A very agile McDonald’s in Korea

2013-12-01 12:44

A very agile McDonald’s

By Kim Da-ye
Rarely in any Korean industry does only one foreign company introduce service innovations that competitors simply copy. McDonald’s in the fast food industry is one such company. McDonald’s, the world’s largest chain of fast food restaurants, has been launching a gamut of new services since the mid-2000s, helping revive the local fast food industry that had been heading downhill.In 2006, McDonald’s opened the country’s first 24-hour fast food restaurant and introduced a breakfast menu called McMorning. In 2007, the company became the first to deliver fast food to consumers’ homes and workplaces. In 2009, amid the high popularity of costly coffee shop beverages, it started offering inexpensive beverages with the same coffee-shop quality. Many of McDonald’s services have been adopted here by local and global competitors including Lotteria, Burger King and Dunkin Donuts. In the last few years, the company also expanded its drive-through outlets, a service that it first introduced in 1992. In addition, among large fast food chains, McDonald’s is the only one that freshly prepares burgers upon order.
The company has been implementing all kinds of aggressive promotions along with the continuous addition of new menu items. For example, the company recently provided free coffee for four days in a row between 8 a.m. and 9 a.m. and reintroduced the “1955 burger,” which used the McDonald brothers’ original recipe and was a massive hit among hamburger enthusiasts.
Each new service is a bold step that requires a sizable investment into both labor and equipment. How did McDonald’s introduce innovative services in Korea before any of its competitors did? The Korea Times’ Business Focus asked the company’s new head of Korean operations about McDonald’s secrets to agility.

Joe Erlinger, the managing director of McDonald’s Korea, says that the driving force of its swift localization is focus on consumers. He says that the management looks into two or three consumer researches a month.
“I can’t talk about why it takes others longer, but I know that we are constantly looking into consumer researches… Yesterday, we were going through a consumer research about the burgers we are testing… We just know that we have to be ahead of the consumers and attentive of consumers,” said Erlinger.
“It’s all about us innovating on behalf of consumers.”
When Erlinger started his post in Korea eight months ago, he was startled by the low sales of the Chicken McNuggets meal, which consists of six pieces of chicken nuggets, french fries and a drink. He says that the meal is highly popular in the U.S.
The managing director then went to a chicken-and-beer place, a popular hangout for Koreans. He noticed people there share a bucket of fried chicken as a snack rather than as a meal.
This observation prompted him to quickly launch the McSpicy Chicken Tenders, available in two, four or eight strips that can be ordered on their own as snack or added to a meal. The company also introduced 20-piece chicken nuggets for consumers to share.
Erlinger began to better understand Korean consumers through the services launched by his predecessors. He initially couldn’t understand the delivery service because McDonald’s does not offer it in the U.S. market.
A few days after he arrived in Korea, Erlinger said a laundryman knocked on the door of his apartment and picked up his shirts. The laundryman didn’t say much nor hand him any proof that he collected the shirts. In a couple of days, however, Erlinger’s clothes arrived safely and were “perfectly clean.” This was when Erlinger realized the value of the delivery service in Korea. “The MDS (McDelivery Service) is serving that exact same need — the need for convenience,” he said.
The same applies to the discounts on the McLunch menus. The McSpicy Shanghai Burger (a popular chicken sandwich developed exclusively for the Korean market) meal, for example, costs 4,400 won between 10:30 a.m. and 2 p.m., more than 1,000 won cheaper than the normal price. Erlinger said that there are hardly any other markets that offer discounts during lunch. “Most people here eat lunch outside every day, and there is an expectation that I have to get a deal. So we will continue to offer that,” he says.
Once it identified the consumers’ need, McDonald’s introduced the service with a one-store-at-a-time strategy, a key factor to McDonald’s agility.
According to Erlinger, McDonald’s doesn’t launch a new service one day and make it available across all branches at once. The company first tests the service in one restaurant before expanding it to other restaurants.
The McDelivery Service, for example, was first tested in the flagship store in Pocheon, Gyeonggi Province. After the successful test, the service was soon implemented by branches in southern Seoul.
When the service was proven highly popular, the company set up a central ordering system with a single hotline number. The trained call center staff take orders from across the country and pass them on to outlets nearest the customers. The hotline operates round the clock. Recently, an online ordering system was added.
“That’s how I think innovation works at McDonald’s. It goes from one restaurant to another restaurant, and eventually we see something working, we help facilitate and move it to other places. It can also go from one country to another country,” he says.
“I think there is often this perception that people at the headquarters press a button and things get made at restaurants. That’s not what happens. It’s very much a bottom-up type of business rather than a top-down type.”
McDelivery and the so-called riders are now a crucial part of the brand, Erlinger says. “They are the people who walk into your home and provide the meals, so the amount of training we put into riders and making sure they represent us is huge. I see our riders in all McDonald’s uniforms. They are highly identifiable,” he says.
Using this one-restaurant-at-a-time strategy of building business gradually, McDonald’s is also conducting an important experiment that is receiving much attention from other foreign markets — expanding drive-through outlets in markets with limited space and poor road access.
“Korea has presented some unique challenges. The land size available to us here is considerably smaller. Getting good road access is considerably more difficult, so we had to do some innovations around the size of the buildings and the number of car parks we offer,” Erlinger said.
Erlinger sees a big opportunity in the drive-through service because he observed that most Koreans own and drive cars regularly and traffic can be bad. McDonald’s Korea aims to boost the number of drive-through outlets to 200 by early 2015. The platform was introduced in Korea in 1992, but the firm didn’t reach its 50th outlet until 2011. Between 2011 and May 2013, the number of such outlets doubled.
“There are other countries that want to come and see these small footprint drive-throughs. Yesterday, I was exchanging e-mails with a gentleman from the Middle East who wants to bring a group of people here early next year. China wants to bring a group of people to learn how we do drive-throughs in more urban locations,” said Erlinger.
Questions still remain over how McDonald’s launched the bold services before its competitors did. Erlinger gives the credit to the staff, who he says “executes very, very well.”
“One of the things we are working on is having our teams work more cross-functionally. Consumers do not care if it’s marketing, operations or human resources. Consumers just want a great McDonald’s experience,” said Erlinger.
“People from different disciplines and backgrounds come together to improve the customer experience. I think the cross-functional nature of the work we are doing is one of our secrets to our execution.”

