Mcdonald’s Is China Loving It Possible Solution

With China’s rapidly developing economy, the rising wealth of its middle-class and more Western fast-food chains infiltrating the nation, McDonald’s finds itself at a crossroads. The company must evaluate its current standing in the Chinese fast-food market and elect to either continue its present operations, hoping to maintain its second place rank to KFC, or implement new strategies to gain market share, meet the Chinese people’s expectations, and abide by governmental standards. The following alternatives will be evaluated to make a decision:

1. Base – status QUO

In this scenario, McDonald’s will continue operating under its current strategies. New threats from competitors in China, including long-time rival KFC, Asian fast-food companies like Hong Kong’s Cafe de Coral, Taiwan’s Dicos Fried Chicken and Japan’s Ajisen Ramen, and emerging Western chains like Subway and Rainforest Cafe, would be ignored. Since its competitors’ menus focus on Chinese preferences for chicken and noodle dishes, McDonald’s will attempt to continue to offset that advantage by emphasizing quality and service. However, in the long run, McDonald’s operations would fall victim to China’s developing economy.

In particular, China’s unionized workers would call for additional pay increases and inflationary pressures would cause material costs to rise. As a result, McDonald’s would be forced to increase its prices, as it had done in the past. In all likelihood, the price point for the quality of food offered would fail to live up to public and governmental standards. With competitors progressing in tandem with China’s economy, offering more luxurious casual dining environments and healthier menu options, McDonald’s would fall behind in the market.

Option 1: Efficiency, Convenience, and Environmental Responsibility.

In this case, McDonald’s would augment its strategies to remain competitive with Western fast-food counterparts like KFC, Burger King and Subway, and Asian competitors like Cafe de Coral, Dicos Fried Chicken and Ajisen Ramen. McDonald’s would capitalize on the public’s demand for quick, convenient service at low prices and continue using its tier pricing model. The company would further exploit the wealth distribution in China by widening its target focus to include the increasing purchasing power of the lower-tier consumer in rural egions of the country. Chinese rural households account for over 60% of the total population. These households spend a larger proportion of income on food, compared to urban households, but as incomes rise, the proportion spent on food does not increase. Thus, McDonald’s would focus on selling more products to more customers at lower prices. McDonald’s would incorporate healthier options in its menu, so to compete with Subway, a chain focused on fresh, healthy food, and to address growing governmental concerns with an obesity epidemic.

McDonald’s would also secure and sustain its locally-based supply chain and joint ventures, to maintain value and its business model, keeping competitors at a disadvantage. Despite the lack of formal legislation on environmental issues in China, McDonald’s would further emphasize its dedication to decreasing its environmental impact by repositioning itself as a market leader in environmentally friendly packaging, going beyond the established “no straw days” instituted in Hong Kong.

This will highlight McDonald’s willingness to partner with its customers to decrease the use of plastic as well as reducing packaging costs. McDonald’s long-term goal would be to dominate the fast-food market as a dependable, responsible and valued brand.

Option 2 – Sophisticated Dining Experiences

This option targets the higher-income segment of the population. McDonald’s would recognize that individuals in this market have rising standards on the type of food and service they receive.

Additionally, the amount of money these individuals spend on food, in proportion to growing incomes, is not increasing (see Exhibit 1). In order to retain these higher-income customers, McDonald’s will offer more luxurious ambiences and more amenities at its restaurants. McDonald’s would renovate current locations and build new locations in two ways, with both types offering the typical Western McDonald’s menu and options catered to Chinese tastes. One line of restaurants would encompass sit-down dining-rooms with waiter-service, which would mainly compete with Pizza Hut and Rainforest Cafe.

The other line of restaurants, McCafes, would include sit-down dining spaces without waiter-service and offer wireless internet, calm music, and comfortable seating. The McCafes would compete directly with Starbucks. Delivery service and car-side pickup options would expand throughout the country in both types of settings, to maintain sales volume. In addition, coupon partnerships with Internet companies like Taobao.com will continue to provide incentives for customers to dine at McDonald’s.

The main risk in this scenario is that McDonald’s is completely revamping its identity as a true-fast food company. Consequently, the company may lose its second-place position to KFC, to justify itself as a luxury brand.

 Option 3 – Fast Food Efficiency and McCafe Combination

In this situation, McDonald’s would implement strategies from options 1 and 2. Tier pricing would continue, services and products would be tailored to the characteristics of the various provinces in the nation, and convenience, health, the environment, and luxury would be emphasized.

