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In its effort to deal with macro-environmental trends that have slowed its sales in China, McDonald’s is embracing the benefits of franchising even more powerfully than it has in the past. Specifically, it is selling 80 percent of its stake in its operations in China to a conglomerate, agreeing to a 20-year term worth an estimated $1.66 billion. By handing over most of the operations to franchise owners, the corporation avoids the costs and liabilities of running the stores, while still retaining ownership of the brand and a portion of the proceeds. Unconfirmed reports suggest that in this deal, McDonald’s would receive 6 percent of the sales of the franchised stores in China. The move follows dwindling sales in China, where consumers facing some economic insecurity are turning more to inexpensive local options, such as noodle shops, for their convenient meal needs. Moreover, some proud Chinese consumers are choosing to avoid Western food brands, especially in the aftermath of quality scandals, in which several fast food chains received and sold expired meat. But according to the new franchise owners, 1500 new McDonald’s restaurants will soon open in more second-tier cities, adding to the 2400 that already serve mainland China. Buoyed by the promise of this approach, McDonald’s also announced its plans to move toward a model in which 95 percent of its restaurants, all around the world, are franchise operations.

Source: Wayne Ma, Kane Wu, and Julie Jargon, The Wall Street Journal, January 9, 2017