Making a meal of it

PUBLISHED : Monday, 18 June, 2012, 12:00am
UPDATED : Monday, 18 June, 2012, 12:00am


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The seemingly unstoppable rise of McDonald's in China, and elsewhere in the world for that matter, has faltered, according to the company's recently released second quarter report.

While US sales rose 4.4 per cent, Asia, Middle East and Africa sales dipped by 1.7 per cent. One quarter's results cannot be the basis for a rushed judgment on the company's overall prospects, but it is a chance to put in context the performance of McDonald's in China.

Since the American fast food chain landed in China in 1990 it has established some 1,400 stores and has announced plans to have 2,000 outlets by next year. Pictures of the famous golden arches are often used to illustrate the growing presence of foreign retailers on the mainland but the hard reality is that Chinese sales only contributed around 3 per cent to overall McDonald's earnings last year. Moreover, McDonald's is rather overshadowed by the stellar performance of Yum! Brands in the Chinese market; KFC, its most successful chain, already has 3,700 stores in China.

Yet somehow McDonald's seems to exemplify one of the few really successful foreign retail Chinese stories. This is all part and parcel of the company's marketing genius, not just for its fast-food customers but for investors.

This genius can be traced directly back to Ray Kroc, who was not the company's founder or even the main innovator behind its products. Yet it was Kroc who transformed a small California-based hamburger chain, started by the McDonald brothers, into the world's largest fast food company (currently challenged by the Subway sandwich chain, which has more outlets worldwide, but far lower revenue).

In 1954 Kroc owned a small company making milkshake mixing machines and he toured the US to sell them. In the process he learned a lot about kitchens and restaurants. When he came across the McDonald's operation in Los Angeles, consisting of eight self-owned outlets and two franchise stores, he realised the company had phenomenal potential.

The chain (which still exists) was called White Castle and there was no reason to suppose it would not get even bigger. But Kroc looked at the McDonald's nine-item menu, its clean and attractive stores and the queues inside them, and had what he called 'an epiphany'.

The menu was there, the format had been established and the system, which he later elaborated into a 75-page operation manual, was also in place. What was lacking was Kroc's vision of transforming it into a worldwide behemoth.

Although Kroc was never troubled by modesty or self-doubt, he often emphasised that he did not invent the hamburger, he 'just took it more seriously than anyone else'.

And here lies the key to why the words hamburger and McDonald's are symbiotically linked. What worked in the US also worked when it first expanded to Canada and the rest of the world, including China. Despite all the talk of special Chinese characteristics for business success in the mainland, there is no shaking the basics of retail success.

Kroc distilled it down to a few principles, the first of which was marketing and more marketing, leading him to spend what were then unprecedented sums of money for publicising a restaurant chain. Then there was consistency of product and the ability to reproduce it worldwide. Thirdly, although Kroc elaborated this in rather more excitable terms, there is the question of quality in the product itself, the way it is presented and the environment in which it is sold.

In China, awash with food-tainting scandals, McDonald's emphasises its hygiene. And in every market where it operates, the fast-food chain applies its basic principles then responds to specific local demand. Kroc also knew that 'the definition of salesmanship is the gentle art of letting the customer have it your way'.

Kroc died in 1984 and has been succeeded by a line of more faceless executives who religiously follow his credo and, like Kroc himself, often get things wrong.

McDonald's can't stay number one forever but investors might like to look again at its shares, which have shown a consistent ability to hold their price in troubled times, and still have plenty of scope for a growing Chinese contribution to profits.