Will McDonald’s Customers in Japan Still Be Lovin’ It?
McDonald's Japan just raised prices again--the 3rd time since last spring. Will their customers remain loyal?
What’s new: On January 16, 2023, for the 3rd time in only the past 10 months, McDonald's Japan raised prices again. This time the prices of 80% of its product portfolio went up, which is more than the increase to 20% of menu items in March 2022 and to 60% of their products in September 2022.
Why it matters: This rapid succession of significant price increases during the last 10 months is pushing the boundaries of customer loyalty. The company is attempting to justify the most recent round of price increases by touting superior taste and value—at least for its popular Premium Roast Coffee. The price of this best-seller, which first appeared in 2005 as part of the "100 Yen Mac" series, has remained unchanged during the past 18 years--even after the consumption tax was increased twice—which enabled many companies in Japan to camouflage price increases in 2014 and 2019.
By the numbers: McDonald’s Japan is a true success story, but there is the potential to lose market share.
McDonald’s sales had been holding steady, despite the previous two price increases implemented during 2022.
On the other hand, the holding company, McDonald's Holdings Japan, is forecasting a 3% decline in operating income for the full year of 2022 (January-December), due largely to soaring raw material and transportation costs and the weak yen. It is believed that the decision to roll-out the most recent price increase was done partly as an attempt to cover the extra costs.
"Even with two price revisions, we were unable to keep up, and even with this revision, we are not able to fully pass on all the costs. Although profit margins remain high, the company is in the midst of aggressive investments in stores and IT, and it was a difficult decision to absorb even a small increase in costs.” - McDonald’s Japan Public Relations Department
Noteworthy was the price increase of coffee. Hot coffee has been sold since the establishment of McDonald’s Japan in 1971. McCafe Premium Roast Coffee was launched in 2005 at the price point of 100 yen ($0.76) for the smallest cup. As of January 16, 2023, McDonald’s Japan raised the price of the 175ml small or “S” size by 20% to 120 yen ($0.91). The price of the 300ml medium or “M” size was also increased by 20% from 150 yen ($1.14) to 180 yen ($1.37).
The big questions: It was somewhat risky to increase the pricing of Premium Roast Coffee, given its high market share. The company dressed up the announcement of the price increase by simultaneously explaining how they have improved quality and taste due to a complete renewal of their coffee brewing process for the first time in three years. This initiative is known in Japanese as the Honki Café Sengen (本気カフェ宣言), which roughly translates as the "Serious Café Declaration.”
Can McDonald’s justify to its customers the value of paying 20% more for a cup of coffee? According to Rika Kamei, director of the National Marketing Department,
"Coffee is a product that many people buy on a daily basis and has quite a few repeat customers.”
According to the company, while competitors such as 7-Eleven, the leader in convenience store industry with 20,000 outlets, and other coffee shop chains are competing with each other, MacDonald's Japan, with less than 3,000 outlets, holds the top market share at 10%. For several years until last fall, convenience store operators and MacDonald's had been matching the price of the smallest S or R (regular) size coffee at 100 yen. Convenience store coffee prices were then raised successively by each company to 110 yen ($0.85) for the S and R sizes.
The Honki Café Sengen was a big project, involving 100 people from inside and outside the company and taking a year and a half to complete.
The renewal was largely composed of three major components, including changes to the coffee beans, modification of the shape of the dripper, and a larger drinking spout.
"The short brewing time of self-serve coffee (like convenience store coffee) causes a strong, sour taste." - Product development manager explaining why McDonald’s Japan has been focusing on a brewing time of 3-1/2 minutes
In addition to reviewing the origin and temperature at which the beans are roasted, the bottom of the dripper was made thinner to allow the beans more time to come into contact with hot water, "so that the acidity does not become stronger over time" (said the same person in charge of product development), and the company claimed to differentiate its coffee from that of self-serve machine coffee.
The official press release translates,
“The first step in this evolution is the ‘Premium Roasted Coffee’ menu. As the first step, Premium Roast Coffee (hot) will be renewed with a new Premium Roast Coffee that has a new taste, from the selection of coffee beans to the new Premium Roast Coffee that has a strong and clear sharpness. The new Premium Roast Coffee will be available at McDonald's stores nationwide on January 16. Premium Roast Coffee is the most time-consuming item on the McDonald's menu, and it is served with the ‘slow and serious drip’ method, in which each coffee is carefully brewed drop by drop at the store. In addition, a new TV commercial will be aired from January 16 to convey the appeal of the renewed Premium Roast Coffee.”
Can McDonald’s leverage coffee to increase sales during off-peak periods? “In the past, consumers who wanted a quick cup of coffee had only convenience stores to choose from," said Director Kamei.
In contrast to convenience stores, which have a large number of outlets and sell coffee via self-serve machines, McDonald's prides itself on "providing a comfortable and relaxing atmosphere with a food menu unique to McDonald's." At present, however, the company is not fully utilizing this strength.
The storefronts of McDonald's during peak hours are overflowing with people waiting to order and be served, regardless of the day of the week. The introduction of mobile ordering (an advance ordering system using smartphones) and collaboration with various delivery agents have not eliminated the crowding.
There seems, however, to be room for growth during off-peak hours other than lunch and dinner. General Manager Kamei outlined,
"I hope (coffee) will also help to attract more customers during snack hours from about 2:00 to 5:00 p.m."
Lingering concerns: While last year's price hike did not cause a significant loss of customers, the latest round is the largest of the three price hikes. It remains to be seen whether the highly publicized renewal will be enough to retain customers.
What’s next: McDonald’s Japan is also developing "Mac Cafe by Barista," which offers a full menu of cakes and other café items, but only some of its stores will launch these products. Although Direct Kamei has revealed that the company is considering a nationwide rollout of macarons, "We don't want to sell only the café menu," she said.
The key to success will be to what extent McDonald’s can use coffee with a different flavor as a hook to induce customers to buy macarons in combination with existing products and limited-edition pies.
Kamei explained that the new menu was implemented as
"a measure to encourage customers who have been away from the store for a while and those who have never visited the store to buy our products.”
It sounds to me that she just wants to remind customers that “it’s (always) a good time for the great taste of McDonald’s.”
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Links to Japanese Sources: https://toyokeizai.net/articles/-/646702 and https://www.McDonald’s.co.jp/company/news/2023/0111a/
Thanks Mark! Great article. That inspires me to have a Happy Meal for my last supper! 😉
Are smiles still free at McD's? :-)