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28/06/02 . Takahashi Nobuyuki . Asian Times . Japan/ Asia
Beef about McDonald's in Japan
In all of the soccer stadiums in Korea and Japan, advertising billboards featuring the golden arches of McDonald's Japan have been prominent, as it is an official sponsor of World Cup 2002. But all is not well with Japan's largest listed fast-food chain - 2,407 on the over-the-counter Jasdaq market.
McDonald's Japan is preparing for the first anniversary of its initial public offering next month, and it is hoping that its World Cup campaign will help improve its image after the recent bovine spongiform encephalopathy (BSE) "mad cow" scare, and allegations of contributing to environmental degradation in Australia and sourcing goods made with child labor in China.
These problems have contributed to a slide in McDonald's Japan's share price. Listed on July 26 last year at an opening price of 4,700 yen, it rose quickly to 5,080 yen. But as the BSE fears set in, its price dropped to 2,760 yen early this year. A technical rebound saw it in the 3,310 yen range for early June. Shares are currently suspended pending a company restructure.
McDonald's Japan introduced a low-price strategy in 1995, cementing the top position in sales in the Japanese catering industry that it has held since 1982. However, when BSE was found in Japan last September, sales were affected, and they were down more than 19.9 percent this May year-on-year after falling for seven months in a row. To counter the effects of this, and in a reversal of its low-price strategy - an icon of the Japanese deflation economy - it has raised prices.
McDonald's Japan reported a net profit of 10.186 billion yen (US$85 million) on sales of 361.672 billion yen last year, a drop of 39.4 percent from the previous year. It has a 64.7 percent share of the Japanese hamburger market.
The BSE scare focused attention on McDonald's Japan's beef source for the 1.2 billion burgers it makes each year, even though the company spent 500 million yen on TV commercials and 2 million pamphlets to assure customers of the safety of its product. The focus of the advertisements was that all of McDonald's Japan's beef was imported from the "lush greenery of Australia" where pastures "maintained tight quarantine systems and a clean breeding environment as cattle were fed with natural grass and crops".
McDonald's Japan imports at least 40,000 tons of beef a year from Australia. The flip side of this, though, is that in order to satisfy this demand, Australia is losing 566,000 hectares of natural woodlands a year - the fastest destruction rate in a developed country - mainly to cattle breeding.
Woodland ecologist Barry Traill of the Wilderness Society in Queensland comments, "McDonald's Australia showed a cooperative attitude on negotiation, although they still have not stopped using beef raised in pastures cleared by woodland destruction," adding that much of this beef was exported to McDonald's Japan. McDonald's Japan has never formally clarified its position on a possible connection with environmental destruction in Australia, brushing off questions with comments that they do not have available information. It also claims, curiously, that it has not been in contact with its affiliate, McDonald's Australia.
The director of finance of McDonald's Australia, Steven Jermyn, has said that the firm's beef supplier has been FJ Walkers ever since the first McDonald's outlet opened in Australia in 1971, and he says that since 1995 FJ Walkers has supplied McDonald's Japan. Australia Meat Holdings, the parent company of FJ Walkers, has commented that its cattle are raised in pastures all over Queensland. However, Queensland is the worst-hit area in Australia of destruction of natural woodlands for cattle breeding.
Of the total land cleared in Australia, 75 percent is in Queensland, and in the three years up to 1999 the state destroyed 425,000 hectares of natural woodlands a year, according to government figures. This corresponds to an area that more than 170 of the biggest World Cup stadiums would occupy. And a report by the Queensland government in 2000 confirmed that "86 percent of land clearing is for cattle breeding", most of which cattle are for export.
It is evident that pressure from the final buyer to cut costs is being placed on the breeders, and the best way that the breeders can do this is to expand so that they can produce on a better economy of scale.
Apart from cost, one of the key management principles of McDonald's Japan is speed. To achieve this, the company prepares much of its food in advance, but anything not sold after 10 minutes is thrown out. It is estimated that beef worth more than 3 billion yen is binned every year. So on the one hand Australian breeders are cutting down trees to produce more beef, but much of this ends up being wasted anyway.
As a sponsor of the world's most expensive event, McDonald's Japan promoted sales of soccer-related products through booths at the stadiums in Japan. It also sponsored appointed youngsters to escort the players on to the field in the 10 host stadiums, from the north in Hokkaido to the south in Oita. The promotion is in line with the traditional McDonald's sales strategy of targeting children and to shake off the scandal involving a toy factory in China two years ago.
It was revealed that a Shenzhen factory supplying premium toys for McDonald's outlets - such as Hello Kitty, Snoopy and Pooh for the children's set menu - was using hundreds of children, mostly girls, as young as 12, working 16 hours a day for a pittance in clear breach of international and Chinese law. In the face of widespread adverse publicity, McDonald's ended the contract with the factory, but refused to take any blame for the indiscretions of the company to which it had outsourced work.
McDonald's Japan is planning to restructure into a holding company - McDonald's Holdings Co (Japan) Ltd - to develop diversified projects, such as sandwiches and an e-commerce company promoting a wide range of clothing and household goods - under the umbrella structure. The chief executive, Fujita Den, is keen to continue giving McDonald's its unique Japanese flavor, while still staying within the global group company.
However, McDonald's, which has a group financial strength that exceeds the gross domestic product of not a few developing nations, should be required, as should its subsidiaries, to address its social responsibilities with regard to the consumer, the investor and the people who produce for it. Failure to do so could have a strong backlash in the marketplace, especially if the group's financial strength translates into abuses of vulnerable people in Asia.