What allows teams to be cross functional is strongly linked to the human resources system, where opportunities are open to crew-level members. At McDonald’s, Erlinger said that 50 percent of the employees at the headquarters started their career at the restaurants. Because employees know inside outside of the McDonald’s business, it allows them to work organically.
Crews are part-time employees serving at restaurants. They are paid the minimum wage of 4,860 won per hour ($4.59), but how does McDonald’s encourage them to stay and develop their careers? All part-timers of McDonald’s enjoy many temporary workers do not. They become subscribers of the national pension fund, the national health insurance, unemployment insurance and occupational health and safety insurance. They are also paid bonuses for major family events including weddings and funerals. McDonald’s also supports their online studies.
But the reason behind the longevity of their career is more than the financial benefits. Erlinger talks about three factors. Firstly, employees get continuous training so that they do not fear the next level job. Secondly, the company constantly creates job opportunities for the existing employees. “When we open a new restaurant, that means that restaurant managers have been promoted,” he says. Thirdly, Erlinger says that McDonald’s has “many great examples.” Six out of eight CEOs McDonald’s has started their careers as crews. In Korea, the head of human resources and the head of real estate development started their careers at restaurants.
In addition, those who want to be in operation must have experience at restaurants. Erlinger also spent a year at two restaurants in downtown Chicago — six months in training from a crew member to the first assistant manager and another six month as a branch manager. He says that he was the only Caucasian person among the staff while the rest were Hispanic Americans and African Americans. “When you create that kind of connection with people, it’s part of what makes McDonald’s successful,” he says.
Ambitious plans
Of course, all innovations require capital investment, and the McDonald’s headquarters has heavily invested into the Korean operations.
McDonald’s Korea plans to operate 500 restaurants by 2015, which involves a total investment of 300 billion won ($280 million) or about 100 billion won per year. On Nov. 25, a day before this interview, the 331st McDonald’s branch opened and the next one was set to open in the coming Friday. That also indicates that the firm will be hiring some 25,000 by 2015, up from the current 15,000. One restaurant usually hires about 50 crew and managers.
“Our results remain strong, and there is confidence in the management back in the United States to invest that amount,” said Erlinger, who stresses that the amount does not include additional investment from franchisees and suppliers. “Every time we meet suppliers now, they are talking about expansion and their plans to grow with McDonald’s.”
Erlinger said that McDonald’s Korea is sourcing the investment internally without borrowing from financial institutions or issuing bonds. Doing so is a huge commitment from the headquarters, he adds.
Opening new restaurants is crucial for McDonald’s presence in Korea at this moment. Its main competitor, Lotteria, is operating more than 1,000 outlets across the country. Last year, Lotteria earned 558 billion won in revenue and 37 billion won in operating profit.
The income of McDonald’s in Korea is not publicly available, unlike its global sales. Part of its finances, however, can be gleaned through the earnings statement of McKim, a joint venture between McDonald’s and a local investor, Makan Holdings. McKim operated 63 out of more than 300 McDonald’s outlets as of the end of 2012. It generated 125.85 billion won in revenue and 3.17 billion won in operating profit. McDonald’s Korea is in the process of acquiring the rest of McKim. While the merger process has drawn interests from the financial media here, Erlinger says that it isn’t an important issue internally. He vows that the merger won’t have an impact on the restaurants and employees.
A simple comparison between the key figures of Lotteria and McDonald’s show that McDonald’s generates more sales per outlet. By opening new stores, it appears, McDonald’s will be able to lead the market.
