Updated: Big losses ahead for McDonald's Japan

by Meat&Poultry Staff
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McDonald's Japan believes menu innovations such as a new Tonkatsu McBurger on the regular menu will coax consumers back into its restaurants.

TOKYO – McDonald's Holdings (Japan) Ltd. is bracing for losses of 17 billion yen ($157 million) in net income for fiscal 2014. Parent company McDonald's Corp. holds more than 49 percent of struggling McDonald's Japan.

The unit withdrew its original earnings guidance in July due to uncertainty of sales and profits in the wake of the Shanghai Husi food-safety scandal. But now that the financial picture has cleared, it doesn't look good: McDonald's Holdings expects that "large extraordinary losses from write-offs of unsold food products and impairment charges" stemming from the incident will result in large net losses for the year.

"The company’s financials have been/will be largely affected by the Shanghai HUSI incident," the company said in a statement. "It is probable that sales for this year will be far lower than expected at the beginning of the year. This will significantly affect our overall profitability, due to the profit impact from the sales decline, costs impacts either directly or indirectly resulting from the incident as well as our strategic investments to recover from the incident by regaining customer confidence in our food."

Food-safety authorities in Shanghai suspended operations at the Shanghai Husi plant after a television report showed workers picking up meat from the plant floor and mixing fresh meat with expired meat. McDonald's severed ties with OSI China, a unit of Aurora, Illinois-based OSI Group. But according to an OSI spokesperson, there has been no evidence that expired meat was mixed with fresh meat at the plant in question, and that media reports implying this are unsubstantiated and based on allegations only.

McDonald's holdings also forecast all-store sales declines of 45 billion yen ($415.5 million) for the fiscal year.

"It’s obvious that we need to take action on pricing, menu innovation and restaurant development to create more customer value at McDonald’s, and we need to accomplish progress on them faster," the company said. "So as we began to assess our plan in May, we decided to sharpen our focus to more quickly deliver on these foundational customer needs. We will sharpen our focus on the three key areas to do these things better and meet customers’ basic needs."

In the area of pricing, the company plans to launch a Value Lunch promotion on Oct. 8 which will offer 10 different Extra Value Meals for 350 ($3.23), 450 ($4.15) and 550 ($5.07) yen.

"We also have started a full pricing review to assess our offering’s relevance with customers," McDonald's Holdings added. "Our goal is to offer more customer value, implement consistent pricing structures and easy to understand pricing displays.

Additionally, the company plans changes to its couponing strategy.

"We want our loyal customers to feel more valued, while at the same time ensuring our regular pricing has better integrity," the company said.

Menu innovations include a new Tonkatsu McBurger (a fried pork cutlet topped with shredded cabbage and a sweet Tonkatsu sauce which contains grated onion, carrot, tomato and apple) that will be added to the regular menu. The initiative also means more options for young children and leveraging supplier connections to bring new food ideas and innovations to McDonald's.

Finally, the company plans to invest in its restaurants to enhance customers' dining experience. The company plans to rebuild, remodel and refresh restaurants in the next four years. The company said approximately 25 percent of its restaurants could be considered modern. McDonald's plans to increase that number to 85 to 90 percent in 2018.

"We had focused on building what we call Gold Standard Drive Through restaurants and strategically closing others, but this has still left us with many that are older and outdated," the company noted. "We will focus more on rebuilding, remodeling and refreshing of existing restaurants to provide a “more comfortable eating experience” to customers."

As part of the company's redesign, rebuild and refresh campaign, McDonald's plans to discard its one-size-fits-all format in favor of localized styles.

"We will to take a new approach to restaurant development from one-size-fits-all model to a local market, relevant design format to build restaurants which meet customers’ real needs," the company said.

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