July 2002

• McDonald's falling sales remain a clear sign that BSE is still a dominant factor in the minds of Japan beef consumers.

The following article is re-produced from the Weekend Australian Financial Review July 20-21

The Weekend Australian: July. 20/21, 2002
(C) All rights reserved

Japan loses its taste for Big Mac

Report  by Brendan Pearson, Tokyo

Japan, which consumes one in 10 McDonald's hamburgers sold globally, may be losing its appetite for the burger chain's offerings. Sales are falling by between 15 and 19 per cent each month, with 130 loss-making outlets to be closed this year. Profits in the first six months of this year were down 52 per cent, with sales in company-owned stores down 11 per cent over the period.

The share price of McDonald's Holdings (Japan), half owned by the Illinois-based parent company, has dipped sharply in recent months.

To stem slumping sales, McDonald's slashed prices by up to 25 per cent this week.  From August 5, a basic burger will retail at just ¥59 (90¢), making it one of the cheapest in McDonald's network of 30,000 restaurants worldwide.

The causes for the sales slump are dividing analysts.  Japan has traditionally been one of McDonald's star markets, with its 3,800 outlets more than the total number of operations in Britain, France, Italy and Germany combined.  In 2000, the chain attracted more than 1.3 billion Japanese customers.

The catalyst, if not the whole explanation, for the downturn in McDonald's fortunes is Japan's mad cow scare in October last year.  Sales have been struggling ever since, despite high profile campaigns pointing out that all the beef for the burgers is sourced in BSE-free Australia.

"The BSE impact is still dragging on, and it is painful", McDonald's Japan president Yasuyaki Yagi, told the Nikkei Shimbun. "Our biggest customer base consists of kids and families, and they are still worried about food safety," Mr Yagi said.  But the BSE factor is only part of the answer.  Of the 19 per cent sales dip in May, McDonald's officials said that 8 per cent of the slump was due to BSE-related factors.

And some of McDonald's competitors in the chain restaurants sector appear to be emerging from the BSE-induced crisis more quickly. In May, for example, Lotteria, a local burger chain, saw sales slip by 8 per cent compared with McDonald's 19 per cent. Another competitor is the Yoshinoya chain, whose main product is gyuudon or beef on rice, and which is forecasting profit growth of 12 per cent in the financial year to 2003. Yoshinoya president Shuji Abe argues that the mad cow effect has almost been wiped out, but added that the issue led to a change in dietary habits.

McDonald's seems to agree, recently unveiling plans to expand its McTokyo concept to 2,800 stores.  Initially targeted at the commuter market, the McTokyo menu includes soups, salads and bakery products.  McDonalds has also tried to limit the impact of the new players like coffee chain Starbucks by the introduction of "Premium Coffee", and is rolling out the introduction of internet cafes, in cooperation with local IT company Softbank.