China and its challenging market

Giulia Marchini- MIEX

ABSTRACT

The McDonald’s Corporation is one of the most successful restaurant chains in the world. This
multinational company has been able to use effective management and global expansion strategies
to enter new markets and gain the leadership in the local fast food market. This report illustrates
how McDonald’s has achieved this incredible success in China, its best practices in the food
industry, and the challenges that it had to face in a foreign country like China. The first part
analyzes how McDonald’s has been able to enter into foreign markets and what strategies it used in
order to be a dominant leader in the fast food industry, still maintaining low prices. The second part
focuses on how the company made it into China, the strategies used to approach the local market
and the challenges that the company had to cope with related to food safety and a growing local
fast-food industry.

RESEARCH METHODOLOGY

The report is based on online data such as articles, essays and newspapers news.

- Research Papers and Case Studies: Amity University

- Articles from Business Magazines: International Business Time, The Wall Street Journal, Business
Insider, Bloombering, The Australian Business Review
- Publications : Marketing Science

1. McDonald's around the world

The McDonald's Corp. is the world's largest chain of fast food restaurants, serving around 70
million customers daily in 118 countries. Based in the United States, the company was opened in
1940 by the McDonald's brothers, and originally it was conceived as a barbecue restaurant. In
1948, the brothers transformed the business into a hamburger restaurant chain, that obtained a
good success. Later on, in 1955 Ray Kroc, a franchise agent, decided to buy the company with the
intention of transforming it into an international fast-food chain. Nowadays, McDonald' s
restaurants operate as franchising, managed either by a representative of the company or by an
external manager. McDonald's annual revenues are around $27.5 billion, with a profit of $ 5
billions, in constant growth, since the company's income is made not only from the sell of burgers
but also from rent, fees paid by the franchises and royalties.
 The strategic choice of opening McDonald's through francises allowed the company to grow
bigger without the need of investing a huge capital. In fact, each individual owner invest on its own
business, which means less risk for the company, higher return for the single owners (which will
motivate them to make the business successful) and higher control for the company that ensures
that qualified manager will lead each restaurant. Moreover, this entry method allowed MCD to
expand really quickly, since multiple restaurants were able to open at the same time, they took
over the competitors that couldn't compete with its market dominance and the growing brand
awarness. As the company CEO once said “People usually think that we sell hamburgers. But in
fact we are a real estate dealer”.1
Its business model and the variety of food offer
made MCD the leader of the fast food industry. If in
the beginning McDonald's used to offer mainly
hamburgers, cheeseburgers, chicken and french
fries, in the last ten years the restaurant chain had
to widen the menu offer with salads, fish burger and
fruit, in order to adapt to new trends of consumers'
McDonald's Annual Report 2012
taste. If we consider that the company owns more
than 35000 restaurants around the world, we understand why adapting to the consumer taste
becomes a key strategy to approach new countries, with different cultures and food traditions. The
international expansion allowed McDonald's to lower the business risk against the other American
fast food chain, and to become an international leader in the sector. The company currently divides
the revenues in four segments (US, Europe, Asia/Africa, and the rest of the world) and almost 65 %
come from international sales. In fact MCD strategy over the past few years, it's to focus on
emerging markets like India, China and Africa, where the sales increased up to 8 % compared to
the previous years.
Through the smart use and the deep knowledge of the marketing mix, MCD gained the position of
leader in the fast-food industry around the world.

• PRODUCT
McDonald's strategy to attract a wider variety of customers by expanding the food offer, its been
a key factor to expansion of the business. The menu in each country has been adapted to the local
taste, but still maintaining the core base of the burgers-and-fries menus. Especially after the

1 Lee, Juan Cui Dan Supersize the Franchise: McDonald's New China Strategy
release in the US of the film- documentary “Super Size Me”, about the dramatic impact that fast
foods have on health, McDonald's had to contrast this crisis by presenting healthier and lighter
menus which included salads and fruit. To adapt to different culture and lifestyle around the world,
the fast food company came up with the idea of offering culture specific food, in order to attract
different segments of customers. It created the McAloo Tikki in India, a spicy burger made with a pea
patty seasoned with spices (since Indians traditionally don't eat beef), McArabia made with chicken and
pita bread and the Bubur Ayam McDo in Malaysia were traditionally breakfast consist in porridge, chicken
and ginger.

