McDonald's strategy and challenges in the Chinese market

McDonalds

In the last 30 years, developing markets have shown the potential for fast food restaurants to realize increasing profit margins. This is because markets such as China provide them with the capacity to offer unique products and experiences to customers. However, specific concepts must be integrated with each other to effectively connect with them. In the case of McDonalds, they are facing considerable challenges and opportunities in China. (Allon, 2012) ("McDonalds and KFC")

A good example of this can be seen with observations from a report conducted by Zach's Research which said, "The U.S. business accounts for 30% of the fast-food giant's overall revenues. The region has not been able to post positive comps since Oct 2013 mainly due to heightened competition and a few wrong decisions that have slowed service. Moreover, the headwinds in the international market have compounded the woes for the domestic market. Going forward, we remain wary of all these issues taken together along with sluggish economic recovery in some of the company's primary markets, which would put pressure on its business in the near-term. The company is also making marketing and promotional offerings. However, these initiatives are yet to reap benefits and convert into positive numbers for the region." ("McDonald's Earnings Beat," 2014)

These insights are showing how the company is facing considerable challenges from sales in some of its fastest growing markets. To fully understand what is taking place requires focusing on critical issues, the recommended strategy, providing a justification and an action plan. Together, these elements will illustrate how the company is evolving to meet the demands of consumers.

Critical Issues

The biggest issues are creating a product which is in demand. This means that the company has to offer something which reaches out to Chinese consumers. At the same time, they must provide them from their traditional menu. In 2008, the firm rolled out new products, concepts and images to attract more traffic. This is following the negative publicity it received from food safety related issues. A good example of this can be seen with insights from the case study which says, "On the road to aggressive expansion, KFC China is up against the issues of consumer confidence in food safety. This is because they sold products which had red chemical dies in certain foods. Consumers were angry as they felt deceived by the practices of firms." ("McDonalds and KFC")

In the case of McDonalds, the company is dealing with a negative backlash surrounding safety and quality. They had similar problems when it comes to the different products they are using to market to consumers. The new strategy is designed to offer customers with more choices and creating a unique atmosphere through a specific product (i.e. red kidney soup). As a result, they are taking a competing concept and using it to encourage more people to visit their locations. While it is simultaneously, encouraging everyone how they have better safety practices and standards for quality. (Allon, 2012) ("McDonalds and KFC")

Evidence of this can be seen with a recent scandal surrounding tainted beef and chicken meat. The problems became so severe; the company was forced to not sell certain products because of these uncertainties. According to Cendrowski (2014), this is negatively impacting sales and the brand image of the firm with him saying, "The humiliation reached a new pitch Friday when prosecutors in Shanghai arrested six employees of the Chinese subsidiary of McDonalds's largest meat supplier, OSI Group, for selling expired meat to McDonald's, KFC, and other chains in the country. The OSI subsidiary, Shanghai Husi Food, was caught by a Shanghai TV channel in late July re-labelling expired meat packages and using expired beef to make patties. McDonald's was short on beef and chicken for three weeks in China following the ordeal. Sales in the region that includes China plummeted 7% in July. For a while, you couldn't order a Big Mac in Beijing." (Cendrowski, 2014) This is showing how food safety issues are a major challenge for all fast food restaurants going forward. To deal with them, McDonalds needs to impose greater standards in achieving key objectives.

Lower prices mean giving customers something more. This is achieved using their value menu to sell items such as: smoothies, frappes, wraps, breakfast burritos and fruit. These items are sold in conjunction with coffee, tea and designing the location to offer conveniences (i.e. free wifi). For example, one way that McDonalds stands out is to effectively compete for cliental with lower entry pricing. These areas are designed to show how the company is offering more in contrast with competitors. (Allon, 2012) ("McDonalds and KFC")

At the same time, the company had reduced levels of exposure from having a smaller number of locations. These areas hurt profitability by only concentrating on certain parts of China. However, competitors (such as KFC, Taco Bell and Burger King) began expanding through franchising. To keep up, the company had to allow this to occur and ensure the owner is following the various standards for quality and safety. (Allon, 2012) ("McDonalds and KFC")

To make matters worse, there is a shortage of skilled labor. This makes it difficult for them to find competent managers and employees who could increase the profitability of these locations. The result is that McDonalds is only focusing on those locations they could control and increase their profit margins. If these areas are addressed, it will help the firm to become more competitive in the long-term. (Allon, 2012) ("McDonalds and KFC")

In this situation, there are several different areas that must be dealt with. The most notable include: costs, safety, labor and having a smaller number of locations. These issues are problematic, as they are undermining the company's strategies in China. As a result, they need to immediately address these challenges in order to protect the brand image of the organization. (Allon, 2012) ("McDonalds and KFC")

Justification

These areas will directly solve the problems of the company, by focusing on the primary causes. In China, this is something which competitors are grappling with. To protect the brand name and image of the firm, new steps must be utilized that will reach out to customers. This means that the company needs to have greater amounts of flexibility. The way that this is achieved is by reducing the impact of specific events to influence what is happening at the firm. Instead, McDonald's needs to have numerous relationships established with stakeholders. These practices will allow the firm to quickly adjust with key challenges. In China, this is something the most successful organizations are able to achieve. (Allon, 2012) ("McDonalds and KFC")

This will solve the problems for the company by dealing with the root causes of its China strategy and testing it inside existing locations. Over the course of time, this will enable the firm to create a refined strategy which can help McDonalds to grow. This is when they can rapidly expand into other areas and have the infrastructure to maintain control over its quality, safety and supply chain practices. (Allon, 2012) ("McDonalds and KFC")

The basic analysis focused on the strengths, weaknesses, opportunities and threats (i.e. SWOT). The strengths are the growing demand for fast food related products inside China and having restaurants located strategically in urban areas. The weaknesses are their inability to develop a comprehensive strategy for China. The opportunities are the ability to build market share and establish a new avenue of increasing its earnings. The biggest threats are from foreign and domestic fast food chains. They have the ability to quickly move into different markets and take control. This could hurt McDonalds by offering its customers with something different. (Allon, 2012) ("McDonalds and KFC")

Action Plan: Write an action plan that describes the actual steps that will be taken to carry out the recommendations. This is a blueprint for how to carry out the strategy step-by-step.

The basic strategy involves a 1 year timetable. This is when McDonalds will reach out to new suppliers and search for alternative avenues (such as: importing beef and chicken) in the first two weeks. Next, there will be a focus on working inside established stores. To take into account specific cultural tastes and understand what is important to Chinese consumers. This is when they can create customizable products and services. These steps will occur during the in month the second to fourth months. After this, is when the results will be tested across China. Once it is determined to work, is the point these franchises can increase their profit margins. The monitoring period is from months five to twelve. (Allon, 2012) ("McDonalds and KFC")