McDonald's Japan
Corporate History & Strategy

In 1969, the Japanese government implemented the second round of capital liberalization, deregulating entry into Japan's food service industry through joint ventures with foreign companies. In the United States, fast food categories such as hamburgers and fried chicken had grown into massive restaurant chains, and they were eyeing opportunities to enter the Japanese market. In 1970, Daiei-affiliated Dom Dom Burger opened its first store in Machida, and in the same year Mitsubishi Corporation partnered with US-based Kentucky to open stores in Nagoya, as major corporations began entering the food service sector one after another.

At the time, the westernization of food was still in progress in Japan, and the view that the food service industry itself would experience rapid growth was widely shared. An era had arrived where large corporations entered the food service industry, which had been dominated by small and medium enterprises. Entry formats were diverse, including joint ventures with foreign capital, development with proprietary capital, and chain expansion from individual shops. The hamburger market was considered to have large latent demand precisely because it was untapped, and multiple companies decided to enter simultaneously.

Den Fujita, who ran an import sundries business called Fujita Shoten, focused on the operational system of US McDonald's. The system of manualizing required skills so that even inexperienced personnel could learn store operations in a short period was novel in Japan's food service industry, which had been centered on apprenticeship systems. Fujita proposed a partnership for Japanese expansion to US McDonald's, but the American side was initially exploring joint ventures with major companies such as Daiei.

However, negotiations with Daiei broke down because Daiei insisted on a 51% equity stake, and few companies showed interest in hamburgers—an unknown product. As a result, negotiations proceeded on terms favorable to Fujita, and he succeeded in setting the royalty rate at 1% versus the standard 5%, with a contract period of 30 years. In March 1971, McDonald's Japan was established with equity contributions of 25% from Fujita Shoten, 25% from Daiichi Pan, and 50% from US McDonald's, with capital of 54 million yen.

Shortly after establishment, a change in capital policy was made. Fujita was concerned that equity participation by an ingredient manufacturer would skew supplier relationships, and bought out Daiichi Pan's stake. This restructured McDonald's Japan into a 50-50 joint venture between Fujita Shoten and US McDonald's. Fujita assumed the presidency, and while the US side offered advice, day-to-day management decisions were entrusted entirely to the Japanese side.

This 50-50 equity structure with management delegation was maintained for approximately 30 years until Fujita's passing around 2003. The goals set at founding were the development of 8-10 stores within one year in central Tokyo with annual revenue of 100 million yen, with planned capital expenditure of 60 million yen. The de facto founder of McDonald's Japan was Den Fujita, and the company's management style was defined by the joint venture terms and capital structure established at founding.

The opening of the first store in Ginza Mitsukoshi in July 1971 established McDonald's Japan's reputation as a 'food service company with strong customer-drawing power.' Store opening requests poured in from department stores and commercial facilities nationwide, but McDonald's Japan adopted a policy of limiting store locations to the three major metropolitan areas of Tokyo, Osaka, and Nagoya. Considering the marketing effect of TV commercials, the aim was to boost per-store revenue in the short term by concentrating store openings in metropolitan areas where advertising investment had accumulated.

Regarding quality control in store operations, the company chose expansion through company-owned stores rather than franchises. Fujita judged that a company-owned system where headquarters education could fully reach stores was essential to thoroughly implement 'QCD (Quality, Cost, Delivery),' which US McDonald's emphasized, in Japan as well. In 1971, Hamburger University was established, and a training system for store operations personnel was also developed. As of July 1972, the store count stood at 12.

Securing raw materials became a challenge in pursuing multi-store expansion. At the time of the first store's opening, beef was imported frozen from the United States, but as the number of stores grew, imports alone could not keep pace. Additionally, a regulatory issue arose as the Ministry of Agriculture, Forestry and Fisheries objected to the import of semi-processed products. In May 1972, McDonald's Japan concluded a full-scale supply contract with Zenchiku (now Starzen), a fresh meat trading company.

