McDonald’s Expansion Policies

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Nearly three out of four of the 30,000 worldwide outlets McDonald’s operates are franchised. 2 Since McDonald’s has chosen to expand using franchises they have been able to penetrate a large number of markets throughout the world with little capital outflow. In order to do this, however, they must have a consistent strategy to maintain the quality of their restaurants. This strategy consists of several key points:

* Gather your people often for face-to-face meetings to learn from each other

* Put your employees through arduous and repetitive management training

* Form paradigm-busting arrangements with suppliers

* Know a country’s culture before you hit the beach

* Hire locals whenever possible

* Maximize autonomy

* Tweak the standard menu only slightly from place to place

* Keep pricing low to build market share.3

Whether McDonald’s is opening a new store in the US or another country, these strategies are the keys to their successes.

Entering China

When McDonald’s Corporation decided to expand its operations into China in the early 1990s, they followed these strategies to increase their chances of success. The growing Chinese economy, an emerging middle class with more money to spend on entertainment, and the Chinese desire for a free-enterprise system triggered the expansion into China. The expansion into China came in the form of joint ventures with Shanghai-based Hualian Group Co. or Beijing Shanyuan Foods Co since franchising was not legal in China in 1990.2

During the first few years operating in China, McDonald’s faced many challenges. First, infrastructure problems and government regulations in the country meant that it would cost twice as much to open and develop new restaurants as it did in the US. For example, in Beijing government officials forced McDonalds to pay fees for such things as “family planning, flowers for the city streets and propaganda telling Chinese to be more gracious.4” These fees were put in place because local Chinese agencies were forced to raise revenues when government funding was cut. McDonald’s also had to negotiate with the Chinese government on where their stores could be located. The government in China tightly controls the use and ownership of land. This was hard for McDonald’s to overcome at first because they were used to being able to choose where their outlets would be placed and develop these sites.9

Development of suppliers was also a challenge when entering China. Initially, the supplies needed to make the food and maintain the facilities were shipped in from developed suppliers around the world. Since the first McDonald’s was opened in 1990, however, the company has invested over $200 million to develop over 50 farms and plants in China to provide supplies to the McDonald’s stores. In 2003, “McDonald’s purchased 6 billion yuan (US $722 million) of raw materials, including beef, potatoes, milk and vegetables, from China.5”

Stimulating demand for McDonald’s in China was also a challenge when first entering the country. In order to stimulate the demand, many new stores in China have had to price their menu items below cost. The low prices and the desire for an American treat typically create strong demand quite quickly and the economies of scale that are realized help these restaurants turn a profit. In china today, nearly half of all their McDonald’s stores make money due to these economies of scale.6

Despite these challenges, McDonald’s Corporation has been able to open more than 560 outlets in China since 1990. Including the world’s largest McDonald’s store in Beijing in 1992. This store has 700 seats, 29 cash registers and on it’s first day of operation served 40,000 patrons.7

Employees

Since one of McDonald’s strategies of expansion is “Hire locals whenever possible,” the company decided to hire local Chinese to operate their stores in China. At first, working for McDonald’s was not perceived as being a respectable job. Before the transformation of the Chinese economy almost everyone worked for the government. Since this has changed the Chinese people were left to find their own jobs and were also left with the reality that they could be laid-off.8

During this time, the Chinese also had a negative attitude towards working in the service industry. McDonalds’s, however, developed a way to change this attitude. First, they provided training for inexperienced workers to promote success. They also offered scholarships to part-time employees who maintained good grades. The biggest thing McDonald’s had to offer to new employees was their pay. “A McDonald’s manager makes twice as much as the manager of a government department, and that counter staff earn at least twice as much as members of a road construction crew.4” These employment practices have made it so college graduates line up at the door for openings at a McDonalds and also make it to where the staff at a McDonald’s in China is enthusiastic about their jobs and willing to welcome all patrons.

Menu

Another expansion strategy, “Tweak the standard menu only slightly from place to place,” was also followed when McDonald’s outlets were opened in China. The menu consisted of the normal

Today, McDonald’s menu in China has not changed much. They have begun to offer spicy chicken wings in some of the outlets in China to try to appeal to the tastes of those in the Sichuan province who prefer spicy foods.9

Competition

McDonald’s has one main competitor in China, Yum! Brands Inc. This company owns and operates KFC and Pizza Hut chains. This company entered China in 1987 and now operates more than 850 KFC outlets in China compared to McDonald’s 560. Not only do they have more outlets, they were also the first to open western-style restaurants in the more rural provinces of China. Since KFC was the first restaurant of it’s kind in China, they have enjoyed much success. KFC has also started to offer chicken rolls, roast duck and rice porridge on their menus in order to cater more to the Chinese taste.9

Franchises

In order to compete with KFC, McDonald’s is currently attempting to expand their operations through the use of franchises. In August of 2003, the first franchised McDonald’s in China was opened in the city of Tianjin, about 100km southeast of Beijing after McDonald’s management helped the Chinese government draft franchise rules.2 The first store that operated under this form of management was so successful that McDonald’s plans to extend this type of expansion throughout the country over 2004.5 To purchase a franchise opportunity in China, a person should expect to pay about 4 million Yuan for the operating rights, basic kitchen equipment and interior d�cor. This price does not include the operating site and advertising costs. To put this price into perspective, this cost amounts to about six times the average annual income for urban people in China.10

The use of franchises will allow McDonald’s to bring their brand to the Chinese in more rural areas and will also allow the owners of McDonald’s outlets to have a better relationship with the local agencies. The franchising of these outlets should also bring more high-paying jobs to those in the rural areas and will provide these people with the training needed to succeed.

