February 13, 2018 6:10 pm JST

Resurgent McDonald's plans 200 openings in Japan's burger battle

Biggest expansion wave in decades spurs Burger King to triple eateries

SUGURU KURIMOTO and TOMOMI KIKUCHI, Nikkei staff writers

Shoveling fries at a McDonald's in Japan: The chain's group net profit hit a record 24 billion yen in the year through December. (Getty Images)

TOKYO -- Fast-food chains in Japan are launching the biggest expansion wave in decades and adopting strategies that would have been unthinkable in the early 2000s, when hamburgers were a prime symbol of deflation.

McDonald's Holdings (Japan), the biggest player, is emerging from a prolonged slump and on Tuesday announced it is planning the first net store increase in a decade this year. Burger King, the world's second-largest hamburger chain, aims to triple its Japanese locations to 300 by 2022, spending 5 billion yen ($45.5 million) in the process. 

McDonald's saw a 4.5-fold increase in group net profit for the fiscal year through December, logging a record 24 billion yen. It aims to open 150 to 200 new locations in the next three years. Factoring in closings, it expects a net increase of around 100.

"Over the last several years, we were focusing on optimizing our existing store portfolio," President Sarah Casanova told reporters. "Now, it's time to look to opportunities to grow with new restaurants."

The number of McDonald's locations in Japan peaked in 2002 and has been decreasing since. The chain now has 2,900 restaurants after a net decrease of about 1,000.

Opening new restaurants might seem like an odd move in a country where the birthrate is falling and consumers are holding back on dining out. The hamburger business, however, is one of the few bright spots in an otherwise bleak restaurant industry.

A Burger King in Tokyo: The chain aims to have 300 locations in Japan by 2022. © Reuters

It helps that chains like Burger King and McDonald's are globally recognized. Japan is welcoming record numbers of tourists -- 28.6 million last year -- giving the restaurants a steady stream of fresh customers looking for familiar flavors in an unfamiliar land.

Burger King Japan, the U.S. chain's local operation, will open most of its 200 new restaurants in large cities like Tokyo, Osaka and Nagoya. Target locations include shopping center food courts and suburban spots with room for drive-thrus. Open-kitchen interiors will allow customers to see their Whoppers being cooked.

Burger King also intends to offer a home delivery service, countering McDonald's Japan's move to expand deliveries in partnership with Uber Eats last year.

This is Burger King's second crack at the Japanese market. The chain left the country in 2001, after a slump. It returned in 2007 with support from such companies as Lotte, but its store count remains far behind McDonald's Japan's 2,900.

A Hong Kong investment fund recently acquired the Japan operating rights from Burger King and is now pushing the expansion drive.

To prepare, Burger King is revamping its product lineup, starting with the BBQ Smoky Bacon Whopper introduced this month. The burger is priced at 690 yen -- about 200 yen more than the core products on the menu. This reflects the new management's goal of boosting per-customer spending.

This strategy would have been inconceivable when the country was firmly in the grips of deflation. Back in 2002, McDonald's was selling burgers for as little as 59 yen.

The market started to shift with the arrival in 2015 of U.S. chain Shake Shack, whose premium burgers fetch relatively high prices. In 2016, as chains nudged customers toward more expensive items, fast-food industry revenue increased for the first time in four years. 

Now, one after another, chains are charting growth plans.

Domestic player First Kitchen has been establishing "double brand" outlets with Wendy's, the U.S. chain. A spokesperson said this has helped bring in customers visiting from overseas, who would not have recognized the First Kitchen name on its own. Sales are up 30%, compared with the levels before the introduction of the new outlets, the spokesperson said.

Freshness Burger, run by Colowide, is to expand to 400 locations by 2020, from about 160 now. 

The question is, will this expansion rush come back to haunt the industry? It would not be the first time.

A similar wave of openings occurred in the 1990s. By the 2000s, though, many locations were unprofitable, prompting a slew of closures. 

While demand is on the rise, there is another wrinkle to consider this time around: increased operating costs as a chronic labor shortage pushes up hourly wages. If the burger chains saturate the market with new openings, they could very well wind up burned again.

Colowide Co., Ltd.

Japan

Market(Ticker): TKS(7616)
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Consumer Services
Restaurants
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