As in option 1, McDonald’s would expand its operations in the more rural, Western provinces and renovate current locations in urban areas, to include the environmentally friendly and health-conscious menus and processes. In addition, a percentage of the urban locations would be transformed into McCafes, as mentioned in option 2. Drive-thrus, delivery service, and car side pickup would expand to all areas. Furthermore, McDonald’s would secure its local supply-chain, proceed with its joint venture structure, and continue coupon programs with Internet companies.

Critical issues

The following issues are significant considerations for McDonald’s, in order to make its decision:

1. Brand Perception: McDonald’s needs to convince its Chinese consumers that it offers a product worthy of the price it costs, that the products are special and luxurious, and that the company cares about its workers, the environment, suppliers and the health of consumers. McDonald’s must also address governmental concerns on safety and health, demonstrating that its products will not propose any detriment to China’s developing economy.

2. Impact on Market Share:  Since KFC, its biggest competitor, entered the China market earlier than it did, McDonald’s must consider whether its new strategies will be able to surpass KFC in the fast-food market. McDonald’s must consider that as China develops, many new competitors will enter the fast-food market. McDonald’s strategies must be able to attract and maintain its targeted customer bases, and attract the consumers in competitors’ markets.

3. Long Term Sustainability: McDonald’s must consider whether its plan would have its desired affect to gain market share, maximize gross margin and cut its expenses.

The company wants to ensure that it will maintain pricing power (charging more for fewer high-end product sales and charging less for more low-end product sales), improve consumer confidence in a rapidly changing economic environment, and continue to profit in the future.

4. Costs to Implement: McDonald’s must consider the expenses associated with developing new programs and funding expansions. The company must be confident that future profits will cover implementation costs. Base refers to current method. The ratings are based on a 1 through 5 scale with a score of 1 being poor and a score 5 being excellent. Weights for each criterion were assigned on an arbitrary evaluation of their importance. Brand Perception was considered most important (0. 4 weight) because most of McDonald’s problems regarding competition in China stem from a changing consumer perception of the McDonald’s brand.

Impact to Market Share was considered to have the strongest secondary importance (0. 3 weight) because McDonald’s main motivation for changing marketing strategies is to gain market share from its major competitor KFC as well as share from the increasing number of domestic fast food suppliers. Long-Term sustainability was considered to be less important (0. 2 weight) as in such a highly competitive market, McDonald’s may be forced to continuously alter the focus of its marketing strategy due the dynamic nature of the Chinese market. Finally, Cost to Implement was considered to be the least important (0. weight) as McDonald’s growth has been extremely robust and, regardless of the competition it faces, McDonald’s should be able to finance significant capital expenditures for the purpose of securing future growth. The option with the highest score should be implemented immediately. Base is included for comparison only.

Analysis of alternatives base method:

•Brand Perception – FAIR – Increasing awareness of the health risks of McDonald’s food, unfair treatment of workers, inconsistent environmental policy, and global perception of McDonald’s has reduced Chinese perception of the McDonald’s brand. The brand will continue eroding without action.

•Impact to Market Share – POOR – McDonald’s will lose market share to KFC and an increasing number of domestic and foreign competitors offering diverse fast food and casual dining options.

•Long-Term Sustainability – POOR – The dynamic changes in the purchasing power of Chinese consumers and the eroding brand perception will inspire them to purchase alternative products to those offered by McDonald’s.

•Cost to Implement – SUPERIOR – McDonald’s will incur no additional costs than it is already incurring in the China market.

Option 1: McDonald’s concentrates on efficiency, convenience, and environmental responsibility.

•Brand Perception – SUPERIOR – Increasing supply chain efficiency, healthy food alternatives, clean/green/modern restaurant environment will make Chinese consumers perceive McDonald’s to be a vital, healthy, and responsible fast food alternative.

•Impact to Market Share – SUPERIOR – McDonald’s will gain market share from KFC and other domestic and foreign competitors because its modern, energy efficient, and cost effective supply chain approach will allow McDonald’s to offer a superior product at a competitive price. Long-Term Sustainability – SUPERIOR – The efficiency of this new style of McDonald’s will enable it to keep profit margins higher during times of increased inflation and raw materials costs. This advantage will increase the sustainability of McDonald’s.