McDonald’s, however, faces one potential risk. The association of individual-owned fast food restaurants is now trying to reserve pizza and hamburger restaurants for small and medium businesses. If the government accepts the association’s proposal, McDonald’s will be effectively blocked from opening new stores in the future. “Of course, we will always abide by any law or regulations passed in the local market … Any decision is not made on that, but we are very much watching and being attentive to it,” said Erlinger.
McDonald’s defense against such movement is that its growth will eventually benefit Korean franchisees and domestic suppliers. Throughout the interview, he stressed on the principle of the “three legged stool,” which means that the company, franchisees and suppliers should grow together to keep the stool stable. “I hope that we continue to grow many of our local suppliers, and those local suppliers can play broader role not only in Korea, but at some point in Asia,” he says.
McDonald’s gets fresh produce from Shinsegae Food, dairy products from Maeil Dairy, sauces from Ottogi, and eggs from Ganong Bio. The last is a relatively small supplier. During the interview, this reporter noticed behind his meeting table two baseball bats with two balls. The balls were signed by Los Angeles Dodgers pitcher Ryu Hyun-jin. Erlinger, a native of Los Angeles and a big fan of the baseball team, was elated to get the signed balls from Ottogi. He visited Ottogi on the same day as Ryu, an advertising model of Ottogi’s noodle products, did, and was presented the balls although he couldn’t meet the athlete.
Erlinger’s other task is improving profitability, which he tries to achieve in two ways — increasing sales per restaurant and getting better prices for supplies.
“We call it comfortable sales — sales in our restaurants that we opened in the last 13 months. That is the number I see every morning when I wake up. I want to make sure that we are bringing more customers to our existing tables. For me, that’s what gives me the faith that we can have 500 restaurants,” Erlinger says.
In terms of suppliers, he said as McDonald’s Korea becomes bigger, the company will be able to achieve “the scale where we don’t have to import things but source more and more here in Korea, which I am very excited about.” He also hopes that the economies of scale would eventually bring down the prices.
This year, McDonald’s celebrates its 25th anniversary of entering the Korean market. The first branch opened in Apgujeong, a wealthy district in southern Seoul, in 1988.
McDonald’s entered Korea in a joint partnership with two domestic entities — Shin Mac and McKim. Since then, McDonald’s has expanded aggressively, reaching over 350 outlets. In early and mid-2000s, however, fast food chains in general were hit hard by increasing concerns over obesity and widespread fear of mad cow disease. McDonald’s, along with joint ventures, fell into heavy debts.
In 2005, McDonald’s entered the market on its own by fully acquiring Shin Mac and buying a 75-percent stake in McKim. Ray Frawley was the first managing director sent by the headquarters, and some of the industry’s most innovative services were launched under his leadership.
The company opened the first 24-hour restaurant in Cheongdam-dong, southern Seoul in 2005. In 2006, it opened the 3,300-square-meter flagship store in Pocheon, Gyeonggi Province. By April 2008, the Korean operation announced two-digit-growth both in 2006 and 2007 — 10 percent and 16 percent respectively, the third highest revenue growth rate among McDonald’s 119 markets, according to the firm’s press release in 2008. In terms of the number of customers and operating profit, McDonald’s Korea came out on top among 37 markets across the Asia Pacific, the Middle East and Africa.
At Erlinger’s first press conference last June, McDonald’s stressed on the quality, launching the “Mother is surprised” campaign. The campaign publicized that McDonald’s uses the same ingredient that any households would use to prepare their foods. The firm also planned National Open Kitchen Day, when consumers can visit the kitchens and observe the cooking process and maintenance.
Freshness will continue to be highlighted. Erlinger said that one thing he noticed about Korean consumers is that they don’t customize their burgers as much as U.S. consumers do. He, as a father of three children, always customizes their burgers. Although he didn’t reveal details, he said that new register systems will be introduced at McDonald’s that will improve their ability to customize orders.
“We will achieve this year another double digit growth rate here, which I think will be our fifth in a row. And we are building plans for next year, which will include another double digit growth,” Erlinger says.