The transformation in McDonald’s China over the past eight years is most visible in its store footprint. There were approximately 2,500 outlets when Carlyle joined a consortium that acquired the business in 2017. By the time of the private equity firm’s exit in 2024, there were over 5,400.

Yet the journey from a USD 2.6bn entry valuation to a USD 6.4bn exit valuation involved multiple operational touchpoints. X.D. Yang, Carlyle’s Asia chairman and co-head of its buyout strategy in the region, sees it as a testament to the firm’s strong partnership with fellow investor Trustar Capital, and McDonald’s Corporation, which retained a 20% interest.

“Together, we transformed the business by materially accelerating its growth profile, fully rebuilding its digital marketing capabilities, and significantly enhancing key aspects of its operations – including the supply chain and menu innovation,” Yang said.

For Carlyle, the experience has reaffirmed its approach to the quick service restaurant (QSR) space in Asia: working with iconic global and local brands; developing operating plans suited to local consumer needs and competitive dynamics; and recruiting top management talent and incentivising them to execute. Digitalisation, localisation, and strategic relationships are all key elements.

The private equity firm returned to QSR in mid-2024 with the acquisition of KFC Japan. New store openings, menu enhancements, and investment in digital innovation are on the stated agenda.

Staffing up, scaling up

Carlyle teamed up with Trustar and the Hong Kong-listed unit of CITIC Group to buy 80% of McDonald’s China – which spans mainland China, Hong Kong, and Macau – for USD 2.08bn. They held 28%, 20%, and 32%, respectively.

Carlyle’s exit was a USD 1.8bn buyback by McDonald’s Corporation, which took its position to 48%. Trustar holds the balance, having taken out CITIC’s position. A second liquidity event in 2024 saw Trustar extend its ownership via a deal that secured a full exit for the fund behind the initial investment, while a newer fund gained exposure to the business alongside various co-investors.

Trustar and Carlyle effectively led McDonald’s China following the 2017 investment. Yichen Zhang, chairman of Trustar, served as board chair of the investment entity, Grand Foods Holdings, while Yang was vice chair. At the operational level, they worked with management on value creation.

Augmenting management was an early priority. Shihong Chen joined as chief information officer, while Yabin He and Jim Shi were recruited as chief growth officer and chief supply chain officer. They came from the likes of Tuniu, Procter & Gamble, and Alibaba Group.

Chen assembled a 300-strong team to develop digital infrastructure and lead digital transformation. This involved upgrading McDonald’s China’s digital marketing capabilities and positioning the business to tap into emerging channels such as live streaming e-commerce.

In addition, steps were taken to ensure alignment between this upskilled management unit and the investors backing them. These included reorienting key performance indicators (KPIs) and bonus-based incentive structures, and installing an employee share ownership programme (ESOP).

“The China market potential is much more than one hundred or two hundred new stores per year. Once you put in the right people, right incentives and right capabilities, you have the potential to open many more stores,” said Dennis Wang, a partner in Carlyle’s Asia buyout team.

“We were confident that we could help scale the business much faster, for example, in terms of store openings and digitalisation.”

The target of adding more than 1,500 restaurants over a five-year period was comfortably exceeded. Almost all the newly opened outlets are directly owned, not franchised out, an approach seen as essential to delivering rapid expansion without compromising on economics or motivations.

Notable geographic incursions included the far-flung autonomous regions of Tibet and Ningxia in 2021 and 2023, respectively. This was part of an emphasis on lower-tier cities – enabled in part by setting year-one return thresholds slightly below standard levels – that began in more affluent eastern seaboard provinces like Jiangsu, Zhejiang, and Fujian and then spread nationwide.

“We focused on expanding store presence in the lower-tier cities because in top-tier cities like Shanghai and Beijing, there was already a good store density. Based on research conducted, it was clear that we were under-indexed, underpenetrated in the lower-tier cities,” Wang said.

Digital dividend

Technology played a role in this expansion. Previously, store openings were manual and inefficient, relying on handwritten notes and Excel files. Digital tools were developed to streamline the process, enabling real-time visualisation of each stage. The gains in efficiency and transparency led to a significant narrowing of the percentage spreads for new store one-year revenue forecasting.

Digitalisation efforts also focused on elevating customer satisfaction and driving sales growth. Initiatives included in-store self-service kiosks, WeChat mini-programs, a dedicated McDonald’s app, and a digital loyalty programme.

