Third strike for McDonald's Japan

An employee serves french fries to a customer at a McDonald's restaurant in Tokyo.
Yoshikazu Tsuno | AFP | Getty Images
An employee serves french fries to a customer at a McDonald's restaurant in Tokyo.

Following the China chicken scandal and rationing french fries to the smallest sizes, McDonald's Japan was hit by yet another setback this week: bits of vinyl were found in its chicken nuggets.

"It's another blow for McDonald's in Japan and sales will likely fall further," said Hiroyuki Kamiya, chairman and founder of Japan Food Analyst Association (JFAA).

On January 3, a man in Aomori in northern Japan found a piece of blueish vinyl several centimeters in size in a nugget he purchased. On Monday, a customer in Tokyo complained they found what appeared to be a piece of transparent vinyl in a nugget; the company is still analyzing the nugget in question. The company sold around 778 million Chicken McNuggets in 2014.

"We deeply apologize for the trouble we have caused our customers and are taking swift measures to analyze the causes of the contamination," a McDonald's spokesperson said.

The incident occurred on the same day that McDonald's Japan was set to start selling medium and large sizes of French Fries again. An extended labor dispute at ports on the West Coast of the U.S. last year caused a severe delay in imports. McDonald's Japan imports its French Fries from the U.S.

Sales nose-diving

Sales at McDonald's Japan have dropped more than 10 percent on year every month since July, when a Chinese TV report showed workers at U.S.-owned Shanghai Husi Food using expired chicken meat. Same store sales at McDonald's Japan plunged 25.1 percent on year in August and have continued to drop by double digits since.

On October 7, the company warned it would fall into a 17 billion yen net loss for the full year ending December 2014. It forecast a same store sales decline of 11.5 percent on-year.

McDonald's Japan declined to comment on what effect the latest scandal would have on sales and profits, but analysts reckon sales are set to fall further.

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"Children are the primary consumers of chicken nuggets and parents will be worried that yet another scandal has come to light," said Munenori Hotta, associate professor at Miyagi University and a specialist on the food services industry.

No relief in sight

McDonald's situation is unlikely to improve anytime soon due to demographic and economic factors, analysts say.

Children and teenagers make up McDonald's main client base in Japan, JFAA's Kamiya said. With the number of Japanese under the age of fourteen set to fall by nearly a quarter to 12 million by 2030, McDonald's client base is likely to shrink.

The prospect of an end to deflation presents another headwind, according to Kamiya. "The company is the symbol of Japan's deflationary fast food industry," he said, price cuts helped McDonald's Japan over the years.

Meanwhile, a weaker yen is hurting the company's bottom line making imported ingredients more expensive, he added. Over the past year, the yen has weakened by around 15 percent against the U.S. dollar.

"McDonald's in Japan will continue to suffer over the next five to ten years," said Kamiya.