Ah, to be the heroically over-achieving unit in a company bedeviled by declining sales and anemic profits overall. Agh, to be dragging the average down.
Sarah Casanova, since March this year president and CEO of Japan McDonald’s Holdings (Tokyo: 2702), cannot enjoy being in the latter category.
In a news conference in Tokyo September 7 Casanova announced that this calendar year the company she heads will record a JPY 17 billion (USD 157 million) loss on sales of JPY 221 billion (USD 2.1 billion), against a JPY 5.1 billion (USD 47 million) profit on sales of JPY 260 billion (USD 2.4 billion) in 2013. Operating income will be negative JPY 9.4 billion (USD 87 million) against a positive JPY 11.5 billion (USD 107 million). It will be the first loss in eleven years and the first operating loss since the company’s listing in 2001.
Needless to say, Casanova would have previewed her announcement with higher ups in McDonald’s Corporation (NYSE: MCD) whose September 9 announcement of August global sales was also dismal. Worldwide comparable sales in August were down by 3.7%. Within an overall slump, Japan and China (also Russia, probably because of retaliation for U.S. sanctions) were among the worst performers.
Per the company’s market segmentation, the U.S. was down 2.8%, Europe (including Russia) down 0.7%, and Asia-Pacific, Middle East, and Africa (APMEA) down 14.5%. In 2013 segment revenue contributions were U.S. $8,851 million, Europe $11,300 million, and APMEA $6,477 million.
The announcement quotes president and CEO Don Thompson that McDonald’s has encountered “headwinds.” Other sources suggest something stronger. The Nihon Keizai Shimbun’s edition September 9 on-line edition cites U.S. food industry research company, Technomic, that the percentage of (presumably U.S.) persons aged 19-21 making monthly visits to McDonald’s restaurants has declined from 82.4% to 69.5% during the past 3.5 years. This 12.9 point drop compares with a 2 point rise in visits to “fast casual” restaurants like Chipotle.
It is now undeniable, and admitted by Casanova, that something is wrong with McDonald’s in Japan. The great question is, can she fix it?
Casanova, 49, a Canadian, has worked in McDonald’s for 23 years. She was executive director of McDonald’s Japan and marketing head from 2004 to 2009 and did a stint as regional manager for Singapore and Malaysia. She is thus well qualified for the challenge she is now facing.
This year’s fairly disastrous results owe a lot to the tainted Chinese chicken scarel that filled the media and frightened away customers from late July (see sidebar for my earlier post on this). But declining customer visits, same store sales, and revenues were an alarming trend long before the scare.
Immediate steps were taken to remove concerns about Chinese chicken, but these seem not to have reversed trends. Same store sales in September were a massive 16.6% below September 2013.
The main challenge, it seems, is that Japan McDonald’s has been losing customers to competitors, not least to aggressive and innovative convenience stores like 7-11, Family Mart, and
Since returning to Japan in 2013, Casanova has been pouring money into market research and formulating competitive action plans. She told reporters at the October 7 press conference that she had put together and just begun to execute action plans when the Chinese chicken crisis broke.
Market research came up with a list of customer complaints: “McDonald’s has gotten expensive”; “I cannot understand the pricing”; “Restaurants are run down and antiquated.” To some extent, we suspect that there is some “kitchen sinking”—not just direct costs (an extraordinary loss of JPY 2.7 billion for disposing of Chinese chicken), but also front-loading of costs for quality control training and restaurant renovations--in Casanova’s announced losses for this year. The program for renovations will be carried out over the next four years.
Casanova took the opportunity of the press conference to announce a new campaign to win back lunchtime customers and promised a top-to-bottom review of products and pricing going forward. The campaign, official launched from October 8, offers “Lunch Mac sets” priced at 350, 450, and 550 yen. At this pricing per customer profit will decline. The hope is that customer volume will increase more.
Is Japan McDonald’s fighting an uphill battle against changing consumer tastes and a shrinking potential customer universe as Japan’s population ages and declines overall? It is hard to believe otherwise..
Just to prove that when it rains it pours, as volumes and profits have dropped in many Japan McDonald’s restaurants managers have tried to switch to cheaper part time workers, to reduce hours, and generally to increase the stress level on employees. This situation has provided an opening for labor organizers who have reportedly targeted the company. Casanova is not to be envied her challenge
McDonald’s Japan Holdings is majority held directly and indirectly majority by McDonald’s Corporation. The stock closed in Tokyo October 7 at 2,638 yen a share, its YTD high. Its price to book ratio is 2.04 times, its dividend yield 1.13%. ROE is 3%.
McDonald’s (MCD) is trading in New York at a trailing PE of 17 and forward PE of 17.5 times. Price/tangible book value is 6.95 times. ROE is 35.2% and dividend yield 3.45%.
The dividend was raised by 5% on September 18. The corporate press release quoted corporate president and CEO Thompson as follows: “Today's dividend increase reflects the continued strength and sustainability of our cash flow and our commitment to enhancing shareholder value. We expect to return $18 to $20 billion to shareholders between 2014 and 2016 and have returned $3.2 billion year-to-date August toward that target.”
That Japan McDonald’s Holdings will be contributing to this cash flow seems doubtful. On present trends, we might also wonder about MCD’s share price.
