JIN-326 -- McDonald's Japan: In Need of a Strategy

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T H E J @ P A N I N C N E W S L E T T E R
Commentary on the Week's Business, Technology and Cultural News
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Issue No. 326
Wednesday June 22, 2005 TOKYO

+++ VIEWPOINT McDonald's Japan: In Need of a Strategy
1. Counting Its McNuggets Before They Were Sold
2. Globalization Where Localization Needed
3. Misreading the Japanese Market

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++ VIEWPOINT McDonald's Japan: In Need of a Strategy
1. Counting Its McNuggets Before They Were Sold

No sooner had McDonald's Holdings Company (Japan), Ltd. launched
a low-price strategy than it was forced to drastically revise downward
the forecast for a business that had been recovering. Will the company
that previously floundered after slashing prices fall into the same
rut twice?

McDonald's Co. (Japan), Ltd., the group's principal company, began
to stumble with the explosive sale of 100-yen menu items from April.
After such staples as burgers and coffee were priced at 100 yen, 20
million customers visited McDonald's restaurants over the next two
months. Around the same time the company instituted an attractive
flat rate of 500 yen for set menus. Here's how the company counted
its McNuggets before they were sold.

Many customers spent 100 yen and not a yen more. "The purchasing price
did not rise as expected," remarked Eikoh Harada, President
and Chief Executive Officer, of McDonald's Japan--a candid admission of
miscalculation. More than 30 percent of new customers came back,
but many of them were 100-yen spenders, the sort who linger over a
smoke, the morning paper, and the cheapest cup of java in town.

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2. Globalization Where Localization Needed

McDonald's, as a global company, has developed for its main markets a
one-coin strategy that has expanded customer base and contributed to
profits. McDonald's in America, which introduced a dollar menu two
years before the introduction of the 100-yen menu, succeeded in
increasing its customer base and shifting to a moderately priced set
menu.

These past several years McDonald's has shown poor results not only in
Japan but also in many countries and regions. The bewildering menu
revisions, the kamikaze launch of new outlets -- these and other
ill-considered moves have undermined operating efficiency. With
customers keeping away from McDonald's, the Golden Arches have lost
their glitter.

McDonald's in America has begun to prop up existing restaurants. It began
by extending business hours and reviewing the method of food preparation
for providing fresh items. McDonald's in Japan adopted the US-initiated
restaurant renaissance strategy last year.

From May of last year the number of customers was up over the previous
year, and the company recorded a bottom line in the black in the
previous period for the first time in three years, in spite of the
absence of a hit menu. CEO Harada had delivered in his first year in
the post. Core Mcfans were back.

This proves that a renaissance requires the gradual ratcheting up
of the level of service and quality. But their improvement is only
a first step. After existing stores recover their fundamental
strengths, a company must shift to consolidating operations. Harada
witnessed the success of the one-coin strategy in Germany, the US, and
Latin America. He was convinced it would also work in Japan. However,
he found himself confronted by an unexpected decline in profits.

The reason was that new Japanese customers were attracted only by the
novelty of the prices. The 100-yen bargains and 500-yen set menu were
the same old entrees at lower prices; the menu itself lacked novelty.
Customers were not attracted by the McDonald's dining experience
itself.

Uniform prices eliminate the stress of having to choose from a menu of
variously priced items. However, because prices were not standardized
in conjunction with the creation of a new mouthwatering menu, the
expanded customer base did not boost profits.

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3. Misreading the Japanese Market

Once again McDonald's crucified consumers on the cross of low prices.
Distributor and service industries that have misread the Japanese market
on account of US-led strategies for Japan are too numerous to mention.
Harada, the former chairman of Apple Japan, was brought in to revive
McDonald's. One would have expected his raison d'etre to have been the
capacity to see Japanese consumers from many different angles.

--Burritt Sabin

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EDITOR
Written and edited by Burritt Sabin (editors2@japaninc.com)

(C) Copyright 2005 Japan Inc Communications KK. All Rights Reserved.

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