Wang described the loyalty programme, which boasted 260m members as of June 2023, as a “goldmine”. McDonald’s China could use customer data to build bespoke promotions based on individual consumption patterns. For instance, if an individual stopped buying for three months, they might receive marketing coupons tailored to their past preferences.

“In our opinion, that is better than any advertisement you can do. The effectiveness of reactivation was very high. That’s the magic of digital,” Wang added.

On store format, the core McDonald’s offering – around 200 square metres with a kitchen and seating area – remained. However, there was scope for flexibility: larger standard and flagship stores for high traffic and key trading areas, while drive-thru sites were prioritised.

Drive-thru is regarded as inherently more resilient than classic shopping mall outlets. It is convenient for parking, less reliant on mall traffic, and allows for greater control over customer density.

Despite the rise of take-out and delivery services, McDonald’s China recognised its enduring popularity as a destination for social gatherings like birthday parties, especially in lower-tier cities. Certain outlets were therefore designed larger and equipped with high-tech interactive equipment to entertain children, while menus featured big-bucket items suited to sharing.

Local nuance

As the store footprint grew, supply chains had to evolve. At the same time, the company made a strategic decision to diversify its supplier base and increase localisation. By the time Carlyle exited, 90% of raw materials were sourced locally. For example, McDonald’s China went from relying on five chicken suppliers, all global names, to cultivating a network of local and regional-level relationships.

“Local suppliers tend to be nimbler and, in some cases, more capable of collaborating with the brand on product innovation,” Wang explained. “Our focus on the diversification and localisation of the supply chain really helped support the company’s expansion across China and its overall product innovation capability and R&D efforts.”

Chicken wasn’t just a supply chain issue; its prominence on the menu was keenly debated by McDonald’s Corporation and McDonald’s China. The former was cautious, noting that chicken is not integral to the brand’s offering in most markets. The latter saw it as essential to success in China, observing that the meat accounts for 70% of nationwide protein consumption.

Ultimately, McDonald’s China was granted more local autonomy. By the end of Carlyle’s holding period, chicken products accounted for 50% of total sales.

“Trust and partnership with the QSR brand’s global team are crucial. This requires respect for the brand’s DNA, a deep understanding of the local markets, and transparent communication with the QSR’s global team,” Yang said.

In the same vein, while McDonald’s China adheres to global standards for core products like the Big Mac, elsewhere on the menu it caters to regional tastes. Traditional Chinese breakfast items like congee and fried dough sticks are available alongside international favourites. Limited-time offerings include the spicy bamboo shoot chicken burger, matcha soymilk pie, and pineapple chicken burger.

The relaunch of McCafé was another nod to evolving local demand, specifically the emergence of China’s coffee culture, although this wasn’t part of the original plan.

New coffee-making equipment and high-quality raw materials were introduced, packaging was redesigned, and branding and marketing efforts were enhanced. Within three months of the relaunch, the number of cups of coffee sold in each store had doubled. Today, there are more than 2,500 McCafé outlets across China.

Big ambitions

This expansion continued despite COVID-19 intervening midway through the project. Halting new store openings wasn’t an option; indeed, McDonald’s China was able to capitalise on favourable rental terms. However, it also had to play defence, instituting cost reduction measures and creating a leaner organisation at every level. External consultants helped navigate the crisis.

In 2023, McDonald’s China unveiled plans to double its restaurant count to 10,000 by 2028, which means opening 1,000 stores per year or one every nine hours. Neither heightened geopolitical tensions nor China’s slow post-pandemic economic recovery has reined in the company’s ambition.

Carlyle will not participate in this section of the journey. While Mergermarket reported that a continuation vehicle or a rollover mechanism like that pursued by Trustar was under consideration at one point, the GP opted for a full exit. Wang, who remains optimistic about McDonald’s China’s growth prospects, observed that fiduciary duty to investors was the deciding factor.

Some of the lessons learned will now be applied to KFC Japan – with the requisite amount of localisation. Yang believes McDonald’s China has more than earned its place in Carlyle’s QSR playbook, the exit underscoring the amount of value unlocked over the course of the investment.

“The transaction represents one of the largest and most successful corporate carve-outs and private equity buyout exits in China – and more broadly, across Asia, in recent years,” he said.