TT-628 -- McDonald's Food ATMs? e-biz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, September 04, 2011, Issue No. 628


- What's New -- McDonald's Food ATMs?
- News -- Hulu coming to Japan
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback
- News Credits

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Interesting article in the Nikkei this week about
McDonald's Japan considering changing its business model
somewhat so as to raise the efficiency and profitability of
its workforce. In our minds, the issues confronting
McDonalds Japan are the same as for many other service firms
in the mature and now declining Japanese economy, and
their actions will be worth watching and learning from.

McDonald's Japan is a behemoth, with approximately 3,600
restaurants generating JPY324bn in revenues and JPY24bn net
profit a year. The company says that compared to other
countries the Japan operation trails far behind in profitability and
something has to be done about it. Basically Japan has a
profit margin of about 7% a year while Australia, for
example, enjoys margins of around 15% or more.

The Nikkei article says that this can mainly be put down to
two things: the cost of labor and lower productivity of
Japanese staff. The article in particular seems to blame
both the part-time nature of staff and thus the need for
constant retraining and relearning of tasks (since about
50% of its 150,000 part-timers turn over every year), and
also potentially the over-servicing of customers, when the
objective needs to be efficiency instead.

For sure, McDonalds has its work cut out. Not that many
kids in today's pampered droves are interested in making a
career with a company where ii is perceived that the pay is
low, the work is hard and often unpleasant, and the
opportunities limited. In addition, how do you beat out the
culture of over-servicing a customer in favor of efficiency
when it is bred into most Japanese kids since they were

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[...Article continues]

In the manufacturing industry, versus services, one can
simply decide to shutter a factory and start producing at a
low-cost destination off-shore. It may not be morally easy,
but more than 50% of Japanese manufacturers have already
taken this step or are about to do so. A services company
on the other hand (perhaps McDonalds with its global supply
chain is a hybrid) is stuck with the staff it has, because
in most cases it is the presence of people at the customer
interface which makes it possible to do business -- and
thus any further efficiency is necessarily focused on how
to get more output from those people for the same or lower
price. As a rule of thumb, in Japan, service businesses
count about 80% of their costs as the cost of people.

As far as we can see, the efficiency challenge for
McDonalds Japan can be boiled down to the following
1. Use less people by making the production system more
efficient (IT, ergonomics, pre-preparation of materials,
2. Use less people by lowering service standards or by
having customers do some of the work themselves (think
airline kiosks replacing check-in counter staff).
3. Pay the people less (call upon staff to sacrifice for
the company -- many Japanese firms are doing this).
4. Find people who are motivated to work as hard but accept
less pay, such as foreign workers.
5. Pay people with something other than cash (bring back
the post-war barter systems).
6. Find a way to move people to a low-cost location and
still offer the same service as now (remote operations)

It seems that McDonalds Japan is going to try most of these
ideas for itself. For example, the company continues to
invest hugely in IT and ergonomics, to ensure that kitchens
are fast, and that information is received at the right
place at the right time. Impressively, the company has
apparently spent about JPY30bn in the last 7 years to
develop a 20m person database of customers who, in terms of
discounts and coupons, can now automate their business
experience using cell phones at the store.

The Nikkei article also hints that the company plans to try
to assign some restaurant staff to overseas operations, so
as to let them see for themselves how a profitable store
should be run. However, we see this program presenting a
number of challenges. For example, efficiency abroad is
probably traded for customer "feel-good" over-servicing, so
how will that translate back here in Japan? Also, given the
large number of people working in McDonalds and the high
turnover, will the few people the company can afford to
send abroad make any noticeable difference? We suspect not.
Probably better that McDonalds start a company-wide
internal personal development course and use that to change
employee mindsets.

Another solution to get profits up is to "pay" employees
with barter. Following on from a successful example in
Australia, McDonalds Japan appears to be looking to offer
employees certain rights and privileges that are designed
to supplement otherwise undesirable salaries. This is a
good idea if they can pull it off. Apparently McDonalds
Australia has tied up with 300 other companies in a network
of merchants, to provide employee buying privileges, and
we're sure that McDonalds Japan can organize at least this
number of collaborating firms here. Thus being an employee
of McDonald's will give you the right to buy at discounts
elsewhere -- but will that really be motivating? Perhaps if
you're poor enough, it might. But so would simply
collecting the unemployment benefit and using an Internet
discounts tracking service.

In a way, this barter idea harks back to the 1950s and
1960's when Japanese companies still under earnings
pressure and paying out low salaries, would make life
better for their people by offering very low-cost/no-cost
employee housing, insurance, health, and even arranged
marriages. McDonald's solution will be cheaper for the
company, since it will not need to lay out any upfront
investment to arrange the privileges for employees.
However, we suspect that if they persist in this direction
the program may wind up feeding on itself. As other
companies follow suit, the competition will be on to start
offering more meaningful barters/discounts, and that could
get a lot more expensive.

Another way to cut employee costs, which has been
successfully implemented by convenience stores around the
nation, has been to replace expensive Japanese employees
with lower cost foreign ones. This is nothing new of
course, and long gone are the days when we were surprised
to find a foreign name tag on our server. But try as we
might, we can't find any data online about how many
foreigners McDonalds Japan is employing, and our guess it
isn't many. This would seem an obvious way to reduce costs,
and one that is possible through the "trainee" visas still
widely available.

In the future, if one considers the end game of all this
efficiency effort, we can only conclude that McDonalds will
follow the same path that banks and airlines have. Your
server will be a McFood "ATM," with a Disney character to
make it look friendly. The fact that it will offer free
character stickers and no queue will ensure people use it.
At the back end, and when things go wrong, the ATM will
offer you "error handling" service in a slightly foreign
accent, and the person behind that accent will be located
in Dalian, China. That same person, in order to ensure
maximum efficiency, will probably also be working a
computer console checking that the Chicken McNuggets chute
is clear of food jams and cross checking the temperature
and humidity of the restaurant to ensure customers don't
hang around inside the restaurant too long.

