Introduction
When COVID-19 struck in China earlier this year, most locked-down consumers had little choice but to order meals for home delivery. Many consumers also craved comfort food during a time of anxiety. And they wanted value for money as they feared for their financial future.
For McDonald’s China, after temporarily closing all of its restaurants in Hubei province, the epicenter of the virus outbreak, as well as in other locations around the country, the pressure to resume operations was intense. CEO Phyllis Cheung responded by cancelling her vacation to form a crisis response team which focused on keeping their more than 3,000 stores open. She also led a charity initiative to serve meals to emergency first responders in Wuhan, with the initiative subsequently covering all major cities in China.
Cheung recently spoke with Daniel Zipser, a Senior Partner in McKinsey’s Shenzhen office, and Felix Poh, a Partner in the Shanghai office, about what she and her team did to lead McDonald’s through the crisis and reignite growth.
In their conversation, she explains how McDonald’s China is driving growth by accelerating store openings in lower-tier Chinese cities, expanding off-premise opportunities such as drive-thrus, rethinking store formats, and launching new menu items.
McKinsey: How did the early part of the COVID-19 outbreak affect you and McDonald’s China?
Phyllis Cheung: Initially, crisis response was about establishing safe operations so we could protect our employees and serve consumers. We also asked for volunteers for a charity kitchen program serving first responders in Wuhan, and within 24 hours 300 volunteers turned up. The story of how that team established operations, including obtaining personal protective equipment (PPE) and the precautions they took to disinfect everything, was inspirational in driving a sense of purpose among all restaurant general managers. Subsequently, we had every city’s restaurant general managers initiating free meal support for first responders. In looking back, all of our employees are proud of what we have done in serving the community.
McKinsey: How did the crisis affect your working procedures and business operations?
Phyllis Cheung: Footfall dropped dramatically across our stores, many of which are located in transport hubs. Breakfast sales also suffered because people were working from home, and stopped dropping by for a McDonald’s breakfast on their way to work. We responded by launching a campaign to reassure consumers we were safe, focusing on brand trust, and our passion for serving the community through contactless service on delivery, contactless mobile ordering, and pick-ups.
We also messaged relatives of people working in our crews about the protective measures we were taking, so they felt it was safe for their husband, wife, or children to come back to work. Later, we realized the true power of our billion-dollar brands–that McDonald’s has the taste consumers trust, and people were sitting at home craving a Big Mac or McSpicy burger. I can’t begin to tell you how many WeChat or Weibo messages I saw on this! Our first advertising campaign post-crisis led with the Big Mac, literally with the message ‘I’m here’, letting people know that our iconic burger will always be there for them.
McKinsey: Have you seen any opportunities emerge out of this crisis, perhaps in terms of new occasions or interesting consumer behavior?
Phyllis Cheung: Young people were feeling financial pressure as a result of the crisis–about half our customers said they needed to save more money, which helped us focus our response on value and non-discretionary purchases of things like breakfasts and working lunches. In April, people were still uncomfortable with crowds and being inside stores, so we promoted off-premise. Consumers could pick-up food inside or outside restaurants, and we emphasized our service speed so people knew they wouldn’t have to spend long inside. The McDonald’s global standard speed of service is 210 seconds from the moment you order till you receive your food. In China, our average service time is 150 seconds, among the industry’s fastest. Then we activated our membership program and the direct engagement enabled us to bring consumers back quickly.
The opportunity now is around expanding and opening restaurants to serve China’s 700 million households. We will continue to accelerate growth in lower-tier cities. The second opportunity is in off-premise convenience. We are focusing on delivery, drive-thru, and mobile order pick-ups. The opportunity as a group, across the portfolio, is in providing even more convenience not just on location, but through the way that we serve; by re-imagining convenience and safety.
Our food offering is another area of opportunity. Consumers rely on us for their main meal occasions, but are seeking more exciting choices, and we are also expanding into new categories–we launched our fried chicken in April, for example. Digital adoption is the final area of potential new growth.
Before the crisis, our digital adoption was around 60 percent, but now it is more like 80 percent, including self-ordering kiosks. That growth is driven by mobile ordering and pick-ups. It’s like we have made two years of progress in a few months.
McKinsey: You mentioned potential new store formats, what exactly are you thinking of?
Phyllis Cheung: Off-premise is now about 70 percent of our business. It is hard to predict if that is going to be sustained, but it is a trend that will continue even as on-premise returns. We must continue growing on-premise while seeking greater growth in off-premise. In China, we already have many drive-thrus, but we have the opportunity to expand as drive-thru is our key competitive advantage globally.
