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McDonald's Japan still trying to recapture lost savor

TOKYO -- Only four years ago, McDonald's Holdings (Japan) posted a record profit of 27.6 billion yen ($358 million at the time), and was the food giant's second most profitable market, after the U.S. 

     Now, Japan's largest restaurant chain is struggling to turn itself around as it faces its worst results ever.

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

     The latest installment in McDonald's ordeal started Jan. 5, when Sarah Casanova, chief executive officer of the Japanese unit, received a phone call from Japan while she was in the U.S. The caller informed her that reports had surfaced of foreign objects in McDonald's products and that a major scandal was brewing. Officials in Japan wanted to set up a press conference quickly to address the problem, even if she was unable to attend. Casanova gave the go-ahead for the meeting to take place two days later without her.

Not lovin' it

"We have caused concern and trouble for many customers," senior executive Takehiko Aoki said on behalf of Casanova at the afternoon news conference. "We would like to express our deep regret."

      Attendees were apparently not impressed with what they considered tardy reporting of incidents over the previous year. 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 from the reporters, fell ill after the meeting and later 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. But there was no time for Casanova to mourn the loss of her trusted adviser, who previously worked for supermarket chain Seiyu and tire maker Bridgestone.

     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 urged her colleagues to do everything possible to get to the bottom of foreign object problem. She also pledged to conduct surprise inspections to ensure quality. Casanova, who generally avoids overtime, burned the midnight oil to tackle the problem.

Recurring nightmare

Her worst fear was a new scandal. Last July, the worst happened when 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 the tenacious Casanova nearly threw in the towel. In desperation she turned to Eikoh Harada, the company's former chairman, although he was no longer actively involved in management. 

     Harada suggested appointing Atsuo Shimodaira to get McDonald's Japan back on track. Shimodaira, who had left the company six years earlier, later becoming vice president of Quality Foods, McDonald's largest domestic franchise operator, based in Niigata, is a veteran of the restaurant management business and was a driving force in the chain's expansion in Japan. One concern was Shimodaira's lack of proficiency in English, which would make it hard for him to communicate with non-Japanese executives.

     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.

Bland, blander

 The series of blows was nearly too much, even for the upbeat Casanova. Same-store sales fell for three years in a row through 2014. Monthly sales have fallen by double digits for 11 months straight through May. The string of food safety scandals were simply the latest blow to the chain, which was already losing customers due to inconsistent pricing and deteriorating service.

     On April 16, Casanova unveiled a restructuring plan. As 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 in fiscal year ending in December. The cost-cutting measures included closing 131 outlets and seeking voluntary early retirements from 100 employees at headquarters. One step took place behind closed doors: the demotion of several top managers.

     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 shut said he was the only person trustworthy. The open-ended restructuring is creating friction in the ranks.

     Back in the U.S., the parent company named Steve Easterbrook as its new CEO in March, after the previous chief stepped down following a series of scandals.

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, a business partner of McDonald's in Japan received an e-mail 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. "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 "basic" category. The official with the Japanese business partner was speechless on learning this.

     Casanova, a Canadian who started McDonald's unit in Canada in 1991, has vowed to do all she can to win back the trust of McDonald's customers, even rebuilding the company from scratch. Whether she can pull that trick off is an open question.


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