010833 McDonald's Japan Profit Falls, Sales Up

Tokyo - McDonald's Co (Japan) Ltd., Japan's top restaurant chain operator, posted a 10% fall in its current profit for the half year to June after an increase in royalty payments to its U.S. parent.

The Japanese unit said its current profit, which is pre-tax and excludes extraordinary items, fell to 12.61 billion yen ($103.2 million) from 13.96 billion a year ago. This is the first time the unit has announced its half-year earnings results.

McDonald's Japan President Den Fujita told reporters that the sales and profits were still better than its own goals for the interim period, which were not disclosed to the public.

The company had warned that its current profit was likely to fall for the second consecutive year in 2001 due in part to a net increase in royalty and management fees from this business year, so the first-half profit decline had been expected by analysts.

Sales, however, posted healthy first-half growth of 7.7% to 183.85 billion yen, reflecting a brisk expansion of outlets and consumer appetite for McDonald's cut-price burgers.

McDonald's Japan, half-owned by U.S. fast food giant McDonald's Corp, went public two weeks ago amid much fanfare, but the euphoria has ebbed and its shares have slipped on concerns over its high valuation.

Outspoken Fujita dismissed the recent weakness in the shares, which were up 2.91% at 4,250 yen on Thursday but still below the initial offer price of 4,300 yen and 16% below a high of 5,080 yen set on July 30.

“It's just two weeks since we went public, and over the past 30 years we have been expanding our business here and I believe investors should feel safe to buy our shares,” he said.

PRICE WAR

The company sent shock waves through the Japanese restaurant sector last year by slashing hamburger prices on weekdays by half to just 65 yen, triggering fierce price competition.

For the full year to December, McDonald's Japan on Friday maintained its forecast that current profit would fall 8% to 26.96 billion, with net profit also seen down 12.4% at 14.71 billion yen.

Still, Yasuyuki Yagi, vice president of McDonald's Japan, told reporters that the company would be aiming for record profit of at least 32 billion yen, as early as 2003.

Investor attention is now likely to shift toward its plans to branch into new parts of the fast-food industry.

“With its market share standing as high as it is now, it's unrealistic to expect it to keep growing for the next 10, 20 years,” said Kana Sasaki, an analyst at Tsubasa Securities.

“The burning question is -- what is it going to do next?”

McDonald's Japan commanded market share of 65% in Japan's burger industry in 2000.

President Fujita has said the company aimed to triple outlets to 10,000 in 10 years and boost its annual sales to one trillion yen. Its sales totaled 358 billion yen in 2000.

He has said the company was tentatively considering branching out into new fast-food businesses such as pizza chains.

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