000325 Mcdonald's Heats Up Fast-Food Battle In Japan

Tokyo - Fast food leader McDonald's Corp is slashing prices in Japan to protect its market share from several pretenders, including the country's ubiquitous convenience stores, as the battle for Japanese stomachs heats up.

McDonald's Japanese affiliate has launched special deals for customers during weekdays, cutting the price of a standard hamburger and cheeseburger in half to 65 yen ($0.60) and 80 yen respectively.

“We see convenience and price as the two key factors in the Japanese fast food market,” said a spokesman for McDonald's Company Japan Ltd, which is 50% owned by McDonald's Corp.

The aim of the strategy is to fend off the threat from Japan's 52,000 convenience stores, which sell everything from toothbrushes to pre-packed lunchboxes and salads at relatively cheap prices. While McDonald's has 60% of the hamburger market in Japan, company president Den Fujita has said in interviews with the local media that he sees convenience stores as the major threat.

Last week, McDonald's Japan released 1999 earnings showing a 8.6% growth in net profits to 15.9 billion yen ($150 million) from the previous year. It said that the half-price campaign, which has been under way for about three weeks, was doing well and that it hoped to see ten percent growth in profits in 2000.

McDonald's plans to aggressively expand its chain to 10,000 restaurants by some time after 2010 from 3,260 outlets at present. This is despite stagnant demand in recession-hit Japan.

“People are spending less and less money in restaurants because of the recession,” said a spokesman for the Japan Food Association.

The average price Japanese pay for a meal at a restaurant has been falling for the past six years with the exception of 1996 and 1997 when it remained constant, the association said.

“With people's income not increasing, price is an important factor for sales in the fast-food market,” said Hiroshi Hoshino, an analyst at Nomura Securities.

AN INCONVENIENT PROBLEM

Some analysts, however, question McDonald's strategy, saying the real advantage of convenience stores is the variety of food they offer rather than the price.

“I find McDonald's response quite strange. They should increase their menu if they want to compete with convenience stores,” said Mike Allen, senior analyst at ING Barings Securities.

Convenience store operators, which rely on fast food for 30% of their sales, are divided on whether they see any threat from the Mac attack.

“We do not believe that we are competing with McDonald's because we have more variety in the products we sell,” said a spokesman for Seven-Eleven Japan Co Ltd , the largest convenience chain store in Japan.

FamilyMart Co Ltd , the third largest convenience chain store in Japan, said McDonald's is only viewed as a competitor when its shops are located near one of its restaurants.

Analysts agreed, saying that McDonald's competition with convenience stores will vary, depending on the location of the store and the target customer base.

“I think the effect on conveniences store will differ case by case,” said Ayami Oya, senior analyst at ABN Amro Securities.

“Stores like FamilyMart whose location and customer targets are similar to that of McDonald's will see this campaign as a threat, but to stores like Seven- Eleven I don't think it will pose that much of a threat.”

FamilyMart stores tend to be concentrated more in urban areas and target younger customers, making it more of a direct competitor to McDonald's.

Although McDonald's now has a clear-cut advantage in price, it still has other challenges it must tackle in Japan.

Analysts say one of the key advantages held by convenience stores is their sale of traditional Japanese foods such as fish and rice. “The number of people switching from fish to hamburgers just because of price is going to be quite small,” Allen said.

COMPETITORS FORCED OUT OF PRICE RACE

Some of Mcdonald's restaurant competitors are putting more emphasis on the traditional Japanese predilection for quality, as well as focusing on the atmosphere at their outlets.

“We cannot and will not compete with McDonald's in price. We think the key factor is quality,” said a spokesman for Kentucky Fried Chicken Japan Ltd .

The other major fast-food restaurant player in Japan is Mos Food Services Inc. , a domestic group that holds 20% of the hamburger market.

Analysts said that both KFC and Mos will have to find different ways to stay competitive.

“The key will be what Kentucky and Mos Foods look to as their key sales point since they cannot compete in price,” said Takashi Imajyo, an analyst at Daiwa Securities.

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