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McDonald's: Is China Lovin' it?

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Bruce Cheung

on 28 October 2014

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Transcript of McDonald's: Is China Lovin' it?

McDonald's: Is China Lovin' it?
Bruce 42864293, Morgan 42062905, Janet 42052250
IBUS3304

Background
McDonald's is a world famous brand
McDonald's entered in China in 1990
Entry Mode: direct Investment
Fully control of the store operation
BUT high risk
2000+ stores in China in 2014
Only 5 stores are franchised in 2011
1990
1993-1994
2005-2008
2013-2014
1990
First Store in Guangzhou (Southern Part of China)
Fully owned business has a high risk of failure
Therefore, McDonald's chose a location that is very close to Hong Kong as a stepping stone to China
Hong Kong has a mature market since 1975
1993-1994
1993 - A store in China had the highest sales in one day comparing around the world in 1993
1994 - The first McDonald's dessert store
The dessert store only sells dessert to match the Chinese lifestyle
2005-2009
2005 - First drive through & 24 operation hours store in China
2008 - Reached 1000 store & started up 24 hours delivery services
2009 - McCafe entered China
2013-2014
2013 - Launched McCafe in majority of McDonald's restaurants in China
2013 - Launched McRice dishes in China
2014 April - Reached 2000+ store in China
McDonald's Menu in China
Breakfast
Crispy Fritters – Very traditional Chinese breakfast
Soya Bean milk
Dinner
Rice dishes (Beef & Chicken)
Egg & Mushroom Soup
Dessert
Tara Pie

SWOT Analysis
Strengths
World famous brand (essential in China)
Experienced operating practices
Fully owned - ensuring brand quality and control of management
Using local ingredients - building relationship with local suppliers (essential in China)
Weaknesses
Second market entry - KFC had the first entry advantage
Small number of franchising
High price compared with local fast-food stores (Big Mac Index)
Cultural taste preference differences - e.g. tea vs. coffee
Opportunities
Raising average income in China
Changing consumer trends:
Raising number of eating breakfast away from home
Growing youth market
The symbol of globalisation
Threats
Booming local fast-food chain
Mixed style fast-food chain - HK's Cafe De Coral
New Western entry
Presentation Outline
Background & History of McDonald's in China
Big Max Index
SWOT Analysis
Transferable Practice
Three Major Issues
1. McDonald's strategies,
2. controversial/ethical issues,
3. coping with future issues
Recommendation
Current McDonald's Situation in China
Conclusion
Transferable Practice
McDonald's
McDonalds uses Transnational Strategy
McDonalds Charges Higher than normal prices in China
Chinese associate McDonalds with a “Modern leisure culture”
Localisational Strategy
Three Major Issues
1. McDonald's Business Strategy

2. Controversial/Ethical Issues

3. Coping with Future Issues

McDonald's Business Strategy
1. High Price (Big Mac)
Danger in higher prices
Consumers may feel “ripped off” when they learn of higher overseas pricing
2. Franchising - only 6 stores in 2011
3. The slogan with "I'm lovin' it when China wins"
Recommendation
Monitoring consumer perceived value
Adjust the price accordingly
Consider the benefit of franchising
Be aware of future promotion campaign
Controversial /
Ethical Issues
Underpay workers in 2007
Lack of health choice & health crisis
Underpaid
In 2007, McDonald’s had underpaid their part-time employees.
Until the ACFTU called on McDonald’s to adjust the pay.
It means that McDonald’s may have operated as a sweatshop in China before the media found out.
Most of the MNEs have this issue.
Lack of Healthy Food Choices
China's Emerging Health Crisis
Rise in fast food outlet
Dramatic increase in chronic diseases
Coping Future Trends?
1. Difficulty of managing Chinese consumer preferences

2. Dealing with competitiors
Consumer Preferences
Changing consumption behaviour:
American diet & lifestyle
Healthy menu alternative
Localise to existing culture



Challenge: meeting consumer preferences while preserving brand identity

Competition
KFC
Biggest Chinese competitor
First mover advantage
Local knowledge
Chicken vs. beef
“McDonald’s haven’t got the local tastes right. KFC has done it right”,
McDonald’s Chinese advertising executive (Normandy 2005)

