THE MCDONALD'S EFFECT:

Fast-Food Giant Triggers a Price-Cutting Wave

August 20, 2001


McDonald's hamburgers have been part oI the
Japanese diet Ior 30 years. Now the country's
largest Iast-Iood chain is drawing renewed
attention Ior its robust sales in a weak economy.
McDonald's Japan accounts Ior about 65 oI the
domestic hamburger market and boasts the highest sales in the entire restaurant industry. On
July 26 McDonald's Japan made an initial public oIIering oI its shares on Jasdaq, a sister
trading system oI the Nasdaq stock market in the United States. While the IPO was made in
the midst oI 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 oI all the
stock oIIered was 625 billion yen (5 billion dollars), marking the company as the top brand
on Jasdaq.

But it has even greater plans Ior the Iuture. McDonald's Japan has set a loIty target oI 10,000
stores and sales oI 1 trillion yen (8 billion U.S. dollars) by 2011. The company's success is
oIten attributed to localized marketing strategies, detailed manuals, and ultra-low prices.
Manuals have become widely used throughout Japanese industry and society, and the
slashing oI prices has become a common practice in the restaurant and distribution
industries. It seems that a "McDonald's eIIect" is spreading to all corners oI society.

Meeting the Demands of Local Culture
McDonald's Japan began aIter obtaining an operating license Irom McDonald's Corporation
in the United States. The Iirst 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 aIter opening,
McDonald's Japan had climbed to the top oI the restaurant industry with annual sales oI 70
billion yen. As oI December 2000, 3,600 stores were operating in Japan with annual sales oI
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 oI Japanese marketing strategies. Instead oI 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 uniIied strategy oI expansion,
McDonald's Japan has rejected the U.S. model oI relying on Iranchises and has been
employing a system oI direct management. It has also launched a number oI Japanese-style
products, such as the Teriyaki McBurger, that have become popular.



Customers line up at a McDonald's
restaurant in Tokyo. (PANA)



The McDonald's Way
Another key Iactor to the chain's acceptance among Japanese consumers has been its
detailed manuals, the size and breadth oI which are astonishing. Twenty-Iive chapters cover
everything Irom methods oI preparation and quality control to dealing with customers. II
these manuals were compiled into a book, it would run to 450 pages. For example, the
manual calls Ior the bottom oI 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 Ior at least 38 seconds. As Ior buns, the top is to be
16 millimeters thick and the bottom 13 millimeters.

While manuals are no substitute Ior skilled cooks and servers, they play an indispensable
role in securing a minimum level oI taste, quality, and service with which customers will be
satisIied. The manuals prepare even the newest part-time workers, who make up 95 oI
McDonald's employees, to be ready Ior 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 oI its thorough manuals, McDonald's Japan has been
attracting attention as a leader in supervisory management and training.
A Strategy of Lowering Prices
Resolutely lowering prices is a weapon that McDonald's
Japan has been employing over the past Iew years to register rapid growth. The company
carried out a customer satisIaction survey during the economic slump that Iollowed the
bursting oI the "bubble economy" oI the late 1980s. Based on the results oI that survey,
McDonald's Japan lowered the price oI a hamburger Irom 210 yen to 130 yen. The company
moved to lower prices again in April 2000, cutting the price oI a hamburger in halI to 65 yen
(52 cents) on weekdays.

McDonald's Japan has put into practice a strategy oI cutting supply costs and increasing the
number oI stores, mainly smaller ones, based on thorough market research. This strategy has
combined with an era oI deIlation to win over consumers, even older male oIIice workers
who had previously stayed away Irom Iast Iood. McDonald's Japan is now selling about 1.3
billion hamburgers per year, about Iive times as many as beIore the price cuts. The number
oI customers per year has grown as well: up 18 to 1.3 billion.

This successIul company has seen its halI-price strategy spread not just throughout the Iast-
Iood 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 Ieel the "McDonald's eIIect" Ior some time.