TOKYO -- McDonald's Holdings (Japan) has staged a dramatic comeback in the five years since a crisis triggered by food safety scandals, breaking sales records and thriving on takeout demand in the middle of a pandemic.
But the news that McDonald's Corp. of the U.S. plans to sell up to 15% of the Japanese unit at this peak shows that the parent has a very different view of its Japanese unit.
McDonald's Japan has shrewdly capitalized on demand spurred by the pandemic for takeout and deliveries. It forecasts operating profit to grow 3.5% to 29 billion yen ($274 million) in the year ending December. Total sales for all stores are forecast to beat the 549 billion yen all-time high set in fiscal 2019.
This comes just five years after a 23.4 billion yen operating loss in fiscal 2015 following a string of food safety scandals. McDonald's Japan shares have doubled in price, from 2,600 yen at the end of that December to a close of 5,210 yen on Monday.
One would surely think that this rebound would have given the U.S. company high hopes for its loyal unit. Yet McDonald Corp.'s latest annual report barely mentions Japan -- and only in passing. As the fast-food titan sees it, the Japanese unit has had no growth at all.
In fiscal 2010, McDonald's Japan brought in $6.5 billion in sales based on exchange rates at the end of that December. Its fiscal 2019 sales came to $5 billion -- a 23% drop in dollar terms.
By comparison, sales at McDonald's franchises in the U.S. grew 34% from $28.1 billion to $37.9 billion over the period, even with the number of locations down 1.2%. The figure got a boost from inflation while Japan has seen little price growth during that period.
McDonald's previously considered selling a stake in the Japanese operation back in fiscal 2015 -- a year when the unit booked sales of 376.5 billion yen, worth $3.1 billion at the time. A McDonald's executive who came here for negotiations said outright that there was no growth in Japan.
A restructuring that year of the company's overseas segments reflects this view.
Previously, the American company had sorted markets by region -- Europe, the Asia-Pacific, the Middle East and Africa, and so on. In 2015, it reorganized them into three categories: "international lead" markets with established operations, such as the U.K. and France; high-growth markets, which include China and Russia; and "foundational" markets. Japan falls into the third category.
This demotion of what was once the second-largest market, behind only the U.S. itself, comes as no surprise from the American company's perspective.
It remains to be seen whether the sale will go as McDonald's hopes. For one, even if a single company buys the entire 15% stake, this will not be enough for a controlling interest.
In 2015, when McDonald's had considered unloading more than 30% of the unit, it drew interest from trading houses and investment funds. Yet many passed on the deal because the shares were seen as too costly, even at 2,600 yen. An executive at one fund said it would only buy at half that price.
The high price stems from generous shareholder benefits -- part of founder Den Fujita's vision when McDonald's Japan went public in July 2001. Fujita said at the time that he wanted investors to use these benefits to "come to McDonald's together with their children and grandchildren" -- and many own shares just for this reason, without regard for dividends, capital gains and the like.
Investors in the "retail and other" category own 36.68% of outstanding shares in McDonald's Japan, collectively giving them great influence in its operations.
The unit holds a unique position in the McDonald's group as the only publicly listed company, besides the American one, in the roughly 110 markets where McDonald's operates.
McDonald's says it has received inquiries from a few financial institutions about the sale. But selling the stake in a single block without driving down the stock price will be a challenge, leaving the U.S. company with no choice but to parcel the shares out in bits and pieces to individual investors.