Kenneth Chan has been working for McDonald’s for more than 12 years. He started out in Singapore on the fast-track management program, rose to a post as managing director of McDonald’s Restaurants in Singapore, and was then promoted to regional manager of McDonald’s Malaysia, Taiwan and Korea before being promoted to CEO of the mainland business in 2009. Under his leadership, McDonald’s China has embarked on an aggressive program of innovation and expansion, including initiatives to speed up 24-hour home delivery services, push the McCafé concept and add drive-through restaurants in Chinese suburbs. He spoke to China Economic Review about managing growth, handling food price inflation, and localizing the hamburger.
Q: Can you explain the recent acceleration in your expansion?
A: By 2013, the plan is for us to get to close to 2,000 restaurants [in China]. It took 19 to 20 years to build almost 1,000 restaurants, and we’re going to get to the next 1,000 within three or four. So the pace has accelerated. We are following the mega-trend of urbanization in China. A lot of infrastructure is going to follow this urbanization, not only residential and retail but also roads and transportation hubs, which really helps our grab-and-go business model.
Q: Is that the thinking behind building more drive-throughs?
A: We now have just over 130 drive-throughs in China. That is a small percentage of our restaurant portfolio, but going forward you will see us opening drive-throughs in the suburbs of every city. It would be impossible to get a drive-through in downtown Shanghai, but as rents rise and commercial and residential properties move farther outward, that is where we will capture the drive-though market. The car population in China is growing significantly.
Q: What is food price inflation doing to your margins?
A: We have been in business for a long time; we’ve experienced ebbs and flows before. So we know how to mitigate these circumstances, and we know they are short-term. We’re always taking a long-term view. Our main focus is to keep making sure we’re accessible and affordable. From a pricing standpoint, we want to ensure that we don’t drift from our strategy of everyday prices.
Q: Your China sales beat expectations in May, but figures have been disappointing in other markets. What is your forecast for the pace of growth in China?
A: With the right strategy, I think we are looking at double-digit growth for many years to come, in two areas. One is distribution. We are in an industry where we have to build our own distribution points, we cannot ride on someone else’s. So the pace of opening is an important growth driver for us. At the same time, we are focused on building our same-store sales and organic growth. We recently embarked on a nationwide re-imaging campaign for our restaurants with designs from Australia and Europe. We have integrated new brands into that as well, like McCafé. We continue to provide great service, and we are getting better operationally. Lastly, we provide everyday strong value.
Q: What about the McCafé concept? Does that involve modifying the whole idea of fast-food?
A: It’s a strong compliment to our business. First, we’re trying to grow our breakfast business in China, and the whole coffee culture helps in that area. Second, our biggest growth segment for McCafé is actually during tea time – the afternoon – so again that compliments the off-peak areas of our business. It gets us away from depending on lunch and dinner. The ambience there is very important, which is why we put in amenities like Wi-Fi, and are improving our music system. If people want to sit in our restaurants, by all means they can sit and stay.
Q: When you localize your menu, what is your process for deciding when and how you are going to innovate?
A: We have some billion-dollar brands in our core menu like our Big Macs, our french fries, and our Chicken McNuggets. We will always continue to promote and stand by those products. They got us to where we are in China. But some local adaptations are also working extremely well for us. Our spicy filet chicken burger, our premium grilled chicken sandwiches and our chicken wings, for example, have done extremely well, and they continue to be a mainstay of our business. As we move forward, we will continue to think about local adaptation.
Q: Many of your localized dishes are chicken, but McDonald’s was originally famous for beef burgers. Do you expect Chinese people to start eating more beef?
A: Obviously pork and chicken are more popular proteins in China. So we will continue to ensure that we are winners in those categories. From a beef standpoint we will make sure that we continue the focus on flagships like the Big Mac. But also, very recently, we started to embark upon a strategy of localized flavors in our beef patties. It seems to be working extremely well.
Q: What about obesity? McDonald’s has taken a hit on this issue in the West. Are you seeing any blow-back from Chinese authorities or consumers?
A: The topic is always out there, but we’ve been working extremely well with our stakeholders within the industry, our alliance partners in the government and some associations as well. They understand what we are doing and that our number one priority is food safety and quality, and that we have provided, and are going to provide, more options regarding our menu.
Q: Logistics experts frequently express admiration for McDonald’s sourcing and delivery systems. Can you describe some of the unique points?
A: Way back when, when we first started in China, people pointed at us and said, ‘Boy, why is McDonald’s over-investing in distribution?’ That investment was driven by a longer-term vision, to ensure that we could scale up. So we worked with global partners, and they provided the cold chain, the ambience, and the dry goods infrastructure to deliver to all of our restaurants.
Q: McDonald’s home delivery is also quite sophisticated, right?
A: Yes. Our call center manages all the calls, and from there a sophisticated mapping system shows where they are coming from. Our delivery systems are integrated with our point-of-sale systems, so we can work out what needs to be delivered, how much we have sold, and estimate the timing. It has taken some time to build out that infrastructure, but now we have a long runway to build on other platforms, like web-based or mobile ordering. We have launched in about 11 cities and are doing extremely well, especially in the key cities that have busy consumer lifestyles.