McDonald´s also sells its China operation - Ben Cavender

Ben Cavender

In line with expectations, McDonald´s has sold a controlling stake of its China and Hong Kong operation to private investors, after competitor Yum did the same last year. With the new financial resources, the China operation can improve fast, says Shanghai-based retail analyst Ben Cavender to Bloomberg.

Bloomberg:

Oak Brook, Illinois-based McDonald’s and rival Yum China Holdings Inc., which owns the KFC and Pizza Hut brands in the mainland, are combating rising domestic competition as they fight to retain middle-class Chinese consumers who increasingly demand high-quality and healthier dining options. The fast-food giant is also looking at further deals in markets such as South Korea, Japan and Southeast Asia as it streamlines its sprawling global operations. 

“Citic and Carlyle’s resources will allow McDonald’s to expand rapidly and refurbish old restaurants, which is expensive to do,” said Ben Cavender, a Shanghai-based analyst at China Market Research Group. “Given that McDonald’s lags behind KFC in terms of store count in China, we can expect them to expand aggressively and invest heavily.” 

Yum China Holdings and Starbucks Corp. plan to add about double the number of stores -- as many as 3,000 in China -- over the same period. 

Under the deal, Chinese state-backed conglomerate Citic and Citic Capital Partners will jointly take a 52 percent stake, while Carlyle will hold 28 percent. 

While Citic and Carlyle are paying a “substantial price,” for 20-year franchise rights, the food and beverage chains are “cash machines,” Cavender said. In contrast, Yum China licensed the KFC and Pizza Hut brands from Yum! Brands Inc. for 50 years, with automatic renewals that could make it possibly indefinite.

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Yum: selling fast food in a contrary market - James Roy

James Roy

Yum, with brands like Pizzahut and KFC, had a hard time because of food scandals. But worse is, says retail analyst James Roy to Bloomberg, is that increasingly heath-conscious consumers do not want their food anymore.

Bloomberg:

“They’ve made progress in China but that’s really from hitting rock bottom a couple of years ago after their food safety scandal,” said James Roy, a senior analyst at China Market Research Group. “They face a larger issue in the market with Chinese consumers becoming more health-conscious and moving away from fast food.”

More in Bloomberg.

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McDonalds says no wrongdoings found

An investigation by the labor authorities in Guangdong province has not shown any wrongdoings on the side of the company, McDonalds says in a statement, according to Bloomberg.

"Our interpretation of those laws has been correct,'' McDonald's China unit said in an e-mailed statement, citing an official finding by the Guangdong Labor Authority.

Together with KFC and Pizza Hut, McDonalds has been part of a months long uncover operation by a Guangdong paper. A formal complaint at the Labor Bureau forced both the labor authorities and the Chinese trade union ACFTU into action.

The article did not mention any results for the investigationsin KFC and Pizza Hut.

Update: Also Yum, the owner of KFC and Pizza Hut have been clear, All Roads lead to China has read in the Wall Street Journal. The score:

1.5 points to the Union who closed McDonald’s and were able to to highlight the need in the public eye to find ways to protect workers in the foreign food service industry
1 point to the students whose plight was the center of a media frenzy for a week
0 to Yum who stuck to their guns and neither conceded they paid too little nor let the union leverage the situation in
-1 to McDonald’s who are now moving their union discussions up a level as a result of the controversy

Undercover journalists revealed food chain trouble

from the newspaper

Months of undercover investigations by journalists have been at the basis of the current labor problem of Pizza Hut, McDonalds and KFC, a report in the New Express reveals, here in a translation by ESWN, called "McWages in China".
The detailed report is for sure going to cause the companies involved more trouble and might signal a strategy more companies will have to face. Only after the journalists filed official complaints the labor authorities reluctantly decide to investigate the reports.

This woman is 43-years-old. She claimed to have been laid off from her previous job and her husband had died from cancer. She worked at KFC and earned 4.7 RMB per hour. At first, KFC told her to sign a full-time contract. Then they wanted her to sign a part-time contact. This woman worked at least seven hours per day. She had never taken Lunar New Year off in eight years. However, she is coming up to ten years of employment and KFC does not intend to renew the contract with her.
According to the law, any employee who works for ten years cannot be dismissed.
This woman was in tears: "KFC claims to have helped so many impoverished students and hardship cases in China. I am a single mother and I need this job to feed my family. On the last week at the end of my eighth year contract, I received a rating of 100 for my work. Now they are saying that I am too old and they won't renew my contract."