Marketing

When McDonald’s first entered China they did not advertise their product on Chinese television. Since the commercials in China only ran between programs, most people would not have seen the commercials. They decided to advertise in magazines and newpapers. Its first advertisements in China were handled by an advertising group, Berson-Marsteller, and emphasized the McDonald’s philosophy of “QSC & V, or quality, service, cleanliness, and value.7”

Early advertisement was also enjoyed through interviews of McDonald’s employees. In these interviews McDonald’s management would also emphasize the nutritional value of their menu items. Chinese food is designed to meet cultural expectations, whereas, according to McDonald’s management, the items at McDonald’s are designed to provide a half-days worth of nutritional content7.

McDonald’s marketing strategy in China has also focused largely around children. Since the Chinese government enacted the “single-child policy,” Chinese children have become the center of attention in most families. Some families refer to their children as “Little Emperors” or “Little Empresses.” Recognizing the importance of these children to families, McDonald’s has developed a way of marketing it’s product both to children and their parents. The key to this program is McDonald’s “Book of Little Honorary Guests.7” This book has been developed to contain the names and birthdays of each child that frequents the McDonald’s restaurants. The book is filled with names by young women, each referred to as “Aunt McDonald.” These women are paid to talk to parents and befriend children that are regulars of McDonald’s. They often send birthday wishes and visit the children’s schools. The name has been given to these women because Ronald McDonald is often referred to as Maidanglao Shushu or “Uncle McDonald.7”

McDonald’s Success

Although the cost to eat at a McDonald’s for a family in China is high, sometimes one-sixth of the family’s monthly income7, McDonald’s has been successful in China. Their success can be linked to Chinese culture at the time McDonald’s opened it’s first restaurant in China and to the way in which McDonald’s has adapted their company to become more localized.

First, the Chinese view a trip to McDonald’s not just as a trip to obtain food, but as an experience of New China. China has changed a lot over the past few decades. Its people have gone from poverty stricken to middle-class citizens and enjoy spending the little money they do have to show they have come a long way. To those that have lived to watch China change, McDonald’s has become a symbol of how much better life is in modern China. People who work for or frequent McDonald’s in Beijing have also learned new Americanized terms for things such as waste and cheese which also makes them believe they are eating at a modern establishment.7

McDonald’s is also frequented by the locals because of its consistent emphasis on cleanliness and quality. McDonald’s stores and restrooms are always clean, which is not always the case in other Chinese owned restaurants. The food at McDonald’s is also consistent at all outlets because they use the same fresh ingredients and recipes at all stores.

Another reason so many Chinese frequent McDonald’s stores is their desire to eat in a place where everyone is treated equally. Most people in China today are used to attending banquets in which the person hosting the banquet must always worry about serving the best food and drinks. They are used to competing with the people sitting at the next table over who is serving the highest quality dishes to their guests. When asked why they enjoyed McDonald’s so much, many replied that they like the limited menu and consistent quality offered at McDonald’s. There is no competition as to who ordered the best dish at McDonald’s since all dishes have the same consistent quality.7

Cultural Impact

The opening of McDonald’s stores in China has also had an effect on Chinese social behavior.

Prior to the opening of western-style restaurants, the Chinese were accustomed to getting their way by mobbing an establishment. For example, when the first McDonald’s opened, customers swarmed the counter, screaming their orders and throwing their money at the cashiers. A young McDonald’s employee was appointed to coax these patrons into forming a line. Some credit the employees of McDonald’s for the Chinese accepting the fact that they must accept the wait-you-turn system of obtaining what they want.11

Frequent patrons of McDonald’s have also learned to clean up after themselves and lower their voices in restaurants. When McDonald’s were first opened in Beijing, patrons left their trash on the tables for the employees to clean because they viewed McDonald’s as a formal restaurant, but as time has passed they have learned to take their trash to the appropriate bins just as the Americans would do. They have also started to speak more softly in McDonald’s restaurants than they would typically speak in Chinese owned establishments.

McDonald’s has also become a place to gather and enjoy time with one’s family or friends. For example, on any given day one can observe school children spending their afternoon after school at a McDonald’s talking and studying. McDonald’s has also become known as a great place to take a date because the stores are clean, modern and relatively quiet.

The opening of these restaurants has also created a new social order-the yuppies. These are young professionals in the cities of China that eat at McDonald’s and other foreign restaurants to show to others that they have made it as business people.7

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