USA food: Key player - McDonald’s

China is spearheading the aggressive Asian expansion of McDonald’s, but the restaurant chain faces several challenges there

When fast food giant McDonald’s Corp. released its financial results for 2010 in January, it was no surprise that Asia was its fastest growing region. Global expansion has always been a core strategy at McDonald’s, helping it to grow its way out of problems in any one market or region: the world’s largest restaurant chain now has 32,000 restaurants in 117 countries. But Asia is of particular interest, with rapid economic growth giving its growing middle classes more money to spend.

The company’s recent summary of its 2010 results confirmed that. While the company’s consolidated operating income increased by an impressive 9%, the regional contrast was striking. Europe was up 8%, the US up 7% and Asia/Pacific, Middle East and Africa (APMEA) was up 21%. The difference was even starker in the fourth quarter of 2010, when APMEA delivered operating income growth of 18%, against just 2% in Europe. That is worrying, because Europe remains the core of the McDonald’s business, accounting for around 40% of global revenue compared with 35% for the US and 21% for APMEA.

McDonald’s already knows that Asia will be key in serving up future growth. The region’s large populations, heavy demographic tilt towards young people, eagerness to sample Western brands and high existing recognition of the McDonald’s brand makes the region a mouth-watering proposition. Taking its low-priced menu into such markets has allowed McDonald’s to prosper even through the recession in the West during the past two years; it has posted increases in same-store sales for 30 consecutive quarters since early 2003.

Little wonder, then, that Southeast Asia is McDonald’s main target for future expansion. The company hopes to open 750 net new restaurants (1,100 before accounting for closures) in 2011 globally, compared with 541 and 609 in the previous two years. Of the 1,100, at least 500 will be opened in the Asia-Pacific region.

Asian aspirations

Take India, for example, where McDonald’s has stepped up its expansion plan for 2010 and 2011. The company hopes to cater to the country’s booming middle class, and has discovered pent-up demand for its products even in smaller cities, where new outlets have been mobbed by eager customers when they first open. One new outlet in the state of Madhya Pradesh began receiving over 10,000 customers a day as soon as it opened.

The company has customised menus to Indian tastes, avoiding religiously sensitive beef products and including vegetarian options. After opening about 35 new outlets in 2010 to take its India total to about 210 stores, it will open at least 45 more in 2011. Although it faces problems including poor roads, erratic power supply and a still-developing mall culture, revenues in India grew an estimated 30% in 2010 over the previous year. The company says that better infrastructure could even double that growth rate.

As interesting as markets like India are, however, China is by far the most crucial element in the company’s Asia strategy. After entering China in 1990, the company now has 1,200 restaurants there, employing 70,000 workers, its fastest growth in any country outside the US.

McDonald’s opened a record 165 restaurants in China in 2010 and aims to reach 2,000 total outlets there by 2013, by when China could become the company’s third-largest market. During 2011, McDonald’s plans to accelerate its China expansion aggressively, opening between 175 and 200 outlets and raising capital spending on the mainland by 40%.

Not alone

Many other companies have the same idea, however, so McDonald’s will face formidable local and global competition. The biggest threat comes from Yum! Brands (US), China’s biggest fast-food player, which has around 3,700 outlets of KFC, Pizza Hut and a proprietary Asian concept, East Dawning, in China. Yum earned 44% of its US$1.33bn operating income in the first nine months of 2010 from China, where it plans to open some 475 restaurants during 2011.

According to research firm Euromonitor International, total fast-food chain sales in China rose 12% in 2010 to Rmb60bn (US$9bn), of which Yum accounted for 40% while McDonald’s had only 16%. Meanwhile, Taiwan’s Ting Hsin Group operates more than 1,000 Dicos fried-chicken restaurants. Other companies, including California Pizza Kitchen Inc. (US) and seafood chain Nordsee (Germany), all have big China plans. Starbucks Corp. (US) plans to more than triple its China coffee stores to over 1,500 in the next five years.

Yum’s strategy of locating in lesser-developed cities with lower rent and less competition has paid off. But McDonald’s, which operates in 150 cities in China, lacks the distribution networks to follow suit immediately. Under its latest China plans, its new restaurants will be mostly in China’s biggest cities, expanding coverage there before going deeper. McDonald’s will increase delivery services to 550 locations from 400, and accelerate the opening of McCafés and 24-hour restaurants, while half of its new China restaurants will be drive-through outlets. Through new franchise models, McDonald’s may license restaurants within entire provinces, rather than in individual cities.

By 2013, McDonald’s will also remodel 80% of its existing outlets under a new global design, which could help it introduce premium products and raise prices. In other markets such as in the US and Europe, sales at renovated stores have grown by 7% above non-renovated stores. During 2011, the company will also introduce items in China targeted at health-conscious consumers. To ensure it has enough trained employees, in 2010 McDonald’s moved its Hamburger University training centre from Hong Kong to China. In August 2010, McDonald’s also raised a Rmb200m bond issue to fund store growth.

Price pressure

But competition is not the company’s only problem. McDonald’s has said it may have to raise prices this year, as food and commodity prices worldwide jumped. Although it did not forecast cost or price increases in Asia, it said costs would rise 2% to 2.5% during 2011 in the US and 3.5% to 4.5% in Europe. Asia will not be spared.

Indeed, in mid-November 2010, McDonald’s increased prices in China to offset higher raw material costs, given surging inflation. The increases were slight, at between Rmb0.5 to Rmb1 (15 cents) per item. While that is no great hardship for customers, McDonald’s will have to be cautious about further price hikes, to avoid discouraging customers already coping with high general inflation.

McDonald’s offering is built around its value proposition. For example, in China its popular Value Lunch programme has increased sales and traffic, and it has moved the idea into nearly every market in greater Asia, where it now accounts for over 10% of total sales.

McDonald’s could hold down costs by squeezing suppliers, or even shrinking portion sizes. It can also share costs with franchisees, since about two thirds of its operating profits comes from franchises and royalties, but must balance that with keeping franchisees happy, since over 75% of McDonald’s restaurants worldwide are franchised.

McDonald’s is fully aware that its global expertise is no guarantee of local success. In Japan, in early 2010, McDonald’s announced plans to close 430 restaurants by mid-2011 to improve profitability. Though the rapid economic growth in China and India gives it slightly more leeway for mistakes, competition will only get fiercer. Pricing could well prove crucial as McDonald’s hones its strategy for Asia.

McDonald’s Corp
McDonald’s Plaza
2111 McDonald’s Drive
Oak Brook, IL 60523
United States
Tel: +1 630-623-3000
Fax: + 1 630-623-5211


@3 years ago
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