Zenchiku had built trust by supplying Australian patties from the time of the first store's opening in 1971, which led to this formal contract. In July 1972, a dedicated Chiba factory for McDonald's was newly constructed, introducing US McDonald's know-how to begin frozen beef processing. This factory had capacity to supply beef demand for 15 to 45 stores, becoming the foundation for supporting multi-store expansion from the supply side.

The dual-track approach of concentrated metropolitan area openings and supply chain development progressed steadily. By the end of 1974, the store count reached 58, surpassing 50 stores; by the end of 1976, it exceeded 100 at 105 stores. By the end of 1979, it reached 212 stores, growing to over 200 stores in just eight years from founding. All were part of the metropolitan area dominant expansion centered on Tokyo, Osaka, and Nagoya.

Notably, Zenchiku rapidly expanded its performance through its business with McDonald's Japan, achieving a transfer to the First Section of the Tokyo Stock Exchange in September 1977. McDonald's Japan's growth had a ripple effect that also elevated its suppliers' business scale. The alignment of three policies—company-owned stores, metropolitan area concentration, and supply system—enabled McDonald's Japan to build an overwhelming position in the domestic fast food market throughout the 1970s.

Following the success of the first Ginza Mitsukoshi store in July 1971, store opening inquiries poured in from department stores and commercial facilities nationwide. However, McDonald's Japan made the decision to limit store locations to the three major metropolitan areas of Tokyo, Osaka, and Nagoya. As advertising director Kazuo Takagi explained, advertising investment in TV commercials takes effect through 'accumulation,' and opening a single store in a rural area with no advertising accumulation would not benefit from advertising and promotional activities.

In addition, Fujita chose expansion through company-owned stores rather than franchises. He judged that a company-owned system where headquarters education could fully reach stores was essential to thoroughly implement QCD (Quality, Cost, Delivery), which US McDonald's emphasized, in Japan as well. In 1971, Hamburger University was established to systematize the training of store operations personnel. The policy of prioritizing quality control through company-owned stores over rapid franchise expansion became the foundation for metropolitan area dominance throughout the 1970s.

The biggest bottleneck in multi-store expansion was raw material procurement. At the time of the first store's opening, beef was imported frozen from the United States, but as the number of stores grew, imports alone could not keep pace. A regulatory issue also arose as the Ministry of Agriculture, Forestry and Fisheries objected to the import of semi-processed products, making the construction of a domestic procurement and processing system urgent.

In May 1972, McDonald's Japan concluded a full-scale supply contract with Zenchiku (now Starzen), a fresh meat trading company. Zenchiku's director Kondo had seen a newspaper article about McDonald's Japan's establishment and approached Fujita for business, building trust by supplying Australian patties at the first store. In July 1972, a dedicated Chiba factory for McDonald's was newly constructed, introducing US McDonald's know-how and establishing a system to supply beef demand for 15 to 45 stores. On this supply foundation, the store count expanded to 58 by the end of 1974, 105 by the end of 1976, and 212 by the end of 1979.

As of 2004, McDonald's Japan faced structural challenges on both the business and capital fronts. On the business front, the low-price strategy of the early 2000s had reached a dead end, and performance was stagnating, compounded by a decline in beef consumption due to BSE concerns. In particular, numerous stores that had deteriorated or were in inefficient locations as a result of the mass store openings in the 1990s were dragging down overall profitability.

On the capital front, the de facto founder Den Fujita passed away in 2003, and Fujita Shoten's influence on management vanished. The McDonald's Japan shares held by the Fujita family were transferred to US McDonald's headquarters, and management control of the Japanese entity effectively passed to the US parent. The Fujita regime that had lasted 30 years since founding came to an end, and the question of who would lead McDonald's Japan emerged.

US McDonald's headquarters sought to overhaul the management of the Japanese entity and appointed Eikoh Harada, who had served as president of Apple Computer Japan, as CEO. Harada came from the IT industry, with a career spanning NCR Japan, Yokogawa HP, and Schlumberger before joining Apple. He had no connection to the food service industry, but under Harada's own belief that 'CEO is a profession,' the cross-industry executive appointment was realized.

