It was all over the news last week about the McDonald’s decision to slash prices by up to 33% in China. But is it as it seems? Are these actions due to more price sensitivity among the Chinese customers themselves given the slowdown in the economy? Or is the action as a McDonald’s China spokesperson says “in line with the government’s direction to stimulate domestic demand” and “help build a stronger economy.”

Here are some thoughts to consider:

1) McDonald’s and KFC are already expensive in China considering the average guest check is around 15 RMB (US$2.20)for a developing country with an average Household income in major cities of about 4000 RMB (US$612). In the USA for example, the average guest check is around US$5.00.

2) McDonald’s engages in extensive couponing already. I am a frequent visitor to their restaurants and I never fail to see one of their employees outside the restaurant handing out coupon flyers. If McDonald’s permanently slashes prices or uses a loyalty card then the overall guest check may not change very much.

3) McDonald’s has a very different status in China compared to developed markets like the USA or Japan. It is already an excellent dining experience and a “treat” for most people. Chinese customers visit McDonald’s more for the air conditioning, the clean toilets and the cheap soft ice cream than the hamburgers. Basically McDonald’s is a cheaper place to lounge around than Starbucks. And in many cities one can find upgraded booths and seats far better than in the USA.

4) Overall I would much rather frequent a McDonald’s in China than those in the USA or Hong Kong. Good environment, friendly energetic crew members a wide variety of snack items and for me at least drinkable coffee. All these things factor into the Chinese customer’s perception of the pricing.

5) From talking to many McDonald’s Managers particularly in South China I have the impression that the Company has very high food costs which are negatively impacted of course by all the couponing. I also suspect that many stores are losing money considering the high tenancy costs at least in markets like Shenzhen and Guangzhou.

In summary, I think this is a clever move to gain awareness for a new pricing plan that is not that different from the previous one after factoring in all the price promotions. Loyalty cards and everyday low pricing may also allow the Company to cut back on other marketing activities. At the end of the day in China, pricing is the key to driving customer demand. There is also a risk here if the price promotions get out of hand and play havoc with food costs. If the economy in China slows considerably and customers decide that they will spend no more than 10RMB for a meal then there could be a severe impact to store profitability.

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