McDonald's Growth Strategy in China: Food Safety and Quality

Many Americans and Europeans may be astonished to hear that McDonald's is touting food safety and quality as the cornerstone of its marketing campaign in China. But it just shows what they know, or rather, what they don't.

Westerners may scoff at the claims of fast food chains when it comes to health and quality, but for many Chinese, these issues are a matter of life and death - literally. Adulterated pork, milk, chicken and other food products that have killed or caused hospitalizations over the past few years have become a national scandal. In that context, McDonald's claims strike a nerve.

Whether that provides a competitive edge versus other western food purveyors like the dominant KFC brand remains an open question. But while wealthier western consumers have come to disdain the high fat and cholesterol content in fast food, Chinese consumers may view the industry's uniformity and quality control as a significant asset. JL

Laurie Burkitt reports in the Wall Street Journal:

McDonald's Corp. is launching an ad campaign in China that taps rising worries over food safety and quality in an attempt to win market share from its dominant rival, Yum Brands Inc.'s KFC.

The fast-food giant is planning to air a series of television commercials this summer to portray itself as the fast-food brand in China with the best quality. The ads will feature "100% fresh beef" on the chopping block, farmers picking tomatoes from the vine and chickens eating high-quality feed, according to a company spokeswoman
Ads will air on Chinese TV networks ahead of and during the Summer Olympics in London, of which McDonald's is an official sponsor and expects to make an impression on a high number of Chinese viewers. "We're not out to have the most stores in China, but we want to have the highest quality," Kenneth Chan, chief executive of McDonald's China, said in an interview Tuesday.

A spokeswoman declined to disclose spending.

The McDonald's ad blitz comes as the company looks for growth in a market dominated by Yum Brands, which runs 3,700 KFC and 626 Pizza Hut outlets there.

McDonald's operates more than 1,400 stores in China and is boosting its investment by 50% this year from a year earlier to open 250 stores, Mr. Chan said. Last year, the company opened about 200 stores. McDonald's aims to have 2,000 outlets in China by the end of 2013, he said.

A Yum Brands spokeswoman declined to comment.

China's dining landscape is becoming increasingly competitive as fast-food chains and casual-dining outlets expand across the country. Sales within China's food-service industry jumped to 625 billion yuan ($99 billion) in 2011, up 14% from a year earlier, according to market-research firm Euromonitor International.

Chinese consumers typically feel that Western food chains use safe ingredients, said Ben Cavender, a senior analyst at China Market Research Group. However, Chinese consumers are wary of food quality in the country after repeated spates of sometimes deadly food-additive scandals and upheavals in which some restaurants were found to cook with oil collected from gutters.

Still, the ad campaign comes as the industry faces increasing scrutiny in China. McDonald's itself earlier this month said it had never used beef treated with ammonium hydroxide in China, as reports that the company had withdrawn the additive in the U.S. reached the mainland. KFC last year defended its use of powdered soy milk rather than fresh milk after facing online and media criticism, saying the powdered product met quality demands that the company couldn't match with fresh soy milk.

McDonald's has increasingly sharpened its television advertising to stay competitive in a key growth market, industry experts say. It launched a TV ad last year to spotlight its chicken products, which analysts say have been overshadowed by the chain's hamburger marketing.

Yum had the advantage of being one of the first restaurant chains to move into and expand across China, which has given the company better access to prime locations, has enabled it to move further into the country's smaller cities and has protected it from a rising number of rivals, said Torsten Stocker, a partner at U.S.-based consulting firm Monitor Group.

China accounts for less than 3% of McDonald's profit, executives said last year. That is around $300 million in earnings before interest and taxes for McDonald's compared with Yum Brand's reported $900 million of Ebit, according to Michael Kelter, an analyst at Goldman Sachs. McDonald's doesn't disclose separate financial data for China.

Yum holds a 5.2% share of China's food-service market, compared with McDonald's 2%, according to Euromonitor.

While Yum currently has the lead in China's food industry, the market isn't yet set in stone, Mr. Kelter said. "China today is essentially the U.S. of the 1950s, which means there are decades to come of compounding growth as the restaurant market matures," he said.

Mr. Chan said McDonald's, which franchises its stores in the U.S. market but is more company-owned and operated in China, is looking for franchise partners in China so that it can pick up the pace of its expansion in the country. It now has 12 franchises in China.

To boost spending for its current customers, McDonald's is remodeling 120 stores this year, equipping them with wireless Internet so diners will linger, bring their computers, and order more, Mr. Chan said. The company is also targeting on-the-go consumers by adding 100 new dessert kiosks this year and 40% of its new stores will be drive-thrus.

Fourth-quarter sales at McDonald's rose 9.8% from a year earlier to $6.82 billion. Profit rose 11% to $1.38 billion from $1.24 billion.