McDonald's beefs up China management

Veterans pursuing aggressive expansion

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SHANGHAI -- McDonald's Corp. is beefing up its senior management team in China by moving three heavy-hitters from the U.S. and Australia to Shanghai to tackle brutal competition from savvy rival KFC and internal pressure to be more profitable in McDonald's fastest-growing market.

Senior Director-Global Marketing Gary Rosen became McDonald's VP-chief marketing officer, China, replacing Shantel Wong, who was recently promoted to general manager of the burger chain's Olympics 2008 platform. Jeffrey Schwartz moved to the new position of senior VP, China, from senior VP of the company's U.S. operations and franchising division.

And Guy Russo went from CEO, Australia to president, Greater China, making him the new point man for the region. He replaces Peter Tan, who left the company. Mr. Russo, who joined McDonald's in Sydney when he was just 15, transformed Australia from a trouble spot into one of the company's most innovative and successful markets in two years.

Australia has the second-highest obesity levels in the world after the U.S., and the chain suffered from doubts about food quality and health issues. Mr. Russo addressed them with a bold quality campaign and invited customers and the media to look behind-the-scenes at McDonald's operations. He added healthier menu items like yoghurt, low-fat sandwiches and salads.

Unlike in Australia, McDonald's is expanding quickly and nutritional issues are seldom a problem in China.

"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," said Mr. Rosen.

But Asia as a region accounted for 13% of McDonald's second-quarter 2005 revenues, while delivering just 6% of operating profits.

"The company made a lot of commitment 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, which is in more cities and has been [in China] longer," said a Hong Kong-based consultant who has worked with the company.

KFC is run in China by Taiwanese executives who are militant about cutting costs, know the local market well and have a strong track record for innovating relevant new menu items. KFC was also a first mover in China's first-tier cities, Beijing, Shanghai and Guangzhou, and then in the second tier cities. Now, the Yum Brands chain is beating McDonald's into third tier towns. Plus, KFC has an inherent advantage--Chinese cuisines vary, but overall consumers prefer chicken to beef.

"There wasn't one person's vision they could follow to the end, that's why they replaced Peter Tan earlier this year. There were too many cooks in the kitchen, and sometimes execs [at headquarters] make decisions based on an American perspective that aren't right for China," said an agency exec in China familiar with McDonald's.

For example, 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 added. "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."

In a conference call with analysts in late July, McDonald's Vice-Chairman CEO Jim Skinner said, "Despite negative comparable sales in the last few months, China has progressively improved its comparable sales trend throughout the quarter."

Fielding an analyst's question about why China isn't more profitable, Mr. Skinner added, "We have made substantial changes in China relative to the focus of our talent...We're opening 100 restaurants a year now, expect to have more than 1,000 by 2008, and the strategic nature of our behavior there regarding the everyday affordability has also been ramped up, and we're getting the proper products in position to be successful."

With the pressure on, Mr. Russo--who was not available to be interviewed--and his team are expected to pick up the pace of new store openings from the current 683 outlets, streamline bureaucracy, make faster, riskier decisions and be quicker to market. But it won't be easy.

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

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