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+++ NEWS

- Hulu coming to Japan
- Tesco bested by Japanese competitors
- "Oh, we had enough power after all"
- Loan moratorium companies still going under
- Who will ANZ buy in Japan?

-> Hulu coming to Japan

The popular online movies/tv streaming service, Hulu, is
apparently coming to Japan as its first overseas foray.
The company already has 1m paying subscribers to Hulu Plus
in the USA, and is planning to offer the same service here as
well. It will cost around JPY1,480 per month and programs
are broadcast without advertising. ***Ed: One hopes that
they remember to put an English option on the Japanese
product, for all the non-Japanese in town who are likely to
be early subscribers.** (Source: TT commentary from, Sep 3, 2011)

-> Tesco bested by Japanese competitors

Sometimes being one of the biggest in the world just isn't
enough, especially when venturing into the bastion of
customer service and competition -- the Japanese market.
Tesco has now decided after 8 years and JPY35bn of
investment that it has had enough and is looking to pull
out of Japan. ***Ed: Apparently Tesco is going to try to
sell the business, but with just 129 stores, most of which
are small and under-performing, we doubt they will get much
for them.** (Source: TT commentary from, Sep 2,

-> "Oh, we had enough power after all"

We're not sure whether it's cause for celebration of
Japan's ability to "gaman" or not, but in any case,
consumers and industry really rose to the call when told
that they had to suffer for the sake of the country, by not
using air conditioners. We did our bit, sweating it out
many a day at the office. Now it turns out that TEPCO has
more than 35% power reserves and the power saving measures
will be ended September 9th. (Source: TT commentary from, Sep 3, 2011)

-> Loan moratorium companies still going under

Thanks to one-time banking minister Shizuka Kamei's
brainwave to have the government guarantee loans to Japan's
many struggling SME companies, there are apparently now
about 1.15m cases of companies who have received loan
repayment moratoriums since the end of 2009. Despite these
companies in most cases only repaying interest, still an
increasing number of them are going out of business
according to debt research firm Tokyo Shoko Research. The
firm says that from Jan to Aug 83 such firms with
liabilities of JPY64.8bn went under, about double the
number of companies and double the debt from last year.
***Ed: These loan guarantees are a huge hidden liability
for Japan, that many foreign economists are not aware of.
One can imagine that the total sum of guarantees is
probably around JPY1trn-JPY2trn.** (Source: TT commentary
from, Sep 3, 2011)

-> Who will ANZ buy in Japan?

Based on media reports about ANZ being interested in buying
part or all of Aozora Bank here in Japan, the shares of
Aozora rose for a while, before falling back. However, a
report out of Australia says that ANZ is actually looking
at more than one target in Japan, and is also considering
buying distressed Lone Star-owned Tokyo Star Bank. ANZ says
it wants an acquisition in Japan so that it can tap the
"massive liquidity pools" in Japan. ***Ed: Certainly going
after Aozora would give ANZ access to savings of all the
member banks related to Aozora. Not sure that they would
get anywhere the same benefit from Tokyo Star Bank, though
-- although TSB will be a lot cheaper.** (Source: TT
commentary from, Sep 1, 2011)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.



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I sincerely hope that McDonalds Japan does not import overseas "service" standards from McDonalds abroad for efficiency reasons. That just means that the customer experience in Japan will decline dramtically, and I suspect if that happens many Japanese customers will transfer their business to Mos Burger, Lotteria, etc. I know I would.

The Food ATM makes the most sense for the Japanese market. Japanese consumers (especially the younger ones) are pretty comfortable in using machines in that way, and if something goes wrong there are still workers to assist the customers.

For all of the critisicm they get, the airlines have done a good job in creating a good kiosk experience, and McDonalds Japan would be smart to learn from them.


you wrote "As a rule of thumb, in Japan, service businesses
count about 80% of their costs as the cost of people."

I have grave doubts about these 80% relating to restaurants. 80% of personnel costs may be correct with insurance companies, private schools or others.

As an example, my wife works part-time in a family restaurant. The restaurant is open from 10 am to midnight, and depending on the time of the day there are between 2 and 6 employees working (all of them arubaito/part, paid 850-1000 Yen per hour), plus the store manager (tenchou) much of the time.

To calculate the personnel costs, there are on average 4 employees working from 9 am to 1 am the next morning, so 16 hours a day * 4 people * 900 Yen = 57,600 Yen. The store manager is the only one who is a full employee, let's assume his personnel costs are 600,000 Yen a month, that adds 20,000 Yen a day to the costs. So the total personnel costs for the restaurant are around 80,000 Yen a day.

The restaurant has a sales of 200,000 Yen a day on average, and if 10% of that is profit, the costs of operating the restaurant are 180,000 Yen a day. But of these, only 80,000 Yen are personnel costs, so 44%.

Not sure if my calculation is correct, but these are my thoughts based on the figures that my wife told me.



Yes, you're right. The 80% employee costs rule probably doesn't hold for McDonalds, for two reasons:

1. They deliberately seek high-priced high-traffic areas, so the rents are likely to be a considerable cost component, more than most restauranteurs.

2. McDonalds has a high level of automation already, which reduces the number of people they need compared to a regular restaurant.

So I agree with your point here. However, it doesn't detract from the general thesis that McDonalds sees the cost of people as their main point of attack in reducing costs. I presume they don't think they can get rents down or automate much further than they have already...

Regards, Terrie