McDonald's opens drive-throughs in China

Company also stressing food safety to appeal to mothers

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SHANGHAI--McDonald’s Corp. has opened its first drive-through restaurants in China, the latest sign that the U.S. fast food giant is determined to overtake Yum Brands’ KFC, the fast food leader in mainland China.

“This is [drive-through] number two, which is sad, we should be at 102 by now,” said Guy Russo, McDonald’s president, Greater China, at the opening of a site in Shanghai’s Pudong business district, a bustling free trade zone, in early January.

The first drive-through site opened late last year in Dongguan, a small town between Guangzhou and Hong Kong, and a third in Guangzhou in mid-January. McDonald’s plans to open at least a dozen more drive-through stores by the end of this year.

“But new management is on to it and there’s lots more to come. China is seeing a shift and this is definitely the way forward,” added Mr. Russo. The drive-ins reflect China’s rapid transformation into a car culture.

With almost six million automobile sales last year, China has surpassed Japan and is now second only to the U.S. in annual car sales, according to the China Association of Automobile Manufacturers. The market is expected to grow 10 to 15% in 2006, particularly in prosperous urban areas like southern China and Shanghai.

Not surprisingly in a country with more than 100 million Internet users, the new two-story restaurant in Pudong also has a dedicated area where consumers can Web surf for free, as well as a large playroom for children.

Mr. Russo’s dogged resolve to expand rapidly in China reflects the pressure placed up on the Australian, as well as two American execs, Gary Rosen, VP-chief marketing and corporate affairs officer, China, and Jeffrey Schwartz, now senior VP, China.

Mr. Rosen arrived in Shanghai last June to replace Shantel Wong, who was transferred to a management role overseeing the burger chain’s Olympics 2008 platform. (She recently left the company), while Mr. Schwartz was previously senior VP of the company’s U.S. operations and franchising division.

Guy Russo was transferred to China last May from Australia, where he was CEO, to replace Peter Tan, who has also left the company. Described by colleagues as a “cowboy," Mr. Russo joined McDonald’s in Sydney when he was just 15 and by the time he left that market, he had transformed Australia from a trouble spot into one of the company’s most innovative and successful markets.

The zeal this trio of McDonald's veterans brings to the market is necessary to jump-start the U.S. company’s flat sales, especially compared to rival KFC, which has kept costs low while mastering local tastes with innovative menu items and aggressive expansion into China’s lower-tier cities. KFC also has a built-in advantage: Chinese consumers generally prefer chicken to beef.

In the past seven months, the number of McDonald’s stores has grown from 670 to 735, keeping pace with a company target to have at least 1,000 Chinese outlets by the opening of the Olympic Games in Beijing in 2008. Yum, meanwhile, has more than 1,500 stores in China, including KFC, Pizza Hut and Taco Bell.

McDonald’s has also restructured its marketing platform. “Consumers are seeing far fewer messages and promotions from us, but with more relevancy and consistency,” said Mr. Rosen.

A current promotion, with creative by Publicis Groupe’s Leo Burnett, Shanghai, celebrates both the 15th anniversary of McDonald’s presence in China and the Chinese New Year holiday (celebrated this year on January 29-31) by providing a lai see [a traditional Chinese envelope used to present gifts, usually currency] to every consumer who spends at least 18 RMB (US$2.23) at McDonald’s, containing prizes such as free food coupons and even cash.

McDonald’s also relaunched Happy Meals by adding calcium-enriched yogurt as an alternative to French fries for nutrition-conscious mothers. The product’s packaging was updated “in a way that is more fun for kids, such as colorful graphics of Ronald McDonald telling kids how to have a more active lifestyle. It also comes with a mini-magazine for mothers with tips for her, in association with [the Chinese edition of Hearst Magazines International's] Good Housekeeping magazine,” Mr. Rosen added.

Positioning McDonald’s as a lifestyle experience is effective in China, where the cost of a Western fast food meal is far higher than local snacks sold at cheap street stalls. At the same time, in a country that has experienced several high-profile scandals related to food safety and quality, McDonald’s is striving to take a leadership position for transparent health standards. Last year, the China Cuisine Association, an extension of the national health ministry, made McDonald’s the “gold standard” for all restaurants in China, said Mr. Rosen.

“The company is really concentrating in the areas of quality and nutrition, to build a stronger foundation for the business,” added an executive familiar with the company. “In China, it’s not a question of if a food scandal is going to happen, it’s a matter of when, and at that point, everyone will be hurt, but McDonald’s will be hurt less if they’ve established a strong level of trust, and having a reputation for food quality and safety won’t hurt you in good times either.”

It is also a point of brand differentiation for the company, he added, “because McDonald’s and KFC are still seen by many Chinese as interchangeable foreign fast food brands. The issue of food safety is one way to help McDonald’s distinguish its brand in China.”
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