McDonald's Japan Cuts Forecast, Scales Back New Openings

McDonald's Japan Friday slashed its forecast for group net profit by more than 90 percent and drastically scaled back plans to open new stores after a year in which cutting hamburger prices to 50 cents failed to revive a business hurt by fears of mad cow disease.

The news from Japan's top fast food chain came the day after an abrupt announcement that McDonald's Corp.'s top executive plans to retire soon.

McDonald's Holdings Co Ltd (Japan) cut its group net profit forecast for the year

A sales campaign based on price cuts failed to give a lasting boost to a business battered by Japan's first outbreak of mad cow disease last September.

The 50 percent-owned unit of U.S. fast-food giant McDonald's (MCD) will have opened 183 new outlets in Japan in 2002, down from its plan for 220 by the end of December. It plans to close 115 stores by year-end.

McDonald's Japan also said it could close more outlets than it plans to open in 2003.

That would mark the first time in its 31-year history that the hamburger chain's number of stores would fall from the previous year.

"We are aiming to open only about half the number of new stores in 2003 that we have planned for 2002, while keeping the number of store closings the same or possibly higher," said Yagi, who took over for charismatic founder Den Fujita in March.

"This will play a big role in our profitability."

Before the announcement, shares in McDonald's Japan fell 6.39 percent to close at 2,050 yen after a newspaper report that it would miss its August forecasts due to worse than expected sales. The key Nikkei average fell 0.61 percent.


McDonald's shares fell 3.57 percent to $18.11 in early Friday trading on the New York Stock Exchange after climbing on Thursday.

The Oakbrook, Illinois-based company said Thursday that Chief Executive Jack Greenberg will leave at the end of the year, as the company that pioneered fast food struggled to cope with falling profit in a saturated hamburger market, outbreaks of mad cow disease and poor service.

Jim Cantalupo, 59, former vice chair and president of the company, was named to succeed Greenberg, 60. Just eight months ago, McDonald's said Greenberg had agreed to stay at his post for three more years.

Also, at least 17 people were injured in an explosion at a McDonald's fast-food outlet in a railway station in India's financial hub Bombay Friday. Faulty air-conditioning was most likely to blame, police said. Police in Indonesia said a blast on Thursday at a McDonald's restaurant on Sulawesi island that killed three people was a bomb.


In a bid to stem declining same-store sales, it made aggressive price cuts in August, selling hamburgers for 59 yen ($0.50), down from 80 yen, and cheeseburgers for 79 yen instead of 120 yen.

The price cuts helped it lure a record number of customers to its Japanese outlets in August, but the effect of the strategy to lure cost-sensitive consumers failed to last, with sales tailing off again in September.

The price cuts and a rise in labor and procurement costs forced its gross margin — the percentage of profits after subtracting costs of goods sold from revenue — to fall to 11.9 percent this year, compared to last year's 19.1 percent.

"The pricing thing has really hurt them," said Kana Sasaki, analyst at UFJ Tsubasa Securities. "I think it was difficult from a cost perspective to predict how all this would affect the bottom line."


McDonald's Japan also cut group operating profit forecasts to 3.28 billion yen from 12.1 billion yen and reduced consolidated recurring profit, which is pretax and excludes extraordinaries, to 1.75 billion yen from 11 billion yen.

The new forecasts for group net profit and revenue would represent major plunges from a parent-only net profit of 10.19 billion yen on sales of 361.67 billion yen in 2001.

Sales at outlets open more than a year slumped 12.4 percent from a year earlier during January to November.

Its sales have fallen steadily since last September, when the first outbreak of mad cow disease in Japan led customers to steer clear of its outlets despite assurances that it uses only imported beef, mainly from Australia.

The fast-food chain also saw customer traffic slide after ending a special half-price campaign for hamburgers in February.

McDonald's Japan adopted consolidated accounting standards after moving to a holding company structure in July.