McDonald’s Japan Achieves Record Profit Despite Price Hikes, Faces Challenges with U.S. Inflation

McDonald’s Holdings (Japan) reported a record net profit of 14.8 billion yen for the first half of 2024, a 31% increase despite price hikes. Strong customer traffic and strategic promotions contributed to this success. However, the company faces potential challenges in the U.S. due to prolonged inflation affecting consumer spending.

McDonald’s Japan Posts Record Profit Amid Price Hikes, While U.S. Inflation Puts Pressure on Consumer Spending

Despite price increases, McDonald's Holdings (Japan) achieved a record net profit for the January-June half. This was attributed to robust consumer traffic. Nevertheless, consumers have been encouraged to tighten their budgets due to the widespread availability of $5 meals in the U.S. market.

According to Nikkei Asia, the fast-food company announced on August 9 that its consolidated net profit for the year's first half amounted to 14.8 billion yen ($101 million), a 31% increase from the previous year.

Operating profit increased by 32% to 23.7 billion yen, the highest ever for January-June, while revenue increased by 10% to 200.9 billion yen. Same-store sales experienced a 7.1% increase.

In January, one-third of the products, including the trademark Big Mac burger, were priced at 30 yen, an increase of 10 yen. The number of customers increased by 3.2%, while the average per-customer expenditure increased by 3.7%.

During an earnings briefing on August 9, Shuko Yoshida, the chief financial officer for McDonald's Japan's restaurant operating unit, attributed the strong earnings to "the synergistic effect of various measures."

The company established a sense of value by offering coupons and limited-time discounts and by introducing limited-time items like a teriyaki egg burger and a line of burgers with European flavors following the price increases.

The company's success was also influenced by its expansion of offerings beyond luncheon options.

Since 2023, McDonald's Japan has been reimagining its coffee drink menu to establish itself as a cafe alternative and encourage customers to purchase coffee drinks during breakfast or coffee breaks.

Customers were lured away from competitors' coffee chains that have been increasing their prices by the competitive prices, which begin at a mere 120 yen per cup.

The restaurant operator installed touch-screen self-ordering terminals in 750 locations as of the end of June to reduce wait times at registers. It intends to increase the number of stores to 1,000 by the end of December.

"McDonald's Japan has succeeded in separating itself from a cheap, get-what-you-pay-for image and is being used by a wide range of people," said Seiichiro Samejima, senior researcher at Ichiyoshi Research Institute. "Sales have increased by 40% compared to before the coronavirus pandemic, and store management that supports sales growth, such as hiring and digitalization, is also a notch above" that of rivals.

However, an alarming trend is arising in the United States, the chain's native market. Prolonged inflation has depressed the spending of low-income households, resulting in a decrease in customer numbers.

The company introduced a $5 menu in late June, which includes a burger, fries, a side dish, and a beverage. The campaign was initially scheduled to last four weeks and has been extended in response to public demand.

McDonald’s Japan Faces Inflation and System Challenges, Weighs Further Price Hikes Amid Competitive Pressures

In Japan, consumers are also tightening their budgets due to long-standing inflation, which has resulted in rival restaurant chains reducing their prices. Beginning at the end of May, the prices of 16 lunch sets from the chicken chain KFC Japan will be reduced by 40 yen. The company's same-store consumer numbers have decreased for ten consecutive months since October 2023.

McDonald's Japan emphasizes value by providing coupons and limited-time discounts on chicken nuggets and other items. The escalating costs of imported ingredients, such as French fries, may subside as the yen appreciates in response to the Bank of Japan's interest rate increase.

In light of the anticipated continued increase in labor and logistics costs, McDonald's Holdings (Japan) President Tamotsu Hiiro stated that "further price increases will have to be considered."

However, it is still being determined whether consumers will endorse this.

"If the yen continues to appreciate, it will become more difficult to raise prices," Samejima said.

Additionally, it will be imperative to prevent system failures. Many stores were compelled to suspend operations due to disruptions in March and July. One-third of the company's 3,000 restaurants nationwide were temporarily unavailable due to the July disruption. The recuperation process significantly undermined customer confidence for an entire week.

July same-store sales dipped 1.6% year-on-year, the first decline in 49 months due to the system outage.

The January price increases will fund investments such as wage increases and digital technology.

"We need to create a virtuous cycle for a sustainable business," Hiiro said.