The Road to China

McDonald's is refining its Plan to Win strategy to woo 1.3 billion Chinese consumers.

Restaurants and Institutions

Scott Hume
Executive Managing Editor

The scope of the opportunity presented by China's emerging economy can be dazzling, beguiling, even overwhelming: a population of 1.3 billion; more than 50 cities with populations in excess of 1 million; and a developing middle class that is projected to be larger in number by 2020 than the total U.S. population.

For foodservice, the prospects look especially alluring, given Chinese consumers' traditional affinity for food away from home, and McDonald's Corp. is putting in place a disciplined plan to establish itself as a dominant brand in China. It has 770 units in China now (the first opened in 1990) and intends to have at least 1,000—and 50% of new stores with drive-thru windows—when the Beijing Olympic Games begin in August 2008.

More importantly, it wants by that time to have an operations infrastructure and a relationship with Chinese consumers that will serve it well through the rest of the century. The Oak Brook, Ill.-based chain sees development in China as a marathon, where a consistent pace is most important, rather than as a land-rush sprint.

McDonald's confidence about its China strategy springs from the success it has already achieved in Hong Kong; it opened the first of its 209 restaurants there in 1975. Its research finds that 93% of Hong Kong's 7.3 million citizens had visited a McDonald's at least once in the previous four months. That's the highest penetration level in the chain's worldwide operations, Joseph Lau, managing director for McDonald's Restaurants (Hong Kong) Ltd., told reporters last month at the chain's International Media Days meetings in Hong Kong, Shanghai and Beijing.

Tim Fenton, president of McDonald's 37-country Asia/Pacific, Middle East and Africa (APMEA) division, is optimistic its success meeting local tastes in Hong Kong can be replicated. "People in the West have long embraced the exotic tastes of the East. You only have to look at the growth of Thai, Indian and Chinese food over many years. Well, the East is just as keen to embrace McDonald's and its tastes," he says. "That's why a big part of the growth story in China lies in providing the same quality, choice, service, convenience and affordability that people in the West have long taken for granted. And McDonald's is one of the world brands uniquely positioned to capture this growth."

The Forbidden Kitchen

McDonald's "Plan to Win" operations strategy is the same in every market, focusing on the "5 Ps": people (service); products (menu); place (dining experience); price (value); and promotion (connections with consumers). "What's different is the local focus each country adds to meet the needs of its customers," Fenton says.

For China, that means providing the core McDonald's menu (Quarter Pounders, Big Macs, McChicken, Egg McMuffins and others) along with items tailored to local taste preferences.

In Hong Kong, Romeo Leu, director of food innovation and development, oversees McDonald's Food Studio, known internally as the Forbidden Kitchen. Located below street level in an out-of-the-way Hong Kong residential neighborhood, the $2 million facility that opened earlier this year is where McDonald's develops menu items for the entire APMEA region: McCurry Pan for India; DeliChoices sandwiches for Australia; McArabia flatbread sandwiches for Indonesia; rice burgers for Taiwan and Japan, and more.

In Hong Kong, the traditional Filet-O-Fish sandwich is the top seller. In Shanghai, McDonald's Spicy Chicken Filet Burger sells best, and a Spicy Filet-O-Fish recently was added.

The Sixth P

Such products are bringing Chinese consumers in the doors—units average about $1 million in sales—but while guest counts are good, operating margins are lagging: 12.8% for APMEA (and slightly less for China) for the first nine months of 2006, compared with 19% for U.S. company-owned stores and 16.2% in Europe.

Jeffrey Schwartz, CEO for McDonald's China, says he has added a sixth "P," for profit, to the China Plan to Win. "We're instituting the idea that we're also about making money," he says.

China's middle class is rapidly growing, but consumers remain "very, very price sensitive," Schwartz says. McDonald's China has lowered the price of its "entry meal" (hamburger, fries, small drink) from 12.50 yuan to 10 yuan (about $1.27). The goal now is to pull Chinese consumers up to higher-price, higher-margin Smart Choice menu combos (such as a Big Mac, fries and drink for 16 yuan or $2.04) and ultimately to items such as the recently introduced Quarter Pounder (18.50 yuan, or $2.35, by itself).

McDonald's is placing a series of print ads in China that ask, "You got beef today?" and that promote beef as a source of energy, strength and, in one ad targeted to women, a better complexion. Television and print ads introducing the Quarter Pounder (with fresh cucumber slices rather than pickles) were themed "Feel the Beef," tapping the Chinese sensual relationship with food. McDonald's breakfast menu (now only 4% of sales in China, versus 25% in the United States) gets its first marketing support early in 2007.

To encourage Chinese consumers to visit McDonald's and understand what it is all about, the chain offered an Open Door event last year. Consumers could tour the kitchen and ask questions about menu, quality, preparation, etc. Now that has been extended to an every-day policy.

To further establish the brand's transparency, nutrition information is available from in-store materials and soon will be on product packaging as well. It's not something Chinese consumers requested, rather a way to further position McDonald's as open and customer-friendly, Schwartz says.

A new "Ask Me" program invites customers to query crew members (or the company through its www.AskMe.com.cn Web site) about product quality or other concerns. This, McDonald's executives say, is especially important in a country where food-related outbreaks of avian flu and severe acute respiratory syndrome (SARS) have made consumers nervous about food safety.

And everywhere in China, McDonald's units already are trumpeting the chain's role as a sponsor of the 2008 Beijing Olympics. The Chinese government sees the games as the nation's coming-out party as a global economic power. McDonald's plans to celebrate its establishment as a local economic power.