McDonald's sets sights on Asia
McDonald's Corp.'s strategy for China: Sell beef to customers. In their cars. And bring them in for breakfast. All the while dodging criticism that its food makes folks fat. Sound familiar?
SHANGHAI -- When a squad of McDonald's Corp. executives greeted visiting U.S. business journalists to a recent business-strategy presentation here, they acted far too restrained for boss Tim Fenton's liking.
The journalists wanted to know whether sales and profit margins in China were healthy. The execs -- presidents and top officers -- hedged. Things are good, they cautioned.
"Tell them," insisted an encouraging Fenton from the back of the room. The president of the Asia, Pacific, Middle East and Africa (APMEA) region wanted it known that the company's expansion will boost sales in the world's largest consumer market. Margins are up 12.4 percent so far this year, while same-store sales are up 10.7 percent in China, both eclipsing U.S. performances.
The region, Oak Brook-based McDonald's broadest, represents enormous growth potential for the world's largest burger chain. It incudes stores in China, Taiwan, Singapore, Thailand, Egypt, Israel, Saudi Arabia, India, Australia and Japan.
About 7,800 McDonald's restaurants in 37 markets there serve more than 2.2 billion customers a year. Year to date comparable sales in the pan-Asia region are up 5.8 percent.
Quick service restaurant sales in the area will total about $115 billion this year, and are expected to grow 10 percent next year, topping the U.S. growth rate. Sales -- including those at informal eating-out spots such as market stalls, food courts, hawker stands and convenience stores -- are expected to grow 9 percent, Fenton said.
"To us, that is untapped potential, especially considering McDonald's is merely in its infancy here in APMEA," he said. "We're growing as fast as our customers' affluency and aspirations are."
China dramatizes that pace.
• • A nation of 1.3 billion people, it's swelling at a rate of 8 million people a year, even with a policy that limits women to one child each. The country accounts for more than 20 percent of the world's population.
• • China's economy is speeding north as well, having recently surpassed the UK as the world's fourth largest. Its GDP is up 8 percent to 10 percent in each of the past 10 years.
• • In five years, China's middle class will outnumber the entire population of the U.S.
The lure of those people with higher disposable incomes who crave little luxuries has businesses, particularly mature ones like McDonald's, casting their nets there for consumers.
Since the first McDonald's opened in mainland China in 1990, the chain has put about 770 restaurants there.
As a sponsor of the 2008 Olympics, in Beijing, it'll be in the spotlight feeding athletes and spectators. The company plans to have 1,000 restaurants in China by opening ceremonies. It still trails KFC, which has 1,700 there and is opening a new one every day.
About 68 percent of the population is under age 40. And the urban areas see more two-income households and more upwardly professional residents for which convenience is increasingly important.
The burger giant wants all of those young, pressed-for-time urban professionals to beat paths to its doors.
"It's more about being a destination restaurant," said Jeffrey R. Schwartz, CEO of McDonald's China for the past 16 months, noting plans for stores that include party rooms and gyms with dance pads and motocross racing games.
Quick service is still the focus at the restaurants, but customers view visits to the stores as outings and typically spend longer periods there than do Western chain patrons.
McDonald's goal is to have its mainland China operations to look like those in Hong Kong, base of the company's region and the system's highest all-around developed market. Hong Kong's 7.3 million people eat out more than 25 times a month.
A near-midnight November visit to a Hong Kong McDonald's found it hosting three sets of adults and children. Just before that, it was packed with groups of young people. During lunch the next day, it also was jammed.
McDonald's Fenton summed up, "A big part of the growth story in China lies in producing the same quality, choice, service, convenience and affordability that people in the West have long taken for granted."
The company's plan for expansion in China emphasizes drive-throughs, hoping to capitalize on the country's booming car culture and its increasing affluent, fast-paced lifestyles.
Staffers are showing care with new drive-through customers, walking them through the system. An employee takes an order at one window, another takes payment at a second window, and a third hands over the food at the final window. (Eventually, customers will shout their orders into faceless intercoms, the way it's done in the U.S.)
For every fifth driver, there's at least another step. Twenty percent of the drive-through customers grab their meals from the drive-throughs, find parking spots, then walk into the restaurant to eat. "They want the full experience," said Jeff Schwartz, CEO of McDonald's China.
McDonald's will give the Chinese plenty of opportunities. Over the next two years, 120 of its new restaurants -- about half of the total -- will feature drive-through service.
In June, the company inked a deal with Sinopec Corp., China's largest gas station operator, to develop drive-throughs at its locations. Sinopec Corp. operates about 30,000 stations, and is growing at a rate of 500 to 700 locations a year.
Then in July, McDonald's hooked up with the Dalian Wanda Group real estate firm to develop traditional stores at its shopping malls and office complexes as well as drive-through locations.
Competitor KFC, in response, said it would open 100 drive-throughs in China over the next three years. It operates only four.
China ranks as the world's fastest-growing country for automobile ownership, up 80 percent in a few years. In 2004 more than 2 million cars were sold there, according to the China State Automobile Industry Association.
McDonald's opened its first drive-through in China last December in Dongguan in south China's Guangdong province. Since then, it's put up drive-through operations in Shanghai; Guangdong's Shunde city; Zhoushan city in east China's Zhejiang province, Haikou of the southern Hainan province and Tianjin in north China. McDonald's expects 14 will open in China before the end of the year.
Building a restaurant in China with a drive-through adds 30 to 50 percent to the construction costs -- about $200,000 -- but those sites have 50 percent to 80 percent higher sales volume than stores without the service.
Already more than 1,000 drive-through McDonald's are operating in Japan, Singapore, Makaysia and Taiwan.
McDonald's pioneered the drive-through concept, and today about $8 billion a year passes through the windows in the U.S.
cjackson@suntimes.com
Hand sanitizers commonly can be found at big-chain outlet restaurants, but many small, independent eateries leave much to be desired in the area of hygiene.
Ironically, with the concerns about Asian bird flu, McDonald's has seen sales increase, people figuring its supply chain is safe, said Tim Fenton, McDonald's regional president.
Earlier this year, McDonald's China launched a national Web site (askme.com.cn) to provide customers with information about food quality, safety and nutrition. Its Open Doors program encourages tours at the restaurants.