The strategy of the companies when they smelled trouble looks dubious at best: the reissued new backdated contracts. That does not sound like a company who is complying with the law.

KFC, McDonalds, Pizzahut to cooperate with authorities

Both McDonalds and KFC has said on Thursday they were cooperating with the authorities in a probe into labor law infringements that has been expanding over the whole country, writes AP.

"No one cares more about our workers than we do," McDonald's China said in a statement seen Thursday. "The fact is, government officials make decisions on local labor laws. That's why we continue to work with local officials to get further clarity on their recently amended labor laws," it said.

The companies said they were looking for clarification of the law.

"McDonald's China always adheres strictly to the relevant national and local regulations, and we are consulting with the proper authorities to get the facts," it said, noting that the results of the investigation had not yet been disclosed.
A spokeswoman for Yum in China said the company was also seeking clarification but did not have any new statements.

Crisis, but no crisis management at food chains

More than a week old is the current PR-mess for KFC, McDonalds and Pizzahut, but for the time being the companies think they can get away by ignoring the crisis. I think they are wrong, but we will see.
What helps a bit is that - against my expectations - the issue is not really taken up in a massive way on the internet. I guess that most KFC-employees cannot afford internet access.

What is next for KFC, McDonalds and Pizzahut?

The temperature has been rising for the foreign food chains that have come under scrutiny for the - according to an investigation - breaking of the labor law.
China Hearsay has a "seen it, done it" approach of the case and paints the standard procedure for this kind of cases. I have to argue against it, since this does not look like a standard operation, this is real politics and the managers in charge of this crisis have reason enough to feel the beginning of a panic.
First, for Chinese standards this looks like a pretty well organized action. It was very clear after the trade union started to organize Wal-Mart and Foxconn against the will of the companies, they could not just go back to their offices and continue drinking tea. This looks like the plan for the moment and if I would be working at KFC, Pizzahut or McDonalds I would take this very seriously. This does not go away by itself.
Second, it is part of a policy shift on several levels. Until a few years ago, almost anything you did to encourage economic growth was ok and nobody really bothered about the negative side-effects. The different governmental institutions (and for the time being the trade union ACFTU is still one of them) are building a case, both for their bosses upstairs, but also for the Chinese citizens.
So, what is to be done? Raising the salaries over the minimum wages, paying the wrongly not paid wages and deeply, deeply apologize for mistakes being made. And set up a trade union of course. Again: this is not going over by itself.
Next, this is going to be a successful action on the part of the government and the trade unions. There is no ways this can be writing up by the state media without being a resounding success. That will cost some money, but will have consequences for other foreign companies too who will be next. In the long run, ok the very long run, it will also have consequences for the Chinese companies, since the Chinese workers know they will get support when they ask for their legal rights.

Trade Union confirms labor law violations

An investigation has shown that KFC, McDonalds and Pizzahut in Guangdong have indeed violated the labor regulation by not paying their workers the minimum wage, according to a senior ACFTU-leader today in the China Daily.

The fast-food giants must correct their wrongdoings and pay the workers retroactively, said Li Shouzhen, a senior official with the All-China Federation of Trade Unions (ACFTU).
"A joint investigation by the Guangdong provincial trade union and the labor authorities confirmed media reports about the companies' unlawful practice," Li told a news briefing in Beijing. "The federation will uncompromisingly fight any practice that violates workers' rights," he added.

It is another signal the heat will be turned up for the foreign food chains involved.

Pizza-hut, KFC, McDonalds on hitlist trade union

The ACFTU, China's only allowed trade union, has warned foreign foodchains not to underpay their employees, reports the China Daily. A trade union official was over the weekend interviewed by CCTV after media reports from Guangdong signalled that employees of KFC and McDonalds possibly did not receive the legal minimum wage.

Other media reports indicated similar problems in Taiyuan, Zhengzhou and Fuzhou

The foodchains have denied they are not following the labor law and local regulations.

Update: CNN quotes Beijing News, saying the problem may exist in at least ten cities, including Beijing and Shanghai.