Threat of New Entrants
New Western entry
Due to:
Rapid & sustained period of economic growth
Business and consumer taste aligning
Decrease in government restrictions
Local Competitors
Aim: serve traditional menu in an untraditional settings
Copying McDonald's management & operations practices
Ongoing consumer research
Anticipate how consumption behaviours may change and update current practices
Must be innovative, flexible & easily adaptable
Utilise local knowledge
Identify opportunities for expansion
Recommendations
Current McDonald's in China 2014
McDonald’s successfully expanded 1000 stores after 2008
BUT still very low number of franchising
Employees relation seems it is solved since McDonald’s got an award, ‘China’s Top Employer’ from Employer Institute, the 4th times.
Receiving different ‘top’ employer award from 2011-2014
Using Local Suppliers?
Food & Drink safety issues in China
Cardboard bun shop in 2007
The baby formula incident in 2008
The risk of using local suppliers in China?
How should McDonald's avoid the problem happened again?
Affecting McDonald's products in China, Japan and other nearby countries
McDonald's has to stop selling some products
Quickly Switching suppliers from US & Thailand
Estimated sales dropped 10% in 2014 in Asia Pacific
More importantly, It damanges the brand name of McDonald's
Recent Crisis
In July 2014, one of the McDonald's suppliers, Shunghai Husi, were using expiration date meat and the Chinese Government has to stop the manufacture.
Conclusion
McDonald's has been expanding from 1 store in 1990 to 2000+ stores in 2014
Three Major Issues: 1. Business Strategy, 2. Controversial/Ethical Issues 3. Coping with future issues
Overall recommendation: monitor business environment
Recent crisis shows that McDonald's has some quality control problems with their suppliers
Reference List
Normandy, M 2005, ‘McDonald’s tees up China growth’, Crain’s Chicago Business, 01 August 2005, p. 12, viewed 21 August 2014, http://search.proquest.com/docview/198410314?accountid=14723.
Wilcox, J 2012, ‘Chinese Face Major Health Risks On the American Fast Food Diet’, Forbes, 26 July 2012, viewed 20 August 2014, http://www.forbes.com/sites/juliewilcox/2012/07/26/chinese-face-major-health-risks-on-the-american-fast-food-diet/.
Galley, C & Holcomb, B 2000, ‘McDonald’s’, St. James Encyclopedia of Popular Culture, vol. 3, pp. 321-324, viewed 18 August 2014, http://go.galegroup.com.ezproxy.library.uq.edu.au.
Burkitt, L 2012, ‘World News: China Calls For Health System Overhaul’, Wall Street Journal, 25 July 2012, p. 10, viewed 19 August 2014, <http;//search.proquest.com>.
Porter, ME 2008, ‘The five competitive forces that shape strategy’, Harvard business review, vol. 85, no.1, pp. 78-93, viewed 24 August http://www.ebscohost.com.
Zha, J 2002, ‘Learning from McDonald’s’, Transition, no.91, pp. 18-39, viewed 21 August 2014 http://www.jstor.org/stable/3172449.
Curtis, KR, McCluskey, JJ & Wahl, TI 2007, ‘Consumer preferences for western-style convenience foods in China’, China Economic Review, vol. 18, pp. 1-14, viewed 21 August 2014, <http://www.sciencedirect.com.ezproxy.library.uq.edu.au>.
Ko, S. (2008). McDonald’s: is China Lovein’ it?. The Asia Case Research Centre, The University of Hong Kong.
Bloomberg News (2011, July 29). McDonald’s to Open a Restaurant a Day in China in Four Years, Bloomberg News. Retrieved from http://www.bloomberg.com/news/print/2011-07-29/mcdonald-s-franchises-to-account-for-up-to-20-of-china-business.html
Mahapatra, L. (2013, August 20). Minutes of Minimum-Wage Work to Buy A Big Mac: 36 minutes in the US, 6 hours in Afghanistan, International Business Times. Retrieved from http://www.ibtimes.com/minutes-minimum-wage-work-buy-big-mac-36-minutes-us-6-hours-afghanistan-1392339
Patton, L. & Lin, Liza. (2014, August 5). China Meat Supplier Probe Hurting McDonald’s Asia Sales, Bloomberg Businessweek. Retrieved from http://www.businessweek.com/news/2014-08-04/mcdonald-s-results-hurt-by-china-supplier-investigation
McDonald’s China. (2014). McDonald’s menu, McDonald’s China. Retrieved from http://www.mcdonalds.com.cn/content/cn/ch/food.html
McDonald’s China. (2014). About us, McDonald’s China. Retrieved from http://www.mcdonalds.com.cn/cn/ch/about-us.html
McDonald’s Australia (2014). Full menu, McDonald’s Australia. Retrieved from https://mcdonalds.com.au/menu
Branigan, T. (2008, December 2). Chinese figures show fivefold rise in babies sick from contaminated milk, Guardian UK. Retrieved from http://web.archive.org/web/20081205093042/http://www.guardian.co.uk/world/2008/dec/02/china
Grace, Francie. (2007, July 12). China Busts Cardboard Bun Shop, CBSnews. Retrieved from http://www.cbsnews.com/news/china-busts-cardboard-bun-shop/
McDonalds (2014). McDonalds Franchising, McDoanld’s Global. Retrieved from http://www.aboutmcdonalds.com/mcd/franchising.html
The World Bank Group (2014). GDP Ranking, The World Bank Group. Retrieved from http://data.worldbank.org/data-catalog/GDP-ranking-table
The World Bank Group (2014). Population, total, The World Bank Group. Retrieved from http://data.worldbank.org/indicator/SP.POP.TOTL
International Monetary Fund (2013). Report for Selected Countries and Subjects, World Economic Outlook Database, IMF. Retrieved from http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weorept.aspx?sy=1980&ey=2018&sort=country&ds=.&br=1&pr1.x=40&pr1.y=0&c=924&s=NGDP_RPCH%2CPPPPC&grp=0&a
Groom, N. (2007, May 22). McDonald’s pushing McMuffins and coffee in China, Reuters.com. Retrieved from http://www.reuters.com/article/2007/05/22/businesspro-mcdonalds-china-dc-idUSN2243172220070522
China Retail News (2014, April 21). Fast Growth Equals More Fast Food For McDonald’s In China, China Retail News. Retrieved from http://www.chinaretailnews.com/2014/04/21/7055-fast-growth-equals-more-fast-food-for-mcdonalds-in-china/
Gao, Z. (2013). Revisiting the Golden Arches in China: The Chinese Discourse on McDonald’s between 1978 and 2012, Journal of Macromarketing, 33: P288.
Wang, Z. J., Zhu, M. & Terry, A. (2008). The Development of Franchising in China, Journal of Marketing Channels, 15(2-3), 167-184

