THE MCDONALD'S EFFECT:
Fast-Food Giant Triggers a Price-Cutting Wave
August 20, 2001
McDonald's hamburgers have been part of the Japanese diet for 30 years. Now the country's largest fast-food chain is drawing renewed attention for its robust sales in a weak economy. McDonald's Japan accounts for about 65% of the domestic hamburger market and boasts the highest sales in the entire restaurant industry. On July 26 McDonald's Japan made an initial public offering of its shares on Jasdaq, a sister trading system of the Nasdaq stock market in the United States. While the IPO was made in the midst of a prolonged slump in the stock market, interest was high. The IPO price was 4,700 yen (37.60 U.S. dollars at 125 yen to the dollar) per share, and the total value of all the stock offered was 625 billion yen (5 billion dollars), marking the company as the top brand on Jasdaq.
But it has even greater plans for the future. McDonald's Japan has set a lofty target of 10,000 stores and sales of 1 trillion yen (8 billion U.S. dollars) by 2011. The company's success is often attributed to localized marketing strategies, detailed manuals, and ultra-low prices. Manuals have become widely used throughout Japanese industry and society, and the slashing of prices has become a common practice in the restaurant and distribution industries. It seems that a "McDonald's effect" is spreading to all corners of society.
Meeting the Demands of Local Culture
McDonald's Japan began after obtaining an operating license from McDonald's Corporation in the United States. The first store in Japan opened in Tokyo's Ginza district in 1971. At the time, some people in the business world said that the new shop would not last a month. Five years later, McDonald's Japan had grown to 100 stores. Eleven years after opening, McDonald's Japan had climbed to the top of the restaurant industry with annual sales of 70 billion yen. As of December 2000, 3,600 stores were operating in Japan with annual sales of 431.1 billion yen (3.4 billion dollars), second only to the United States.
Although McDonald's originated and developed in the United States, the key to its acceptance in Japan was the adoption of Japanese marketing strategies. Instead of the company's original pronunciation, it is called "Makudonarudo," a sound that is more pleasing to the Japanese ear. And in order to carry out a unified strategy of expansion, McDonald's Japan has rejected the U.S. model of relying on franchises and has been employing a system of direct management. It has also launched a number of Japanese-style products, such as the Teriyaki McBurger, that have become popular.
The McDonald's Way
Another key factor to the chain's acceptance among Japanese consumers has been its detailed manuals, the size and breadth of which are astonishing. Twenty-five chapters cover everything from methods of preparation and quality control to dealing with customers. If these manuals were compiled into a book, it would run to 450 pages. For example, the manual calls for the bottom of the double-sided hamburger grill to be set to 177 degrees Celsius (351 degrees Fahrenheit) and the top to 218 degrees Celsius (424 degrees Fahrenheit), with the patty being cooked for at least 38 seconds. As for buns, the top is to be 16 millimeters thick and the bottom 13 millimeters.
While manuals are no substitute for skilled cooks and servers, they play an indispensable role in securing a minimum level of taste, quality, and service with which customers will be satisfied. The manuals prepare even the newest part-time workers, who make up 95% of McDonald's employees, to be ready for action quickly. Worker manuals, an American invention that McDonald's popularized in Japan, have been given Japanese touches and have not just spread throughout the private sector but also penetrated into the bureaucracy and even old-style Japanese inns. Because of its thorough manuals, McDonald's Japan has been attracting attention as a leader in supervisory management and training.
Resolutely lowering prices is a weapon that McDonald's Japan has been employing over the past few years to register rapid growth. The company carried out a customer satisfaction survey during the economic slump that followed the bursting of the "bubble economy" of the late 1980s. Based on the results of that survey, McDonald's Japan lowered the price of a hamburger from 210 yen to 130 yen. The company moved to lower prices again in April 2000, cutting the price of a hamburger in half to 65 yen (52 cents) on weekdays.
McDonald's Japan has put into practice a strategy of cutting supply costs and increasing the number of stores, mainly smaller ones, based on thorough market research. This strategy has combined with an era of deflation to win over consumers, even older male office workers who had previously stayed away from fast food. McDonald's Japan is now selling about 1.3 billion hamburgers per year, about five times as many as before the price cuts. The number of customers per year has grown as well: up 18% to 1.3 billion.
This successful company has seen its half-price strategy spread not just throughout the fast-food industry but also through the restaurant industry as a whole. Even supermarkets, specialty shops, and discount shops have been cutting prices recently. It looks as though Japan will continue to feel the "McDonald's effect" for some time.