This personnel decision was intended to signal a decisive break from the practices of the Fujita Shoten era by placing a complete outsider rather than a homegrown executive as president. Harada assumed the position of Representative Director, Vice Chairman, and CEO in 2004, and in 2005 became Representative Director, Chairman, President, and CEO. He would be involved in managing McDonald's Japan for 11 years until his departure in 2014.

After assuming the position, CEO Harada significantly transformed McDonald's Japan's management policy. He advocated departure from the low-price strategy that had been pursued under the Fujita era, and launched initiatives including development of premium-priced products, closure of unprofitable stores, and conversion of company-owned stores to franchises. Harada described his management approach as 'strategic navigation,' a method of first presenting a clear goal to all employees, then specifically communicating and leading them through the steps to reach it.

The first half of the Harada regime saw performance recovery through premium-priced product hits and store reforms, but the second half saw performance deteriorate again due to premium-priced product failures and the normalization of coupon dependence. In FY2013, the company fell into a significant earnings decline, and Harada stepped down as CEO in 2014. The 11 years of a professional manager from a different industry leading a food service chain were divided into two phases: reform achievements in the first half and stalling in the second half.

For Eikoh Harada, who became CEO in 2004, the greatest management challenge was departing from the low-price strategy. From the late 1990s, McDonald's Japan had repeatedly implemented drastic hamburger price cuts, and while customer traffic was maintained, the decline in average transaction value was compressing earnings. Low-price products exemplified by the 100-yen Mac functioned as a customer-drawing device but were not structured to generate profits.

The policy Harada set forth was to maintain low-price products while newly introducing premium-priced products, raising the average transaction value across the entire menu. By presenting higher-priced options to customers who visited for the 100-yen Mac, the aim was to lift the average transaction value. Rather than a complete withdrawal from the low-price approach, the strategy was to improve the earnings structure by expanding the range of price tiers.

As the first step of the premium-pricing strategy, the 'Ebi Filet-O' was launched as a limited-time product in October 2005. Priced at 580 yen for a value set, the product featuring shrimp rather than meat as a healthier option gained support among young women, and was promoted to the regular menu in January 2006. In January 2007, the 'Mega Mac' was launched as a limited-time product, and on January 14, immediately after launch, all-store daily revenue hit an all-time high of 2.3 billion yen.

Parallel to the product strategy, a 'new pricing structure' was introduced in May 2006. Prices were raised by approximately 10 to 40 yen across all products, except for certain fixed-price items such as the 100-yen Mac and Happy Meal. Set menus were raised from 380-560 yen to 410-580 yen, and side menus from 150-250 yen to 170-270 yen. The combination of premium-priced product launches and price increases on existing products was a move to improve profitability across the entire menu.

The continuous introduction of premium-priced products and pricing initiatives produced significant results in the short term. In April 2009, the Quarter Pounder was launched nationwide, and in August 2010, monthly all-store revenue reached 51.3 billion yen, setting a new all-time high. Three premium-priced products—Ebi Filet-O, Mega Mac, and Quarter Pounder—hit in succession, contributing to improvement of average transaction value.

However, from 2010 onward, the company struggled to create new hit products. Even when premium-priced products were announced, consumer support did not sustain, and as a result, effective discounting through coupon issuance became normalized. The structure of being unable to sustain premium pricing was exposed, and coupon dependence offset the improvement effect on average transaction value. The introduction of premium-priced products was effective for temporary earnings improvement, but showed its limits as a sustainable pricing strategy.

As a result of McDonald's Japan's rapid multi-store expansion from the 1970s through the 1990s, by the mid-2000s there were numerous deteriorated stores and stores in poor locations. Small-format stores with conspicuous equipment degradation and stores in locations with small floor areas and poor efficiency were dragging down overall profitability. The store operations reform pursued under CEO Eikoh Harada was primarily aimed at sorting out this negative legacy.

