from all geographic segments, the People’s Republic continues to be a leading driver for McDonald’s growth both in terms of new stores opened and sales production.

Company-owned Asian Restaurants

Other critics point to weaker profit margins from company-owned restaurants in China.

In general, McDonald’s prefers franchised stores over company-operated restaurants. Because company-operated outlets require capital investments including equipment, signs, seating and décor, profit margins from franchised stores are typically higher. That’s why about 75% of McDonald’s outlets are franchised.

However, McDonald’s prefers to own and operate its restaurants in China. The company is waiting on the Chinese legal environment becoming more conducive for western-style franchising.

Financial Results Overshadow Fast-Food Critics

Fast-food sales per capita in the U.S. are 60 times higher than in China. For meals consumed outside the home, American spend about 85% on fast foods while the Chinese spend less than 10%. Looking at the big picture, those seeming disadvantages actually represent robust opportunities for dramatically improving McDonald’s sales volumes in China.

Galvanized by China’s vast and increasingly wealthy population, coupled with its growing network of McDonald’s drive-throughs, it’s easy to see how McDonald’s can gain millions of loyal fast-food fans by the end of the Beijing Olympics. This should easily sustain McDonald’s growth plans in China.

That is, at least until World Expo opens in Shanghai during 2010.

Sources For This Article

This article presents independent calculations and insights based on data drawn from source material on McDonald’s.com including McDonald’s 2006 annual report, Melissa Lee’s August 7, 2007 article ‘Companies bank on Beijing’s Olympic buildup’ and the August 14, 2006 article ‘Drive-through restaurants speeding ahead in China’ on Chinadaily.com.cn.