McDonald's (NYSE:MCD) got a dose of good news this week as same-store sales in the U.S. improved 0.4% in January, marking the first time domestic comps have increased in two consecutive months since October 2013. Same-store sales in Europe also crept higher, up 0.5%, but the Asia/Pacific region continued to be a headache as comps dropped 12.6% in the region.
Japan, in particular, has been a nightmare for Ronald & Co. as comps in the world's third-biggest economy fell by a whopping 39% last month, and McDonald's Japan posted its first operating loss since 2001 last year. McDonald's Corp holds a 49.9% stake in the Japanese unit, which makes up the fast-food king's second-biggest market with over 3,000 locations. McDonald's struggles in Japan have been overshadowed by the company's domestic woes and image problems, but with a 39% drop in same-store sales they clearly can't be ignored. Let's take a closer look at what's ailing the Golden Arches in the Land of the Rising Sun.
Food safety scandals
Few things will turn you off from a restaurant faster than finding a tooth in your food, but that's exactly what happened at a McDonald's in Osaka. Earlier in January, McDonald's revealed that a human tooth had been found in an order of fries in a restaurant in August. Oddly, the tooth had not been fried, and an investigation did not pin a source. Not only that, but in December a child was mildly injured by a piece of hard plastic found in a sundae, and more recently, a piece of blue vinyl was found in a Chicken McNugget from a Thai supplier. The news comes on the heels of reports this summer that a Chinese supplier of Japanese restaurant had been using expired meat, and improperly handling the product. Ironically, McDonald's had switched to the Thai supplier because of the issues with the Chinese one.
Even before that, McDonald's Japan had been losing sales due to increased competition from convenience stores, which offer ready-to-eat meals and cheap coffee. Last year marked the sixth consecutive sales decline in Japan.
French fry shortage
Ensuring food safety hasn't been the company's only supply-related challenge. Finding an adequate source of french fries has also been a problem of late. In December, McDonald's locations on the island nation began rationing fries because of labor disputes at ports on the U.S west coast that were affecting exports. The company restricted fry sales to the small size only, and began shipping frozen potatoes by air to alleviate the problem. The costly solution was able to restore normal fry supply by early January, though fry shortages have also been reported in Venezuela because of work stoppages at the ports.
There's still work to do
As the company shifts to a new management team, bringing on former Chief Brand Officer Steve Easterbrook as CEO, it will have a host of problems to deal with: fighting back challenges from fast-casual competitors and health perceptions at home are some of them. McDonald's has promised to cut items from its menu to speed up service and roll out the Create Your Taste program to more restaurants, which allows visitors to customize their burgers.
But with same-store sales falling by double digits in Asia, that region appears to represent the fire that most needs extinguished. With comps down nearly 40% in Japan, it may be a long time before McDonald's regains its former glory. Food safety is a particularly sensitive issue in Japan as the culture is known for its attention to cleanliness, and the company's image problems have proven to be difficult to shake.
With comparable sales in Japan already in a big hole to start the year, last year's operating loss seems likely to widen, which will no doubt hamper the overall company's performance. Investors bid McDonald's stock up 5% on the announcement of new CEO, and comps nudging higher in the rest of the world is a promising sign, but with Japan and China still a wreck, it's far too early to call this a turnaround.