Thank You!! Are you lovin' it?
“China now has the largest population of diabetic in the world”, (Brukitt 2012)

Response to health crisis from McDonald's
In other countries, healthier menu options are offered
For example, Australia offer 13 healthier options
China is providing very minimal improvements according to their website
Why McDonald's choose China?
Market Attractiveness:
High Population 1,357,380,000 people (2013)
GDP of $9,240,270 million USD (2013)
Second GDP highest after US
Fast Growing Economy

How McDonalds Localises for China?
Chicken Products
Decorations and Festivals
New Product trials based on local tastes
Re-Americanising through reintroduction of beef products
Use of Local Producer (Building relationships)

“More than 80% of our restaurants worldwide are owned and operated by our Franchisees.” McDonald’s Home Page
Increase investment cost
Increase growth risk
Very few restaurants are franchised in China because of two reasons:
China franchising Laws
Desire for Product Control
Success using Joint-Venture/Wholly Owned method in China
Could be benefits to Franchising

Franchising

Keep tracking the wages with inflation
McDonald's fixed it by increasing the wages
Recommendation for Underpayment Issues
Ensure nutritional quality of ingredients
Invest in research and marketing
Add in local health food options
Recommendation for Health Issues

oh yes we learned everything from McDonald’s. The design, the hygiene, the service, everything!”
Noodle King kitchen manager (Zha 2002)

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