Can Makudonarudo Turn Up The Heat?

Struggling McDonald's Japan is trying a new recipe, including a CEO from Apple

Eiko Harada won accolades for reviving the Macintosh computer brand in Japan during his seven-year stint as CEO of Apple Japan Inc. Now he has been named chief executive of McDonald's Holding Co. (Japan) Ltd. and hopes he can do for the Big Mac what he did for the iMac. "Hamburgers and personal computers are the same," he quipped to reporters in explaining why he's qualified.

Harada's task won't be easy. McDonald's Japan has suffered two straight disastrous years, losing a total of $87.5 million. Rapid expansion and the necessity of heavily discounting its prices in deflationary Japan slammed same-store sales, which overall fell 4.4% last year. Worse, an outbreak of mad cow disease in Japan in 2001 hit the company's 2002 results. Then mad cow broke out in the U.S. last December, and Japan imposed a ban on imports of American beef. Hamburgers suddenly became unpopular. Shares of Tokyo-listed McDonald's Japan have fallen 13% since its latest peak in December and are now priced below their 2001 initial public offering.

Given that the Japan operation generates nearly $2.7 billion in sales and is the biggest franchise of McDonald's Corp. (MCD ) outside the U.S., the troubles there made the folks back at headquarters in Oak Brook, Ill., a bit edgy. So they ended a 30-year contract with their Japanese partner, billionaire entrepreneur Den Fujita, taking a onetime charge that contributed to last year's losses. Mc-Donald's U.S. then installed as chairman Pat Donahue, who ran McDonald's Canadian operation, to replace Fujita, who retired at the age of 77 in March, 2003, citing health problems. (Fujita and his family still own 26%, while McDonald's U.S. has a controlling 50% stake.) Donahue recruited Harada as chief executive.

MORALE BOOST. Now Makudonarudo, as the Japanese call it, is on a crash diet. Donahue has cut costs by closing unprofitable franchises and laying off 15% of the staff at the Tokyo headquarters. Three years ago, Fujita boasted that he would have 10,000 McDonald's restaurants by 2010. Today there are 3,752, down from 3,891 in 2002. Donahue is following the corporation's strategy in the U.S. of packing more customers into existing restaurants while renovating 800 outlets. The company took a $23.4 million charge in December to pull out of a failed high-end sandwich venture with a British company called Pret A Manger. Donahue has also backed away from Fujita's favorite ploy for drawing customers -- dramatically reducing prices, sometimes to as little as 50 cents a burger.

Already, the outlook is beginning to improve. Same-store sales in local currency terms increased in January for the third month in a row. Morgan Stanley (MWD ) analyst Taizo Demura says McDonald's 2004 profit target of $26.5 million is "very achievable" and forecasts a 43% jump in net profit, to $37.9 million, in 2005, on $2.8 billion in sales.

A full recovery, though, will mean adding more pizzazz to the menu. In addition to existing Japanese-style entrees like the Teriyaki Burger, the company is rolling out spicy Korean-style burgers, a low-calorie tofu sandwich that's being marketed to women, and a bigger Premium Mac aimed at hungry men. The menu changes already are driving the sales gains. "Our morale has been strengthened," says Atsushi Ito, who runs a McDonald's restaurant in a Tokyo suburb. The challenge now is getting back the magic that, starting 33 years ago, made McDonald's one of the most successful U.S. investments ever in Japan.

By Brian Bremner and Hiroko Tashiro in Tokyo, with Michael Arndt in Chicago

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