Now, delivery is the mega trend and is already about 30 percent of total sales. We operate our own rider teams and cooperate with third-party platforms. We also have our own platform, which is going to be big. The rise of mobile pick-ups propels us to rethink restaurant design. How much do we reserve for seating versus bigger catering and kitchen capacity that would allow us to produce food faster? In tier one cities like Beijing, restaurant formats can be smaller because people are looking for fast service; white-collar workers in the central business district have more incidence of ‘grab and go’. If you’re in a lower-tier city, family occasions remain prominent, so we’re still committed to a full-blown dine-in restaurant experience.
McKinsey: Are you adapting to shifts in consumer tastes by offering more wholesome menu choices? Will those choices also be tailored locally?
Phyllis Cheung: We’re building more awareness about the changes we’ve already made, for example reducing salt content and changing our cooking oil to canola blend so there are less saturated fats, which is better for your heart. We are the only QSR in China to use canola blend oil nationwide. We’ve also added more vegetable choices–you can swap fries for salad or corn. Our Happy Meal complies with China Nutritional Society guidance. Kids get baby fries, a pack of apple slices or salad and a drink, which will be milk or low-sugar juice. Our nutritional transparency enables us to make a sub-500 calorie meal. We have done a lot.
Consumers should start to notice, and we will communicate more proactively as well. Moving forward, we’ll do more to open up a new food platform.
McKinsey: Is there any tension between consumers’ desire for billion-dollar McDonald’s brands versus innovation and menu tailoring?
Phyllis Cheung: Our priority is to adjust to consumer needs with permanent products that will give us repeated visits. For example, the new Angus Burger and McCrispy Chicken that we launched in April address major new markets, just like the McCafé does for coffee drinkers. Having said that, consumers in China are young and dynamic, so we give them lots of excitement through our desserts and beverages. We have frequent ice cream and beverage ‘new news’ such as the current durian ice cream and sugarcane bubble McFlurry promotions, which are visually exciting and provide opportunity to tell an interesting story.
These are easy innovations that enable us to keep up the excitement while focusing on building the recurring base of billion-dollar brands. We also have intellectual property-inspired food events, for example with Disney, Over the Moon–an animation produced by Oriental DreamWorks which is coming out on Netflix in October–and of course Minions, which we can leverage to offer innovations around ’eater-tainment’.
McKinsey: Did you run into any supply chain challenges at the height of the outbreak, and are you expecting any changes in the supply chain going forward?
Phyllis Cheung: Contingency planning and years of partnerships working with suppliers ensured we had no break in supply. Our very strong local sourcing network for chicken and fresh produce gave us agility and flexibility to adapt to the changing market situation. We were also able to maintain imports of beef and Alaskan fish. We did have some infrastructure challenges because of service disruptions and high stock levels around Chinese New Year, but our resilient supply chain system resolved all the challenges. After the pandemic, the key is whether we can de-risk potential breaks in supply. Localization, getting more suppliers to be self-sufficient, and finding alternative or secondary suppliers on a global level is the direction.
McKinsey: Western QSR has been a unique food service segment in China over the last 20-25 years. Going forward, where do you see the competition coming from? Do you see Chinese QSRs continuing to scale up?
Phyllis Cheung: Local players with a national footprint are definitely scaling up. Whether in beverages or local cuisines, they are learning and scaling fast, and posing competition. We mustn’t forget about convenience stores as well, which pose a unique challenge and are increasingly offering meal options for take-away breakfast and lunch.
But Western food still accounts for a small portion of the China market and has massive room to grow. We’re going through a crisis with a near term goal of recovering to our pre-crisis level, but in the long run, consumers here want to improve their living standard and will continue to try new things. Consumption upgrading will persist, and we will adapt our menu choices and store formats accordingly.
McKinsey: What role did McDonald’s China play for the rest of McDonald’s globally?
Phyllis Cheung: We did a lot of sharing of the pain points and how we solved them, and we also learned a lot from other countries’ best practices as well. The good thing is that we helped build increased friendship and trust between the China team and the global team.
McKinsey: Have there been any lasting changes or impact on McDonald’s China’s working model?
Phyllis Cheung: The restaurant safety measures we put in place will probably be permanent. We still take crew members’ daily temperatures. If you buy McDonald’s takeaway, the paper bag still carries a record of who prepared it and their body temperature. At the office level, we are cutting back on travel. We found less travel is more efficient.
Digitization is helping us reprioritize what needs to be face-to-face and what can be done remotely. Digital is also helping us rethink operations and productivity, including how we supervise stores and track orders–we have centralized data monitoring that can do this efficiently and help complement market visits.
McKinsey: On a more personal note, were there any leadership lessons or other things that you learned as you managed your team through this outbreak?
Phyllis Cheung: Amid all the uncertainty, clarity of purpose is important to inspire and to guide the whole company. Company values and culture seem to be invisible but are extremely important at times like these. If everyone shares the same values of being passionate in helping others and having pride in serving the community, we will be better people and build a better brand as well. From a business standpoint, it is a good time to reset and to reimagine. I’m excited and energized by the opportunity of accelerating our transformation.