•Cost to Implement – POOR – McDonald’s will incur significant capital expenditures costs to refurbish current restaurants, develop a more efficient supply chain process, research healthier fast food alternatives that will prove successful in the Chinese market while maintaining McDonald’s brand identity as an American hamburger company.

Additionally, McDonald’s will incur significant advertising expenditures as it campaigns to sell the new, green, and modern McDonald’s.

Option 2: McDonald’s concentrates on sophisticated dining experiences

•Brand Perception – GOOD – McDonald’s will increase the Chinese market’s perception of the McDonald’s brand by offering a more sophisticated dining experience worthy of higher prices and a continued characterization as a luxury brand. Impact to Market Share – FAIR – McDonald’s will enter a smaller and more specialized market with increased risks. While offering a more sophisticated and specialized food alternative will allow McDonald’s to charge a premium, there is a significant probability that this alternative will not catch on due to the increasing purchasing power of Chinese and ability to choose among casual dining competitors such as Pizza Hut and Rainforest Cafe.

Long-Term Sustainability – FAIR – It is highly possible that the radical change in business plan suggested by option 2 will increase profits in the short-term as the new McDonald’s will be considered a novelty however, over the long-term, this novelty may wear off and significantly reduce the amount of returning customers. Cost to Implement – FAIR – McDonald’s will incur significant capital expenditures costs to refurbish current locations into more sophisticated casual dining atmospheres and significant advertising costs as the company campaigns to change the Chinese perception of McDonald’s from being a cheap and low class dining option to a sophisticated high-end establishment.

Option 3: Fast food efficiency and McCafe combination brand perception

McDonald’s brand perception will be maximized as it will offer a clean and green environment with fresh, fast, inexpensive, and healthy food in its flagship stores and a sophisticated and cool bistro cafe experience with interesting regional food options in its McCafe stores.

•Impact to Market Share – SUPERIOR – McDonald’s will gain market share from KFC and other domestic and foreign fast food chains as it will offer a superior product at a lower price with an increasing corporate responsibility to have a low environmental impact.

Further McDonald’s will steal market share from casual dining and coffee shop entrants as it works to make McCafe a market leader. •Long-Term Sustainability – SUPERIOR – Option 3 will foster superior sustainability through a strong brand perception of McDonald’s as a market leader in efficient and healthy fast food and cafe service. McDonald’s efforts to use its economies of scale to produce a very low environmental impact will keep its operating costs low and allow McDonald’s to price out the competition in the long-run while keeping margins high. Cost to Implement – POOR – McDonald’s will incur significant capital expenditures as it retools its supply chain and refurbishes its stores to operate more energy efficiently and with minimal environmental impact as well as advertising costs to convince Chinese consumers that it has corrected its prior missteps and has reinvented itself as a market leader in a new fast food space. VII. Recommendations Options 1 and 2 are not the best route for McDonald’s to pursue.

In option 1 McDonald’s will seek to compete in only one market, the cheap fast food market. The more healthy, modern, and energy efficient approach will increase its brand perception, but at the opportunity cost of not exploring more casual dining marketing opportunities. By pursuing only option 2, McDonald’s will compete only in the casual dining market but at the opportunity cost of the cheap fast food market that McDonald’s has been a world leader in.

While option 2 will result in increased brand perception, the long-term sustainability of this option is unclear and may not justify the significant capital expenditures required to refurbish the company’s locations. While option 1 and 2 will both significantly increase McDonald’s brand perception, the increased costs of implementation and increased opportunity costs of foregoing other markets for a single market approach warrant that these options not be recommended.

We recommend that McDonald’s pursue option 3 because it is a multi-segmented approach that utilizes McDonald’s current position as a market leader and focuses on expanding McDonald’s marketing footprint in the casual but sophisticated bistro/cafe space. Option 3, more than the other options, will increase McDonald’s brand perception and counter the growing sentiment in the China market that McDonald’s does not treat its workers fairly, does not offer healthy food choices, and does not strive to positively impact the environment.

Following option 3 will reposition McDonald’s as a healthy and environmentally responsible fast food alternative. While this option will incur significant capital costs in the short-run, this option will allow McDonald’s to grow market share, price more competitively, and run a more streamlined operations that, in the long-run, will reduce operating expenses and lead to higher margins. As it will impact the problems McDonald’s faces in the case most effectively, we highly recommend that McDonald’s implement option 3 immediately. From HBS case, McDonald’s Is China Loving it?