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By Gordon Chu | August 11, 2009

Burgers to Fries: McDonald’s Success in China

On a recent trip to China and after many meals of decadent Chinese food, I found comfort and safe haven seeing the familiar golden arches of McDonald’s amongst the lit streets of Shanghai. Along with the hundreds of patrons who frequent the same restaurant, we lined up waiting to order our guilty meal of the day. The menu was different but the same – there was the same familiar (and all-time favorite) Big Macs, Chicken McNuggets, and fries; but there were new entries I was not familiar with and were targeting a more localized taste including a delicious looking pork sandwich.

Despite the differences in menu, the same smile graced the person taking my order, the same efficient bustle behind the counter as they gather my food, the same “feel” I would get going to any McDonald’s I’ve visited the last 30 years.  McDonald’s is one of the handful of very successful companies growing in China. Having only launched their first stores in China in 1990, they now have nearly 1,000 stores across China and over 50,000 employees strong in their workforce. Secret to their success? Boils down to what all good businesses need – good leadership, a good eye on costs, and a little bit of luck.

Leadership

There’s no big surprise when I say leadership is an important factor in any company’s success; however, McDonald’s example should be a testament to why it is one of the biggest conglomerates globally.

Since 1955, McDonald’s core value has always revolved around employee development. Yes, you do start off clearing tables and taking out trash, but with a little bit of patience and a natural knack to succeed, McDonald’s has a strong reputation to groom talent for long-term success internally. McDonald’s has seven “Hamburger Universities” around the world that train future management level employees the fundamentals of finance, marketing, supply chain management, etc. Training is for more than just immediate operational needs, but select employees are molded for long-term growth.

With international expansion, employee development was more than the basics of “Hamburger University,” training / education lacked the necessary sensibility of knowing and understanding the local environment. And with that, training emphasized more on to homegrown talent. Operating McDonald’s in Nebraska is entirely different than operating one in the heart of Guangzhou or Shenzen. So, McDonald’s saw their role upon entering China as a catalyst to get the business started, then developing local talent to take over the long-term leadership roles. In fact, 42 percent of the company’s worldwide top management team started their careers flashing their pearly whites serving customers. Current head of McDonald’s China Kenneth Chan has been with the company since 1993. And before Chan, Jeffrey Schwartz (former head of McDonald’s China) started his career as a restaurant worker at the age of 15.

Eye on Costs

I read an interesting interview with Tim Fenton (CEO of McDonald’s Asia, Middle East, and Africa) regarding McDonald’s growth strategy in China. He mentions:

“Mistakes we made in the past: you don’t open just one store. You get three or four or five deals done, build them consecutively, train the crew consecutively so you have on the money. So when a truck goes out from the distribution center, it’s no carrying one store, it’s carrying the products for three to five.”

How I read that comment was the importance of costs savings. When operating in China, you have to change your frame of mind to work in quantity. Margins are often low and you have to operate on sheer volume to meet profitability.

Fixed costs can be the bane to your business and should be a very big focus when operating in China. It’s a time warp back to the days of playing Monopoly and understanding cash flow and a proper P&L. China has seemingly endless potential with 1.3 billion people, but having to shift emphasis from sales and revenue to controlling cost is extremely important for long-term growth and success. Don’t get me wrong – there is still plenty (and I do mean plenty) of money to be made, but controlling good ol’ G&A should be the first focus.

McDonald’s is no stranger to controlling costs. Just look at their hamburger empire and it’s obvious they understand the fundamentals of cost-savings. Fenton’s comment above emphasized McDonald’s ability to benefit from economies of scale. Go big or go home. Whether through supply chain management or vertical integration, McDonald’s employs economies of scale to bring costs down. How that applies to any business is just a careful look at how money is spent.

A Little bit of Luck

An old proverb goes, “Luck is a matter of preparation meeting opportunity.” This could not be more true than McDonald’s venture into China. Some would argue many of McDonald’s strategic growth plans in China were big risks. Really – any new venture is a risk, but it’s how the risks are mitigated that reveals the genius and success.

Case one – introduction of the drive-through. In the US, we take this as a given for any fast-food service. If you’re on the go and a standing line will just not do, the drive-through is a valid and servable option. In China, this concept was completely new and novel until recently in 2005. Before, the streets were filled with bikes. Miles upon miles of bikes. There is plenty of truth when they say Beijng is the “City of Bikes.” But with China’s economic growth the past few years, bikes evolved into motorcycles which evolved into cars. So today, miles upon miles of automobiles.

In the mind of McDonald’s, a drive-through service was obvious. There was a learning curve for consumers to understand what a drive-through was at first – after all, even I can objectively imagine it foreign to not have to get out of your car in order to be served. But after a little time, drive-throughs are now a norm and has been a key factor in McDonald’s growing sales. Today, with a partnership with Chinese state oil company Sinopec, McDonald’s has the right to open McDonald’s store at any of Sinopec’s new and existing gas stations (all equipped with drive-through capability) – all 30,000 stores.

Case two – expansion choices into Tier 3- 4 cities. While logic would point expansion in the Tier 1-2 cities in China, McDonald’s strategy is to take a swing at up-and-coming locations. Fenton says it best, “It’s really not that difficult (of a gamble). You look at a developing area, and you see where it’s going. You see the corners. You see the retail. You see the apartments and the condos coming in… we’ve done a lot of real estate. We’ve done it, like, 34,000 times.”

With the bank of experience in real estate and choosing the right locations for McDonald’s stores, Fenton is 100 percent on-the-point. As the cities grow, so will the recognition for the McDonald’s brand and their products. For McDonald’s, they are not betting on what the sales are today, but what the sales will be for the future.

Case three – going digital. Recently, McDonald’s has broken the fourth wall and has gone digital. In February 2009, McDonald’s launched an online shop on Alibaba’s Taobao – China’s top online auction site similar to that of eBay. Why you ask? It’s all about customers, customers, and customers. Yes, the whole online shop to sell “regular” consumer goods such as MP3 players, mobile phones, and gift certificates is a keen marketing ploy to promote McDonald’s products, but more importantly, the move keeps McDonald’s relevant. And especially if they’re talking to their target group of youths, online is the natural extension and distribution channel to reach them all.

Future challenges

McDonald’s future is not all rosey and a simple coast on easy street. The market is filled with stiff competition from both US and local Chinese brands. KFC has nearly 2,000 stores, double that of McDonald’s. And not to mention the limitless variety of food options that fit into McDonald’s “fast food” market.

McDonald’s will have to continue to press the envelope in all aspects of their business. From marketing to costs-savings, McDonald’s has their hands full with what they need to do in China. But as former head of McDonald’s China says, “US (population) 300 million, 13,000 restaurants. China (population) 1.3 billion, 800 restaurants…. So the opportunity is endless.”

For McDonald’s, though introduced to China in 1990 – this is just the beginning for a very long road ahead. And with everything that they’re doing, we’ll be seeing McDonald’s and their golden arches all the way to the bank.

Gordon Chu is the VP of Business Development at METAN Development Group. For comments/questions, email gchu@metanmedia.com.