Chocolate fries: McDonald’s hopes they'll spark Japan turnaround

TOKYO — Maybe McChoco Potato — French fries with chocolate sauce — will help.

McDonald’s Japan, the largest burger chain in the nation, is closing restaurants, lowering prices and rolling out new — and some odd — menu items as it looks to halt years of plummeting sales and declining popularity.

Its troubles can be blamed on everything from food safety scandals to the shrinking population of its core customers, young people.

The company has reported losses for each quarter since mid-2014, and a net loss of  $19.4 million in the first nine months of 2015. That’s the worst result for the period since McDonald’s Japan went public in 2001.

Its problems are worsening even as the parent company is showing signs of reversing lagging sales.

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The number of McDonald’s restaurants in Japan dropped to 2,975 in November, down nearly 24% from its peak in 2002. The company plans to close at least 190 more restaurants by the end of January, mostly in city centers.

McDonald’s Corp,, the U.S. parent company, owns about 50% of the Japan unit and is considering selling about a third of its stake to outside investors.

“In another five years, you won’t see any McDonald’s in Japan except rural areas,” says Kosuke Ogawa, a food marketing specialist at Hosei University’s Business School of Innovation Management, in Tokyo.

The recent turmoil has followed a rash of headline-grabbing food safety and service problems.

In July 2014, McDonald’s and other fast food chains in Japan acknowledged using expired meat from a supplier in China. A month later, a customer found a tooth — presumably human — in an order of French fries. Pieces of plastic were found in Chicken McNuggets delivered from a plant in Thailand.

Even when things went right, they went wrong: For much of 2014, orders of French fries were limited to small sizes because of shipping problems from the United States.  The launch of a new product developed solely for the Japan market — tofu nuggets — backfired when shops across Japan overcharged for them.

In health conscious and service-obsessed Japan, such foul-ups are seen as inexcusable. The troubles helped speed a defection of customers to competitors, mostly locally owned fast-food chains and even Japan’s ubiquitous convenience stores, which have turned to fresh-made, takeout food for new sales.

Market conditions aren’t helping.  McDonald’s and other U.S. competitors did well when the yen was strong. That made imports from the United States — which include the bulk of McDonald’s menu items — relatively cheap, and helped ensure steady profits. Those margins disappeared when the yen fell from 76 per dollar in 2011 to as high as 125 yen per dollar last summer.

Demographic trends aren’t helping either. Japan’s population is rapidly declining, particularly among young people who make up both McDonald’s core employees and most important customers. Fewer of the former means labor costs go up; fewer of the latter means sales go down. It’s not a recipe for success.

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McDonald’s Japan CEO Sarah Casanova, a native of  Canada, responded by apologizing and finding new overseas suppliers. She closed of hundreds of poorly performing restaurants, mostly in expensive, densely populated city centers, and ordered the remodeling of 500 others.

She also introduced new menu items available only in Japan, like “taco rice” (just what it sounds like) and three new types of “burgers” priced at $1.69 each: Egg and cheese with a meat patty; barbecue pork; and ham and lettuce. This week the company introduced another new item: French fries with white and dark chocolate sauce.

“We continue to see a recovery trend at McDonald’s Japan,” Casanova said last year. “But obviously we have more work to do. We are not satisfied where we are.”

Ogawa said that McDonald’s Japan thrived for nearly three decades under its colorful founder, Den Fujita, but lost its way after he died in 2004.

Perhaps chocolate fries are the answer.