McDonald's Japan forecasts deeper losses

by Erica Shaffer
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McDonald's Japan restaurant in a city
McDonald's Japan initiates massive restructuring plan after food safety scandals and product shortages bit into the company's earnings forecast.

TOKYO – A bleak earnings forecast for McDonald’s Holdings Co. Japan has the unit of McDonald’s Corp. taking a hard look at its business. The company expects an operating loss of 25 billion yen ($210 million) and consolidated net income loss of 38 billion yen for ($319 million) fiscal 2015.

McDonald’s Japan is struggling to regain consumers’ trust after a series of food safety problems. McDonald's Japan was one of several quick service restaurant chains impacted by alleged food safety issues involving a Chinese supplier. The company faced more adversity when customers began finding foreign matter in McDonald's food. A customer at a McDonald's in Osaka found a human tooth in an order of french fries. Headwinds from intense competitive pressure have compounded the company’s financial problems.

“We accept responsibility for recent results and the disappointing forecast; so to reflect this, we have decided to reduce remuneration of our representative director and president by 20 percent, our representative director by 15 percent and by 10 percent for board members who are still with the company and were on the board in 2014 for six months,” the company said in its earnings forecast.
McDonald’s Japan has implemented a Business Revitalization Plan in hopes of a turn-around by fiscal 2016. The plan includes significant initiatives centered on food safety and customer service and the company's business structure.

McDonald’s Japan pledged to keep food safety and quality its number one priority as the company strives to regain trust among customers and stakeholders. Customer-focused initiatives currently underway include a new set menu that supports customization and wider variety; new Happy Meal options; a new personalized digital loyalty program with coupons; and a mobile app that collects real-time feedback from customers.

The company also announced plans to close underperforming restaurants while renovating other locations.

“Presently, only 25 percent of our restaurants fit our vision of a Modern Burger Restaurant; we plan to remodel approximately 2,000 restaurants aiming to have 90 percent of our restaurants upgraded to modern within four years,” the company said. “In 2015, we are targeting to remodel approximately 500 restaurants located in food courts or shopping malls.

“In addition, we will close 131 underperforming restaurants this year that have no long-term growth potential, and will reallocate resources resulting from the strategic closures to invest in remodeling restaurants with greater growth potential.”

“Big M” vs. “Little M”

Marketing, finance and human resources will no longer be the sole domain of “Big M” which executes broad-scale national business functions such as menu development and national marketing plans. McDonald’s Japan’s revitalization plan calls for the company to localize its business structure by focusing on “Little M” activities rooted at the restaurant and community level. To address this, the company is creating regional headquarters.

McDonald's Japan restaurant
McDonald's Japan hopes to be profitable in 2016 following restructuring and remodel plans.

“We will reorganize McDonald’s Japan into three regions. Each region will have business functions such as marketing, HR and finance, and have full business execution responsibility for their region, which will enable each region to reduce the layers within organization and to implement activities rooted in the local community and customers,” the company explained. “Also, we will further strengthen marketing activities to meet the demands of the local communities and customers.”

Finally, McDonald’s Japan is targeting cost improvements and resource efficiency. The company said it will shift resources to remodeling existing stores from new store openings. Additionally, the company expects to save 2.4 billion yen ($20.1 million) per year through restaurant closures. McDonald's Japan also identified more than 12 billion yen ($107 million) in cost saving potentials across food and paper, logistics and labor.

“To maximize the effect of the regional HQ structure, we will review and reprioritize the HQ functions and operations and will put the right people into the right jobs,” the company said. “This involves the offering of voluntary early retirement packages to approximately 100 permanent positions in our Tokyo HQ and the field.”

“We expect to post a huge loss for FY2015 impacted by non-recurring one-time cost and investments associated with the above-mentioned Business Revitalization Plan,” the company concluded. “However, by executing this Business Revitalization Plan, we expect to return to profitability in FY2016.”

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