McDonald's to Tout Quality in China

   Date:2012-03-05

SHANGHAI—McDonald's Corp. is launching a new ad campaign in China that taps rising worries over food safety and quality in an attempt to win market share from its dominant rival, Yum Brands Inc.'s KFC.

The fast-food giant is planning to air a series of television commercials this summer to portray itself as the fast-food brand in China with the best quality. The ads will feature "100% fresh beef" on the chopping block, farmers picking tomatoes from the vine and chickens eating high-quality feed, according to a company spokeswoman.

Ads will air on Chinese TV networks ahead of and during the Summer Olympics in London, of which McDonald's is an official sponsor and expects to make an impression on a high number of Chinese viewers. "We're not out to have the most stores in China, but we want to have the highest quality," Kenneth Chan, chief executive of McDonald's China, said in an interview Tuesday. A spokeswoman declined to disclose spending.

McDonald's ad blitz comes as the company looks for growth in a market dominated by Yum Brands, which runs 3,700 KFC and 626 Pizza Hut outlets there. McDonald's operates more than 1,400 stores in China and is boosting its investment by 50% this year from a year earlier to open 250 stores, Mr. Chan said. Last year it opened about 200 stores. McDonald's aims to have 2,000 outlets in China by the end of 2013, he said.

A Yum Brands spokeswoman declined to comment.

China's dining landscape is becoming increasingly competitive as fast-food chains and casual-dining outlets expand across the country. Sales within China's food-service industry jumped to 625 billion yuan ($99 billion) in 2011, up 14% from a year earlier, according to market research firm Euromonitor International.

Chinese consumers typically feel that Western food chains use safe ingredients, said Ben Cavender, a senior analyst at China Market Research Group. However, Chinese consumers are weary of food quality in the country after repeated spates of sometimes deadly food-additive scandals and upheavals in which some restaurants were found to cook with oil collected from gutters.

Still, the ad campaign comes as the industry faces increasing scrutiny in China. McDonald's itself earlier this month said it had never used beef treated with ammonium hydroxide in China, as reports that the company had withdrawn the additive in the U.S. reached the mainland. KFC last year defended its use of powdered soy milk rather than fresh milk after facing online and media criticism, saying the powdered product met quality demands that it couldn't match with fresh soy milk.

McDonald's has increasingly sharpened its television advertising to stay competitive in a key growth market, industry experts say. It launched last year a TV ad to spotlight its chicken products, which analysts say have been overshadowed by the chain's hamburger marketing.

Yum had the advantage of being one of the first restaurant chains to move into and expand across China, which has given it better access to prime locations, has enabled it to move further into the country's smaller cities, and has protected it from a rising number of competitors, said Torsten Stocker, a partner at U.S.-based consulting firm Monitor Group.

China accounts for less than 3% of McDonald's profit, executives said last year. That is around $300 million in earnings before interest and taxes for McDonald's compared with Yum Brand's reported $900 million of Ebit, according to Michael Kelter, an analyst at Goldman Sachs. McDonald's doesn't disclose separate financial data for China.

Yum holds 5.2% market share of China's food service, compared with McDonald's 2%, according to Euromonitor.
 

While Yum currently has the lead in China's food industry, the market isn't yet set in stone, Mr. Kelter said. "China today is essentially the U.S. of the 1950s, which means there are decades to come of compounding growth as the restaurant market matures," he said.

Mr. Chan said McDonald's, which franchises its stores in the U.S. market but is more company-owned and operated in China, is looking for franchise partners in China so that it can pick up the pace of its expansion in the country. It now has 12 franchises in China.

To boost spending for its current customers, McDonald's is remodeling 120 stores this year, equipping them with wireless Internet so diners will linger, bring their computers, and order more, Mr. Chan said. The company is also targeting on-the-go consumers by adding 100 new dessert kiosks this year and 40% of its new stores will be drive-thrus.

McDonald's fourth-quarter sales hit $6.82 billion, up 9.8% from the year-earlier period. Quarterly profit rose to $1.38 billion from $1.24 billion.

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