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McDonald's Japan remains in trouble

TOKYO -- Only four years ago, McDonald's Holdings (Japan) posted a record pretax profit of 27.6 billion yen ($356 million at the time). Japan was the company's second most profitable market, after the U.S. 

     Now, Japan's largest restaurant chain faces its worst results ever. CEO Sarah Casanova on Jan. 5 received a phone call from Japan while she was in the U.S. The caller informed her that a scandal was brewing: Reports had surfaced of foreign objects in meals from McDonald's.

     Officials in Japan wanted to hold a news conference quickly to address the problem, even if Casanova could not attend. She gave the go-ahead for the meeting.

Sarah Casanova, CEO of McDonald's Holdings (Japan)

     "We have caused concern and trouble for many customers," Takehiko Aoki, a senior executive, said. "We would like to express our deep regret."

Lost ally

Attendees were unimpressed. The meeting lasted more than three hours as the company came under fire for a suspected cover-up. Casanova arrived in Japan later that day.

     Aoki, who fielded most of the tough questions at the news conference, fell ill and stepped back from day-to-day management. The departure of Aoki, who is fluent in English, was a big blow to both Casanova and the company. 

     Over the following three-day weekend, executives including Casanova locked themselves in a room at the Japanese headquarters in Tokyo's Shinjuku district to come up with a battle plan to contain the problem. Casanova pledged to conduct surprise inspections to ensure quality.

     Casanova, who generally does not do overtime, burned the midnight oil to tackle the problem.

     Her worst fear was a new scandal. Last July, it came to light that the burger chain had been using chicken that had passed its expiration date. Sales nosedived, turning the screws on franchise operators. Even Casanova nearly threw in the towel. She turned to Eiko Harada, then the company's chairman, although he was no longer actively involved in management. 

     Harada suggested appointing Atsuo Shimodaira to get McDonald's Japan back on track. Shimodaira was transferred six years earlier to Quality Foods, McDonald's largest domestic franchise operator, based in Niigata, later becoming its vice president.

     A veteran of the restaurant management business, Shimodaira was a driving force in the chain's expansion in Japan. One concern was that Shimodaira is not fluent in English.

     The drawbacks notwithstanding, Casanova appointed Shimodaira in January to oversee all McDonald's shops in Japan. At a shareholders meeting on March 25, he was promoted to executive vice president and chief operating officer.

No end in sight

Same-store sales fell for three years in a row through 2014. Monthly sales have logged double-digit declines for 11 months through May. The string of food safety scandals were simply the latest blow to the chain.

     On April 16, Casanova unveiled a restructuring plan. She focused on store renovations and cutbacks aimed at returning McDonald's to profitability. She also said the company was likely to post a net loss of 38 billion yen ($306 million at current rate) this fiscal year, which ends in December. Cost-cutting measures for the company include closing 131 outlets and seeking voluntary early retirements from 100 employees at headquarters. One step took place behind closed doors: Several top managers were demoted.

     The move shook the company. The one-time head of the sales division, unhappy with the prospect of demotion, left the company. A bitter franchise owner said he was the only executive who could be trusted. Restructuring is creating friction in the ranks.

     Back in the U.S., the parent company named Steve Easterbrook as its new CEO in March.

Patience wearing thin

Easterbrook promised his full support to Casanova, who briefed him on her restructuring plan and forecasts. But the U.S. headquarters, which owns 50% of the Japanese unit, will not wait forever.

     In late April, business partners of McDonald's in Japan received an email from the company explaining the positioning of the Japanese unit, effective July 1.

     According to the new scheme, McDonald's will reorganize itself into four global segments, grouping previously separate markets together. "International lead" markets include Britain and Australia; China and Russia are "high-growth" markets; the U.S., which accounts for more than 40% of the group's total operating profit in the more than 100 countries where it operates, is a category all its own. Japan was unceremoniously dumped into the "foundational" category. An executive at a partner company in Japan was speechless upon learning this.

     Casanova, a Canadian who started at the McDonald's unit in her home country in 1991, has vowed to do all she can to win back customer trust. She is even open to rebuilding the company from scratch. Whether she can do that is an open question.

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