A Tall Order for McDonald's Japan

Can it make the change to a public company?

Japan's decade-long recession hasn't taken much luster off the Golden Arches. Thirty years after McDonald's Company (Japan) Ltd. inaugurated its first restaurant in Tokyo's Ginza district, the burger chain now boasts 3,665 outlets in Japan and close to $4 billion a year in sales. On July 26, McDonald's Japan will add shares to its menu when it sponsors an initial public offering on the Japanese over-the-counter market. The highly anticipated placement--the first by a McDonald's unit outside the U.S.--could net more than $1 billion, making it Japan's biggest IPO this year.

That would be a crowning achievement for Den Fujita, McDonald's Japan's founder, who at 75 still exerts an iron grip on the chain's day-to-day operations. Fujita has big plans for the money. He is aiming for a total of 10,000 outlets by 2010, raising the burger chain's share of the overall restaurant market from 2% today to 5%.

BIGGU MAKKU. Thus the company seems well on its way to "A McDonald's in Every Neighborhood"--its TV slogan. The question is whether Fujita is overestimating Japanese consumers' appetite for Biggu Makku. And even as McDonald's Japan expands, it faces nagging questions about the transition from a closely held company run almost single-handedly by Fujita to a public corporation that must answer to minority shareholders.

These new shareholders will demand continued high earnings. The danger is that Fujita "won't be able to cut costs enough to generate significant profit increases," says Michael Jacobs, analyst in the Tokyo office of Dresdner Kleinwort Wasserstein. And he's not the only one raising the alarm. The Japan Securities Dealers Assn. says McDonald's expects to post a net profit of $123 million in 2001, a 12.4% decline on last year's figure.

Is Fujita's fondness for slashing prices eating into profits? The price of McDonald's cheapest burger has dropped 70% since 1995, while production costs per burger have fallen by just 25%. Company officials contend that only 10% of all customers buy single burgers. Most end up purchasing higher-priced meals. And the price cutting has had one big benefit: It forced Burger King Corp. to flee Japan earlier this year after only a five-year stay, leaving McDonald's with 65% of the burger market. Now, only one international competitor, Wendy's, remains, along with an assortment of home-grown chains.

McDonald's has made Fujita one of the richest men in Japan and the most respected. His family controls 41% of the restaurant chain; the Oak Brook (Ill.) parent owns the rest. Yet the 10,000 restaurant plan could mean Fujita's reach is finally exceeding his grasp. In order to reach that target, the company needs to diversify beyond burgers and fries. Otherwise McDonald's risks having one restaurant cannibalize sales from another, a possibility Fujita acknowledged at a meeting with analysts recently. The next step is likely to be Japanese-style foods, such as bento boxed rice lunches.

The company will put 26.2 million shares up for sale. After the IPO broadens the ownership base, analysts say strategic decisions can no longer be made by a committee of one. The headstrong Fujita now takes personal charge of everything from royalty negotiations with the parent company to the purchase of forward currency contracts. "The transition for a very private company with such a charismatic leader as Fujita won't be easy," says Jacobs. Fujita, who has failed to groom a successor, isn't making it easier.

The succession question hangs heavily over McDonald's Japan, but the company plays down the issue. "We have a number of qualified candidates, so we don't view it as a problem," says McDonald's Japan spokesman Kenji Kaniya. Fujita's only public comment on the subject has been to rule out as possible presidents his two sons, both of whom own stakes in the company. Fujita's legacy may now hinge on his skill in passing the baton---even if that means that McDonald's and the Fujita name are no longer synonymous.

By Chester Dawson in Tokyo

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