McDonald's growth path leads East

By BusinessWeek

Make that a Big Mac, fries and a quart of motor oil, please. If executives at McDonald's and China Petroleum & Chemical, better known as Sinopec, get their way, mainland China's motorists may be able to fill up their cars and their stomachs thanks to a long-term alliance clinched last year to combine fast-food outlets with gas stations.

In mid-January, McDonald's (MCD, news, msgs) opened its first drive-through restaurant at a site owned by Sinopec outside Beijing as part of the tie-up that the world's biggest restaurant operator hopes will power its expansion in China.

McDonald's already has about 785 outlets up and running in China and plans to have 1,000 restaurants selling its brand of American food by the 2008 Beijing Olympics.

The deal with Sinopec (SNP, news, msgs), China's biggest operator of gas stations, will give McDonald's a number of choice locations for expansion. "They have in excess of 31,000 locations across China and are opening up 700 new ones a year," says Tim Fenton, the president of McDonald's Asia Pacific, Middle East and Africa regions that span some 34 countries.

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McDonald's CEO Jim Skinner, who is leading a revival of the global restaurant chain, is counting on Fenton, based in Hong Kong, and his team to drive revenue and profit growth across the nearly 8,000 restaurants he oversees, from Turkey to Tasmania. Consumers in this part of the world spend $580 billion on meal purchases away from home, a figure about $170 million bigger than the United States and double the size of such spending in Europe.

Well over half of that potential market is represented by the dominant economies of Asia -- Japan, China and India -- where the prospects for McDonald's look especially strong in the decade ahead.

And to tap that growth, the company is tailoring its restaurant design to local lifestyles, experimenting with new menu items and delivery service, and setting up Asia supply networks to boost profitability.

India's a bigger challenge

These markets, plus the Middle East and Africa, generate about 17% of McDonald's $20 billion-plus global revenues. Fenton, who began his career with McDonald's in 1973 as a crew member at an outlet in Utica, N.Y., thinks that figure will grow if the company can come up with smash-hit menu items and execute its expansion plans.

A more dynamic menu, plus investments in store renovations, has driven store traffic back to strong levels and improved brand awareness in Japan.

"Their menu used to be just a beef patty with a slice of cheese or something," says Seiichiro Samejima, an analyst with the Ichiyoshi Research Institute in Tokyo. "Now, there is chicken, shrimp and more variety than before."

India is a more challenging market, given local dietary preferences for nonmeat dishes. Fenton points out that India's eat-out market is about $128 billion a year compared with $132 billion in China, but is actually growing faster than China's. McDonald's has about 110 restaurants in Mumbai and Delhi, India, and plans to open 25 outlets a year.

Though beef burgers are something of a taboo for most Indian consumers, McDonald's thinks it has strong enough credentials in fish, chicken and pork dishes to succeed there. Its outlets in India have developed some popular vegetarian dishes such as McCurry Pan.

A Middle East debut

One critical task for McDonald's is finding new menu items that not only thrive in one market but can be exported to others around the company's global system. For instance, the McArabia -- a flatbread, spicy chicken fillet, onion and garlic mayonnaise sandwich that debuted in the Middle East a few years back -- is now popular in Malaysia and South Africa. To help make that happen, McDonald's last year opened a food studio in Hong Kong run by a chef and a team of nutritionists to dream up new products.

In the first quarter of 2007, McDonald's is launching a menu item in Australia aimed at kids called Pasta Zoo, in which the pasta is shaped like little animals. The Hong Kong food lab is working on pasta dishes targeted at adults.

Whether it's new menu items such as these in Australia, or gas-station-and-restaurant combinations in China, Mickey D's is pulling out all the stops to keep its momentum going in Asia.

Click here for a slide show of McDonald's efforts in Asia.

This article was reported and written by Brian Bremner for BusinessWeek.