The reform consisted of three pillars. First, converting existing company-owned stores to franchises and selling them. Second, capital investment to renovate high-potential stores. Third, closing unprofitable stores. All were oriented toward selecting from the store assets accumulated during the mass opening era and reorganizing them into a high-profitability store network.

From FY2008, McDonald's Japan began in earnest to convert company-owned stores to franchises and sell store operations. The aim was to transfer the investment burden by selling stores with heavy capital expenditure requirements to franchise operators while simultaneously securing sale proceeds. Over the five years from FY2008 to FY2012, a cumulative 17.1 billion yen in sale proceeds was recorded, processed as revenue. Meanwhile, in FY2010, unprofitable store closures were carried out, with 486 stores closed and 9.7 billion yen in store closure losses recorded as extraordinary losses.

On the capital expenditure front, the company focused on renovating large-format suburban stores with drive-through facilities. Roadside-type stores heavily used by families with high average transaction values were among the most profitable formats for McDonald's Japan. Capital investment was ramped up from FY2006, with approximately 20 billion yen invested annually through FY2008.

The store operations reform supported performance in the short term but contained structural problems. Sale proceeds from FC conversions were exhausted by FY2012, and from FY2013 onward, there was no longer any revenue contribution from sale proceeds. Company-owned store revenue approximately halved from FY2008 to FY2013, and the revenue structure shifted to heavy dependence on franchise income. The structure that had been supporting performance through what was effectively real estate disposition was exposed as disposition targets were depleted.

In FY2013, McDonald's Japan recorded a significant earnings decline, and CEO Eikoh Harada departed in 2014. The shift from store quantity to quality was a necessary reform, but combined with the accounting treatment of recording sale proceeds as revenue, it created a structure of dependence on sale proceeds while the recovery of core business profitability remained insufficient. The store strategy across the 11 years of the Harada regime had both reform and dependency dimensions.

McDonald's Japan, which had fallen into a significant earnings decline in FY2013, suffered a further blow in 2014, the year Harada's departure as CEO was decided. With performance already deteriorating due to the exhaustion of store sale proceeds and the failure of premium-priced products, a serious issue related to food quality control came to light. It was revealed that Shanghai Husi Food, a supplier to McDonald's Japan, had been shipping chicken beyond its expiration date.

In July 2014, McDonald's Japan disclosed and apologized for having used expired chicken. Shanghai Husi Food was a Chinese subsidiary of the US-based OSI Group, and was a major chicken supplier for McDonald's Japan. The quality fraud occurring upstream in the supply chain significantly damaged consumer trust in McDonald's Japan's quality control systems themselves.

Following the revelation of the expired chicken issue, McDonald's Japan immediately suspended transactions with Shanghai Husi Food and switched its chicken sourcing to Thailand. The company also strengthened food safety information disclosure, advancing the publication of raw material origins and supplier information. However, recovering consumer trust once lost required time, and same-store sales continued to show significant year-over-year declines after the issue emerged.

Regarding the management structure, Eikoh Harada stepped down as CEO in 2014, and in 2015 Canadian-born Sarah Casanova assumed the role of President and CEO to take over management. Harada assumed the chairmanship but departed in 2015, leaving McDonald's Japan. The 11-year period of management by a professional manager from a different industry ended, and once again a management structure overhaul led by US McDonald's headquarters was carried out.

The impact of the quality issue dealt a direct blow to performance. In FY2014, McDonald's Japan recorded a net loss of 21.8 billion yen, followed by a net loss of 34.9 billion yen in FY2015, falling into two consecutive years of losses. The combination of the late Harada-era performance deterioration and the quality issue confronted McDonald's Japan with its largest management crisis since founding.

In response to this dire situation, in December 2015, US McDonald's, as the largest shareholder, considered selling shares in the Japanese entity. It reportedly explored selling up to 33% of shares to a fund for approximately 100 billion yen. The fact that the US parent was driven to consider selling its stake in the Japanese entity meant that the quality issue and performance deterioration were not merely a temporary crisis, but that the US parent's assessment of McDonald's Japan's business structure itself had changed.