India Arabic Countries Malaysia

They always say that success of a company depends on its capacity of understanding its customers'
needs. McDonald's during the years had the capacity to change based on trends, traditions and
taste like nobody else in the market. MCD recognizes the demand and answers with a selection of
new products or new services like the MCafè, which was able to compete against well known
companies like Starbucks and Dunkin' Donuts, thanks to its dollar menu breakfast.

• PRICE
Low prices are definitely one of the reasons of MCD success. The company vision has always been
the same since the beginning of the global expansion: they wanted an affordable, fun and
customer based restaurant. Therefor no matter the location of the restaurant, MCD delivers its
services and products maintaining the core goal of quality and price. Innovative pricing strategy
allowed the company to adapt the prices depending on the GDP of the country, making its
products affordable for everybody. This value was reinforced with the creation of the Big Mac
Index. This index invented by The Economist in 1986 “is based on the theory of purchasing-power
parity (PPP), the notion that in the long run exchange rates should move towards the rate that
would equalize the prices of an identical basket of goods and services (in this case, a burger) in any
two countries. For example, the average price of a Big Mac in America in July 2014 was $4.80; in
China it was only $2.73 at market exchange rates. So the "raw" Big Mac index says that the yuan
was undervalued by 43% at that time”2. The choice of the Big Mac shows the determinant impact
that this company had on the global market, thanks to this worldwide presence and its products'
value.
• PLACE

MCD is able to offer to offer a wide range of products and low prices thanks to a well thought
global supply chain. The food suppliers are located in each restaurants' country, so to reduce the
cost of import taxes, and at the same time to maintain the food freshness. The efficiency of the
supply chain is due to the company's capacity to outsource these activities to expert in the sector,
which are in charge of every aspect of the service, included the customer's satisfaction. MCD owns
only 35 stock warehouses from where its able to supply all the worldwide markets. The franchising
strategy allows every manager to place an order for each restaurant, so to make it easy for the
suppliers to order from the producers only the necessary raw materials, and at the same time
avoid waste of money and food.

• PROCESS

Quality is definitely one of the key strenght of

MCD products. The company ensures its
customers that wherever in the world, they will
benefit from the same quality and same safety
they had experienced at home. The company is
famous for the severe guidelines that need to
be followed during the supply chain and food
preparation. The kitchen is visible so that every
customers is able to see how carefully each
meal is prepared.

• PHYSICAL ENVIRONMENT / PEOPLE

MCD glocal strategy, shows how the company combines local awareness with global core
elements. The branding standardization allows the customers to recognize the restaurant wherever
they are in the world. MCD understood the importance how important is to train its staff in order
to ensure the same customer service and the same experience all around the world. Its employees
represent the brand in front of the customers and the values of the company. McDonald's gives
the opportunity to its employees ad nits managers to enrolled in the Hamburger University, which
2 The Economist, The Big Mac index
teaches all the skills necessary to improve and get better at their jobs. The comany's main aim is to
create a lively environment both for customers and employees, because the latter influence the
outcome of the “final transaction”. Therefor the recruitment requirements are standardizes around
the world.

• PROMOTION

When a brand expands so quickly globally, it has to be supported by a strong marketing promotion.
In 2011 MCD reached the 6th position as the competition “Best Global Awards”. The popular advert
sang by Justin Timberlake “I'm loving it”, and the yellow M are recognized all around the world,
and they helped create that brand awareness that only few brand like Coca Cola have.

2. McDonald's in China

On April 1992, the American chain opened its first restaurant in Beijing, that with its 700 seats and
29 cash registers was able to serve more than 40.000 customers, only on the first day. The
restaurant became soon a landmark for Chinese tourists, that could finally experience the “real”
American food. Really quickly MCD started expanding in Mainland China and in 1996 it counted
already 29 restaurants only in Beijing. The incredible growth of the company was due to the fact
that at the time China was opening up to the western market, and it was eager to absorb and
experience the western lifestyle. At the time, the company CEO saw in this country a huge market
opportunity, and planned to open more than 600 restaurants by the end of the century.
Unfortunately, what in the beginning was a great success turned into an unexpected failure.

