For most of the past two years, Eikoh Harada's jump from iMac to the Big Mac has looked like a pretty bad move. In March, 2004, Harada quit as president of Apple Computer Inc.'s (AAPL) Japanese business and took over as chief executive of McDonald's there. Although he had earned praise for turning around Apple's operations, many doubted he had what it took to combat slumping sales and profits in McDonald's second-biggest market after the U.S.
Until recently, it looked as if the doubters might be right. True, under Harada annual sales have risen 8.5%, to $2.8 billion. But last year, net profits slumped 98%, to $515,000. The weak earnings stemmed partly from restructuring costs, but a big factor has been a strategy of pricing Big Macs, fries, and other items at just 100 yen (85 cents). "The cheap burgers attract customers but don't contribute to earnings," says Yasuhiro Matsumoto, an analyst at Shinsei Securities Co. in Tokyo.
These days, though, it appears Harada may be on to something. McDonald's Japan has outperformed a sluggish market for fast food and posted increases in same-store sales of as much as 11.6% every month since February. Perhaps more important, customers are spending more. On Aug. 2, the company posted a 650% climb in operating profits to $10.7 million for the first six months of year, prompting Harada to raise his full-year projection for pretax profits by 20%. That's helping the fortunes of McDonald's Corp. (MCD), which owns half of Tokyo-listed McDonald's Holdings Co. (Japan). Announcing second-quarter sales results on July 17, McDonald's CEO Jim Skinner cited "strong performance in Japan and Australia."
Harada's efforts have been helped by new sandwiches better tailored to Japanese tastes. One hit: the Ebi Filet-O, a shrimp burger that generated sales of 10 million in the first three months after its launch last October. New salad plates introduced in May, called Salad Macs, are proving just as successful, despite prices around $5.
Still, rebuilding the brand will take more than just a few hits, however tasty. When McDonald's Japan listed in Tokyo in 2001, the company aimed to have 10,000 restaurants by 2010. Today, there are 3,600. At 16.65, the stock trades at less than half its initial public offering price and, so far, hasn't really budged despite the rising sales. Operating margins, which regularly topped 8% a decade ago, remain at about 2% today.
Today young Japanese are happy to pony up for a Caramel Frappuccino from Starbucks (SBUX) or a bowl of noodles at a local mom-and-pop eatery. "I don't go [to McDonald's] that often," says Takeshi Miyazoe, a video game developer in Tokyo. "There are so many other good restaurants." There are also 30,000 convenience stores selling everything from sausages to sushi. They account for a third of Japan's $62 billion fast-food market. To hit back, Harada says McDonald's will keep more restaurants open 24 hours a day. Other concerns are demographics and the rebounding economy. With fewer children being born in Japan, the traditional customer base is shrinking. And as deflation tapers off, cheap McDonald's grub is less tempting. "With the macroeconomic environment picking up, the quality of the food becomes more important and people care less about price," says Yukimi Oda, an analyst at Morgan Stanley (MS) in Tokyo.
Harada is keen to move further upmarket. "We have to graduate with our customers," he says. McDonald's now offers wireless Internet service at 2,660 restaurants, increasing traffic as salarymen surf while they snack. Harada is even considering a new format with fancier menus and interiors, though he's sparse on the details. "Of course," he says, "our Golden Arches will stay."
By Ian Rowley, with Hiroko Tashiro in Tokyo