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McDonald's Chinese take-out

McDonald's has traveled light years from its '70s-era formulation of two all-beef patties, lettuce, cheese, pickles, onions, and special sauce on a sesame seed bun. And nowhere is that shift more evident than in Asia.
McDonald's staffs
McDonald's staff hold the new 'Toasted Shrimp Rice Burger' during the opening ceremony of McDonald's Food Studio and Quality Center in Hong Kong earlier this week. McDonald's plans to have more than 1,000 outlets in China by 2008 Olympics.Kin Cheung / AP
/ Source: BusinessWeek Online

McDonald's has traveled light years from its '70s-era formulation of two all-beef patties, lettuce, cheese, pickles, onions, and special sauce on a sesame seed bun. And nowhere is that shift more evident than in Asia. A generation ago, the Golden Arches in Asia offered little more than the basic fast-food fare also found in Kalamazoo or Kansas City.

No longer. Last year in Taiwan, a new lineup of sandwiches featuring Kalubi beef or spicy chicken on a fried-rice patty glazed with soy sauce was a smash hit, and was quickly rolled out to Singapore and Hong Kong. The McArabia flatbread, chicken, onion and garlic mayonnaise number that debuted in the Middle East a few years back is now in Indonesia. And the popular Ebi Filet-O, basically a shrimp burger -- all the rage in Japan -- may soon make its way to restaurants around that region, too.

McDonald's executives in Hong Kong, where the company oversees operations of some 7,700 outlets around Asia, the Middle East, and Africa, would love to see even more of this kind of cross-fertilization. To help make that happen, the conglomerate on June 6 opened a new multimillion-dollar food studio and quality center. It's a culinary idea lab that will draw on diverse cooking styles to jazz up McDonald's offerings in the region. "We are in the world's greatest cookbook," says Tom Pickles, McDonald's Hong Kong-based senior director for menu management.

Giant footprint
The food lab will draw on the expertise of an executive chef, nutritionists, and quality control experts to speed up the conception and introduction of new menu ideas. Another key focus is to make sure McDonald's 500-plus regional suppliers abide by the strictest safety standards, especially procuring beef and chicken. A lapse would be a brand killer in Asia, given all the concern about avian flu outbreaks in Indonesia and Vietnam.

McDonald's Hong Kong regional headquarters has a managerial footprint covering 35 countries. The division generated $2.8 billion of McDonald's total revenue haul of $20.4 billion in 2005. But the markets that matter most are Australia, China, and Japan (where the company owns a 50% stake in its operating unit). Those three countries account for about half of McDonald's total sales in Asia, the Middle East, and Africa.

Just as it does for every other consumer products company on the planet, China represents the biggest opportunity for McDonald's. The company opened its first restaurant in Shenzhen back in 1990 and has about 750 on the mainland now. Last December, it opened its first Chinese drive-through restaurant, in Dongguan, a prospering city in Guangdong province in southern China. And plans are underway to expand the format to Shenzhen, Shanghai, Beijing, and other markets where car ownership is soaring.

Another 250 stores will be added by the summer of 2008, when Beijing will host the Olympics — McDonald's is a major sponsor of the Games. Tim Fenton, the top executive at McDonald's regional operation, who relocated to Hong Kong in March, sees unbridled growth ahead in China. He thinks the market could eventually support about 10,000 restaurants, vs. roughly 13,800 in the U.S. today.

"This is the fastest growing part of the world, and we are growing with it," says Fenton, a tried and true McDonald's man. He joined the fast-food colossus back in 1973 as a crew member at an outlet in Utica, N.Y.

Back at global headquarters in Oak Brook, Ill., CEO Jim Skinner is expecting strong performance in Asia and also Europe, where McDonald's booked $7 billion in 2005 sales. That's not to say McDonald's U.S. operations haven't made a big comeback from the scary sales stall earlier in the decade. Better coffee, aggressive store renovations, and extended hours in the U.S. have boosted revenues and profits.

Japan's slump
In April, the company's U.S. operations added a new Asian salad with mandarin oranges, snow peas, red bell peppers, and low-fat dressing that looks promising. Still, it was largely fast overseas growth that generated a 6% increase in global sales, to $5.1 billion, and a 2% jump in operating profits, to $923 million, during the first quarter of this year.

One area that needs shoring up in Asia is Japan, where McDonald's joint venture operates about 3,800 outlets. Last year, profits slumped when a discounting campaign didn't pull in the expected numbers. And this year, operating profits fell 20% in the first quarter, thanks to higher staff training and food supply costs.

To keep consumers coming back, the company now offers wireless broadband service at 2,600 outlets, and 200 of its restaurants operate around the clock. Seiichiro Samejima, an analyst at Ichiyoshi Research Institute, thinks that helps, but he'd like to see a more diverse and jazzed-up menu. "They have to develop more hit products," he says.

That is precisely the logic behind McDonald's new food studio in Hong Kong. And if Fenton and his team have their way, expect to see some pretty exotic fast-food offerings (fermented soybean burgers, anyone?) showing up at an ever-evolving Mickey D's in Asia.