• PRODUCT

McDonald's approach to China had been really different compared to other countries. Due to the
general enthusiasm towards western culture, McDonald's decided to propose the same menu that
was sold in the US, hoping that it would have appreciated by the local crowd, because of the
cultural symbolism that the hamburger carried at that time. The company's mistake in China was
to impose its culture, instead of acting locally and adapting the taste to the local culture. In fact, if
in the beginning the menu was well appreciated, it soon started to lose its appeal and MCD
customers started turning toward competitors like KFC and Burger King, that offered chicken and
rice meals, which are included in the typical the Chinese diet. Moreover, Chinese people have
always been really careful about health and nutrition, and they soon started to realize that the
meals offered by McDonald's weren't filling and were way too greasy. The American fast-food
chain in order to keep up with the strong competition, started introducing new dessert, and new
snacks more in line with the local taste and diet.

Chicken Wrap Taro Pie

McDonald's started by introducing to its menu fried chicken wings, corn cups and desserts like Taro
Pie and Tapioca Pearl milk tea, which are traditionally part of the Chinese cuisine. But its strategy
wasn't as aggressive as the one of KFC, so in 2013 the company decided to tailor new recipies only
for the Chinese market, because it couldn't afford to lose this part of the Asian market. A winning
choice was the creation of a new menu which included the Chicken Rice Wrap, Beef Rice Wrap,
Chicken Rice Bowl and Beef Rice Bowl. The new menu was part of a push strategy to grow the
business in Asia where a meal it is not complete and filling without rice.

• PHYSICAL ENVIRONMENT

In order to be able to compete with the other both Asian and American competitors like
Yum, Dicos and KFC, MCD started adapting to the local market by improving its physical
location. Thank to markets studies and surveys, the company understood that Chinese
people appreciate a nice dining environment and applied
the recent trend of “Less is more”, by redesigning the store
and its furniture (softer colors and more comfortable
seats). The Wi-fi service has been integrated in every store
in addition of flat Tv screen, with a private channel called
McTV. 95 % of the store now are open till later and some
of them are open 24/7. Moreover, some McDonald's restaurants offer the delivery service,
common practise in most of the Asian countries, with the intention of meeting the cultural
norms of the environment.

• PLACE

As it was said in the previous part, most of the success the McDonald's had in the Western world
was due complete market dominance, strictly connected with the number of stores opened
through franchises all over the countries. When MCD first entered in China, it decided to control
and buy its own restaurants, thinking that China
didn't have yet enough regulations regarding
franchising operations and that it wouldn't have
been profitable due to the high operational
costs. MCD realized that the business model
wasn't working when it was too late, and KFC
had already took control over the market. By
owning the restaurants in China there was too
much financial risk, and because of China's
Marketing Science restrictions on foreign land ownership, the
company had control over only 10% of the total properties, while in the States the percentage was
around 60%. At the same renting costs in China have been rising, and at the end of the contracts,
the company will be forced to pay higher rent fees for its restaurants. The company started
recruiting franchising partners in 2010, and they represent only 5 % of all the venues in China right
now. “Developing the franchise business will become an important factor for achieving rapid
growth in China for our company in the years to come” 3 says one of the MCD executives
responsible for the Chinese market.

• PROCESS
If MCD in Europe and US is renowned for the efficiency of the supply chain, and the first quality of
its ingredients, this is not the case for China, where a huge scandal involved the company's name.
Subsidiaries of MCD and KFC were caught selling expired relabelled meat to the American fast-
food chains. The sales dropped drastically and for weeks MCD wasn't able to serve a Big Mac. The
vunerability of the company in this country was obvious, and this display of non control over the
business caused a lost in trust in the Chinese customers towards Western brands. If in 1990, many

3 Lee, Juan Cui Dan Supersize the Franchise: McDonald's New China Strategy
Chinese customers were attracted to MCD because it was the first Western restaurant and because
the brand represented quality and great customer service, now instead they look around for other
options.

“The company went from being a cool option to just another choice in the market.” 4. Competitors
like Dicos and Zhen Gong Fu are expanding and they are conquering an important size of the
market, while MCD is still trying to adapt to a constantly changing market like China (only 15 % of
the market share). Chinese consumers are changing and if before they were attracted by the brand
because it was foreign to them, now they are much more aware of the importance of food quality
and they are critical towards practises like abuse of antibiotics on chicken. The fast-food chain has
been remodeling his brand, putting emphasis on safety and health by adding new lighter menu to
its offer, but it will take a lot more to regain the Chinese consumers' trust.

4 Dow, Jones, McDonald's China Challange: rising competition, The Australian Business Review.
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