In China, golf and American fare

By Published on .

[Shanghai] When mayors in China's interior fantasize about ways to spruce up grimy industrial towns, two things top their wish list: an 18-hole golf course and a McDonald's restaurant.

"Officials all over China call me up, asking us to bring McDonald's to their city, because having our brand there means they have a modern, international, sophisticated city," says James Chu, McDonald's Corp.'s director-franchising and government relations for China.

While many Americans view McDonald's as a quick, cheap meal, for hard-working locals in developing markets like China those iconic Golden Arches represent an aspirational, American lifestyle. After all, in a country where the average blue-collar worker earns just $100 per month, a hamburger and fries are a pricey, exotic treat that can easily cost twice the price of a bowl of noodles at a dai pai dong food stall.

As incomes rise, consumers are herding into one of the 683 McDonald's restaurants in China for a variety of reasons that might surprise U.S. consumers: its high standards for hygiene, customer service and food quality, the cornerstones of McDonald's growth strategy since its first site in China opened in 1990.

"Nutritional issues seldom come up in China," Mr. Chu says. "People are more concerned about food safety, and our internal regulations are higher than what the government requires."

"My first impression here is that the perception of McDonald's in China is incredible, particularly among mothers, who trust the quality of our food," agrees Gary Rosen, McDonald's VP-chief marketing officer, China. He arrived in Shanghai late last month to replace Shantel Wong, who was promoted to general manager of the burger chain's Olympics 2008 platform.

HIGH EXPECTATIONS

Mr. Rosen-a McDonald's veteran though this is his first overseas appointment-is well-aware that the company's global executives back in Oak Brook, Ill., have high expectations, not only of him but of two other recent arrivals, Jeffrey Schwartz and Guy Russo.

Mr. Schwartz early this month was named to the new post of senior VP-China, from senior VP of McDonald's operations and franchising division in the U.S. Mr. Russo was promoted last May to president-Greater China, making him the new point man for the region.

Described affectionately by colleagues as a "cowboy" and an "operations guru," Mr. Russo started at McDonald's in Sydney when he was 15, and eventually rose to CEO-Australia, where he transformed the troubled territory over the past two years into one of McDonald's most innovative and successful markets.

China already is McDonald's fastest-growing market and one of its top 10 markets globally in sales volume. It hopes to have 1,000 restaurants in China before the 2008 Olympics in Beijing. Leo Burnett Worldwide handles McDonald's advertising in mainland China, while DDB Worldwide handles Hong Kong.

The new team of McDonald's heavy-hitters intends to jump-start growth and correct some past mistakes.

"The company made a lot of commitments to shareholders to deliver profitable revenue in China, and that's not easy for anybody, but it is missing targets and feeling pressure from KFC," says a Hong Kong-based consultant who's worked with McDonald's.

"They want to build the market quicker and make more visible progress, so they are sending in more experienced people," adds an agency executive who's worked with the brand in China. "This economy is growing remarkably fast, so they are trying to put resources into the market to really match that pace of growth, and they need a high level of expertise to cope with what's happening."

ACROSS THE BOARD CHANGES

Observers say McDonald's is at a pivotal point in its evolution in China. Changes are expected across the board from menu and pricing to marketing to management practices.

In the past, says another agency director, McDonald's bureaucratic structure led to a lot of back-and-forth on decisionmaking as well as catering to executives at the regional and global level.

"There wasn't one person's vision they could follow to the end," the agency director says. "That's why they replaced Peter Tan [formerly president-Greater China] earlier this year. There were too many cooks in the kitchen, and sometimes Oak Brook execs make decisions based on an American perspective that aren't right for China."

Although McDonald's has localized its menu with items like Szechuan-style spicy chicken wings, seafood soup, rice, Oriental sauces, and taro and red bean desserts, "they haven't got the local tastes right; KFC has done it better," he adds. "Instead, McDonald's cast a net with a low-cost range of items, and the menu and prices have been changed six times in the past couple of years."

McDonald's is facing brutal competition in China from KFC. The Yum Brands chain is run by Taiwanese who are militant about cutting costs, know the local market well and have proved more adept at introducing relevant new food products. KFC was also a first mover in China in the first-tier "top three" cities of Beijing, Shanghai and Guangzhou, then the second-tier smaller cities, and it's moving into third-tier towns ahead of McDonald's. And KFC has one inherent advantage-Chinese cuisine varies, but local consumers across the country prefer chicken over beef.

Mr. Russo wasn't available to comment on these issues, but senior executives at McDonald's privately acknowledge China has proved to be a challenging market, prompting the company to import some heavy-hitters with solid track records. Mr. Russo and his team are expected to pick up the pace of new-store openings; streamline bureaucracy; make faster, and at times riskier, decisions; and be quicker to market. It won't be an easy task.

"People on the outside have this perception that China is so big, why wouldn't it be easy to build a brand?" warns an agency executive. "This is a tough market to crack. It's not as easy as everybody thinks."

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