Turning Things Around: How McDonald’s is Addressing Its Sales and Revenue Decline in Japan
Global Brand, Local Flavor
MacDonald’s has operated in Japan for over three decades, and with approximately 4,000 locations in the country, there is no doubt that the global fast food giant has a strong presence in the Land of the Rising Sun. In fact, the importance of the Japanese market for McDonald’s is evident in its position as the largest foreign market for the company, with about 13 percent of McDonald’s worldwide outlets located in Japan.
McDonald’s has become so entrenched in everyday life in Japan that George Rizer, an American Author, once claimed in his book ‘The McDonaldization of Society’ that “a Japanese Boy Scout was surprised to find a McDonald’s in Chicago; he thought it was a Japanese firm”. Although McDonald’s restaurants in Japan have the same menu and standard food tastes as any McDonald’s around the world, they also have some locally inspired foods to their menu in line with local Japanese culinary and cultural preferences.
In line with the need to cater to local tastes, McDonald’s Japan introduced, among other products, the Rice Burger, Teriyaki Burger, Green Tea ice-cream.
In addition to slight changes in the menu, other differences emerged between McDonald’s United States and McDonald’s Japan. These differences relate to how McDonald’s restaurants were perceived by Japanese consumers. Most Japanese consumers consider McDonald’s products as snacks as opposed to ‘real’ meals. McDonald’s therefore did not pose a serious threat to the Japanese lunch or dinner market, and its positioning in the Japanese market seemed to play to this advantage.
One of the main explanations for this perception of McDonald’s products as snacks is that most products on the McDonald’s menu, such as hamburgers, cannot be shared amongst several people. Sharing is an important part of Japanese dinner or lunch time, because it brings a sense of community. Nevertheless, McDonald’s have periodically revised its product offerings to ensure that its Japanese customers continue to perceive it as a local chain that satisfies their local tastes and preferences. This indicates how McDonald’s has managed to maintain a dominant position in the Japanese market since its entry in the early 1970s.
In the last few years, McDonald’s has struggled to sustain profitability as it suffered the consequences of a weakening Japanese Yen and a subsequent price increase on some of its notable menu items. The increased prices had the effect of driving customers away, with first-half sales report in August 2013 showing that the chain’s operating profits have dropped more than 40 percent and its sales have fallen 11.4 percent.
In an attempt to combat the falling sales, McDonald’s sought to address what it thought to be its weakest link by taking advantage of Japanese consumers’ perceived love for French fries. After observing a trend that suggests that French fries was popular among many urban Japanese youth, the company introduced a menu item that is limited to the area that the company thought would entice Japanese customers to troop to its restaurants — the Mega Potato.
Nonetheless, this approach did not yield significant results, as sales figures continued to lag — the company’s customer numbers reportedly fell further. The poorer than expected earnings have forced McDonald’s to review its annual sales and profit targets downwards, while the company’s shares plummeted by more than 7 percent. Accordingly, the signs clearly indicate that all is not well with the company that has become used to decades of success and profitability in Japan.
Apart from external circumstances outside McDonald’s control, such as the weakening of the Yen and deflationary trends in the Japanese economy, the company realizes that its stuttering performance is also partly a strategic problem that should be addressed with the right approaches.
New Growth Strategies
The decline in sales and revenues from McDonald’s outlets in Japan necessitated a critical reassessment of the company’s business strategy in Japan. Based on the its three-pronged brand philosophy that emphasizes trusted quality, speedy and friendly service, and clean and comfortable environment, McDonald’s introduced various products and marketing strategies and deployed aggressive restaurant portfolios including strategic restaurant closures for those outlets deemed to be no longer viable.
This strategy also involved a robust restaurant development initiative centered on large-scale & drive-through restaurants to enhance customer value. In general, three key areas represent the core of McDonald’s growth strategy in Japan — optimization of its restaurant portfolio, strengthening of its franchise business, and stronger marketing activities.
McDonald’s restaurant portfolio optimization strategy involves a re-engineering process in which the company is undertaking a holistic appraisal of all its outlets in Japan, with the aim of identifying the weak links, determining those that need to be closed and those that require redevelopment, as well as those that require relocation as the case may be.
