A Giant New McDonald's in Ho Chi Minh City Won't Solve the Chain's Asia Problem


McDonald’s (MCD) is getting closer to covering the planet with Golden Arches. The fast-food giant this weekend will open a 350-seat restaurant in Ho Chi Minh City, its first outlet in Vietnam. In Asia, only seven countries are now without Big Macs: Bangladesh, Bhutan, Cambodia, Laos, Myanmar, Nepal, and North Korea. Expanding into new markets is especially important for McDonald’s, which relies on markets outside the U.S. for about 68 percent of its revenue.

And after suffering through a rough year in Asia’s two biggest markets, the company could use a bit of good news from Vietnam. In both China and Japan, consumers are losing their appetite for McDonald’s fare.

On Jan. 24, McDonald’s announced that in China, its comparable sales had dropped in the fourth quarter by 40 basis points. For all of 2013, the company endured a 3.6 percent decline in China. The decline must be especially worrisome for McDonald’s executives, since it came at a time when the Chinese economy was slowing down but still growing more than 7 percent.

McDonald’s isn’t giving up. The company said last May it would hire another 75,000 employees in China, nearly doubling its existing Chinese workforce of 90,000. There are nearly 2,000 Golden Arches outlets in China; last year, McDonald’s added 275, a little short of its stated goal of 300. “Given the opportunities inherent in a growing, more prosperous middle class, we also continue to grow through expansion in China,” Chief Executive Donald Thompson said in a conference call with Wall Street analysts on Jan. 24.

To be sure, some of the problems were the result of safety scares caused by outbreaks of avian flu rather than customer dissatisfaction. “We feel we’ve got a sound strategy,” Chief Operating Officer Tim Fenton said.

The problem of declining sales in Asia isn’t limited to China, though. Japanese Prime Minister Shinzo Abe’s reform agenda may have helped jump-start the economy and fueled expectations of record earnings at such companies as Toyota Motor (TM) and Hitachi (6501:JP), but Abenomics hasn’t helped lift demand for Big Macs in Japan. One of Abe’s top goals is to end deflation, and prices are indeed rising again in Japan.

While that might encourage more Japanese to consider low-cost fast food, those consumers are not turning to McDonalds. Same-store sales dropped 9 percent in December compared with the same month a year earlier, McDonald’s Japan told the Tokyo Stock Exchange on Jan. 8. That decline followed a 10.4 percent fall in November and was the sixth consecutive month of slipping sales. The slide started shortly after McDonald’s raised prices for the first time since 2008, with the cost of hamburgers jumping 20 percent, to 120 yen ($1.18), and the price of a cheeseburger rising 25 percent, to 150 yen ($1.48).

The price increase didn’t help Tokyo-listed McDonald’s Japan (7202:JP), which is about 50 percent owned by the U.S. parent. The company had 3,170 outlets in Japan as of October and plans to close 74 restaurants, McDonald’s Japan announced in December. For all of 2013, revenue slid 11.6 percent, to 260.4 billion yen ($2.56 billion), McDonald’s Japan announced today. Profits were just 5.14 billion yen, a 60 percent drop from 2012. Over the past six months, McDonald’s Japan stock price has declined almost 9 percent, compared with a 2.6 percent fall for the benchmark Topix Index.

For all of Asia, comparable store sales fell 2.1 percent in December, according to data compiled by Bloomberg. That’s much worse than the company’s worldwide total of minus 1.2 percent growth. Moreover, December was the fourth consecutive month with McDonald’s Asia’s same-store sales dropping more than 2 percent. As more Asians seem to grow tired of McDonald’s, opening some restaurants in Vietnam won’t help turn things around for the fast-food company.

Source: Bloomberg Business Week 

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