McDonald’s sources indicate that this strategy is steadily yielding results, as it has helped the company streamline its operations and expand its visitor opportunity share in the fast food market. Based on the relative progress being made on the strength of this strategy, McDonald’s is looking to further optimize its Japanese restaurant portfolio by ensuring greater focus on the opening of Gold Standard drive-through restaurants and acquiring high-quality real estate in prime areas to increase opportunities for profitable operations.
On the one hand, comparisons with other store types indicate that Gold Standard drive-through restaurants may have a competitive edge, thereby facilitating a possible increase in sales and profitability. On the other hand, possessing choice land and building in strategic locations offers the advantage of easier access for many urban consumers, and this can have a significant impact for McDonald’s sales figures.
Strengthening its franchise business is also a major aspect of McDonald’s strategy as it seeks a return to profitable operations in Japan. McDonald’s global operations maintains a strong franchise network that makes up the majority of its restaurant chain. Although the company ‘thinks globally’ by ensuring certain unnegotiable standards in terms of core menu components, service quality, and overall restaurant experience, it allows each McDonald’s franchise operator to “act locally” — in terms of menu adaptation and customization — according to the local trends and prevailing socio-cultural preferences in a specific market.
Accordingly, in view of its recent challenges in Japan, McDonald’s is implementing aggressive franchising readjustments, particularly in the area of management efficiency, in order to ensure that customers derive greater value when they visit each McDonald’s restaurant in any part of japan. This also involves a clarification of the role of company-operated restaurants to determine whether there is need for a higher franchise ratio for a stronger baseline. The essence of this strategy is to ascertain whether it is more profitable to increase or reduce the number of either franchise-held outlets or company-operated restaurants.
An equally important component of McDonald’s Japan growth strategy to counter faltering revenues is to strengthen its marketing efforts in the country. To this end, the revised marketing strategy has included recruiting brand ambassadors and launching a light-hearted media advertisement campaign about dancing through the workday. Central to this advertising campaign is the “Dancing McCrew” ad, a viral hit whose individual themes include, among other elements, “Welcoming,” “Assembling Hamburger,” “Making Drink,” “Washing Hands,” “McDelivery” and “Star Crew.”
With over a million views for various versions, the Dancing McCrew video is not only a keen celebration of the McDonald’s brand, but also a bubbly recruitment video that makes working at McDonald’s seem a creative and fun experience. This aspect of the marketing strategy seeks to renew consumer interest in the McDonald’s brand and convey a sense of merriment that draws attention to the features that supposedly stand McDonald’s apart.
Another component of McDonald’s efforts to strengthen its marketing in Japan involves a strategic positioning of the breakfast market as a primary investment target, leading to the implementation of all-year-round breakfast campaigns. This also includes complimentary coffee sampling across all McDonald’s restaurants in Japan; the company reports that this strategy has succeeded in capturing many new customers.
An Uncertain Outlook
Although McDonald’s insist that its growth strategies are yielding positive results in line with its objective of returning to profitability, independent reports and observers suggest that there are significant obstacles to the company’s recovery. To begin with, McDonald’s long term sales slide in Japan has occurred in spite of several pricing and menu adjustments.
Unlike in China, where McDonald’s has maintained steady, albeit slow, growth, its performance in Japan — specifically in terms of same-store sales performance — has declined by approximately 3.3 percent since 2012. This indicates that the root cause of the company’s sales decline can hardly be addressed through adjustments in price and menu composition alone.
Then again, if price reductions did not succeed in improving sales figures, McDonald’s soon found out that price increments would not salvage its poor sales. The Bank of Japan recently served McDonald’s notice to implement a quantitative easing policy aimed at propping up the struggling Yen. McDonald’s responded to the policy by announcing a 20 percent increase in menu prices, an increment that many consumers in Japan reacted negatively to, further compounding McDonald’s sales woes.
Furthermore, there is a lack of evidence to indicate the effect, if any, that the McDonald’s new marketing and restructuring strategies have had success over the last two years, given that there is yet no reversal in the sales slide.
Some analysts have credited McDonald’s diminishing profitability to its declining creative ability and its inability to captivate customers. Given that aspects of the company’s new marketing strategy, particularly the “Dancing McCrew” advertising campaign, seemingly demonstrate some creative ability, it is perhaps plausible to suggest that there could be yet hope for a change in fortunes for McDonald’s in the foreseeable future.