McDonalds India launch

Golden Arches Case of Strategic Adaptation Dr Amit Rangnekar NMIMS

Strategic issues addressed
Market entry in a developing country with low PCI levels
Evaluating market attractiveness
Strategic insight into a consummate global marketer
Compatibility between product adaptation & local responsiveness (on the one hand) & a global strategy on the other hand
Critical assessment of future strategic options, namely aggressive expansion when the operations are yet to attain profitability
Framework for assessing Industry / Market attractiveness

Case Coverage
McDonalds International
Corporate Strategy
Challenges
Attractiveness
Strategies- Country Business Plan
SCM
CSR
Marketing Strategy
Branding, Pricing, Promotion, Distribution
STPD
Product Adaptation
Performance
Future Plans
Issues & Realities

The Beginning…
1954, Ray Kroc, 52, a distributor of milk shake maker- Multimixer, heads West on hearing about the McDonald Bros hamburger stand in California
Seizing the opportunity, he pitched the idea of opening up several restaurants to the McDonald brothers, to sell 8 of his Multimixers to each and every one.
"Who could we get to open them for us?" they asked "Well," Kroc answered, "what about me?"

McDonalds-Global Fast Food powerhouse
2004- World’s biggest marketer of fast food
31000 restaurants
120 countries
47 million customers per day
Ronald McDonald, introduced 1963, second only to Santa Claus in terms of recognition

Philosophy & Vision
McDonald's complete commitment to Quality, Service, Cleanliness and Value (QSC&V).
" We take the burger business more seriously than anyone else " Ray Kroc
" If you've got time to lean, you've got time to clean " Ray Kroc

Global Strategy
Customer driven, goal oriented
Achieving sustainable, profitable growth
Designed to increase restaurant visits and grow brand loyalty among new & existing customers
Further build financial strength

Plan to Win
Built around 5 key drivers of exceptional customer experiences- People + 4Ps
Founded on the belief of 3 success components
Operational Excellence
Leadership Marketing
Innovation

Operational Excellence
Intent on delivering exceptional experiences to 47 million customers served each day
Implement restaurant-specific review policies to identify opportunities to improve QSCV
Independent mystery shoppers to evaluate performance & give a customer's perspective
Improve speed of service and efficiency
Better kitchen organization, front counter and drive-thru areas
Emphasize hospitality, accuracy and cleanliness Simplify the restaurant environment

Leadership marketing
Reconnect with customers thro’ contemporary global marketing direction “i'm lovin' it”
“ i'm lovin' it” reflects an attitude we want our employees to embrace & reflect in their service
Maximize ad spend impact
Broaden reach through PR
Deliver global brand message through ads, packaging and restaurant experiences
Emphasis on building sales at existing restaurants rather than adding new ones.

Innovation
Evolving to remain relevant to consumers
Variety of value, premium & wholesome menus
giving more customers more reasons to visit
Expanded Happy Meal choices to attract & retain customers
Educating people about healthy, active lifestyles, premium Salads < 10 gm fat
Wi-fi accessibility when enjoying a Big Mac XP
400 McCafés in 23 countries serving premium & specialty coffees, cakes, pastries inside existing McDonald's restaurants

Franchising
Always been a franchising Company
Franchisees play a major role, approximately 70% of McDonald's businesses are owned and operated by independent franchisees
McDonald's remains committed to franchising

Financial Muscle- Y-2002-03
$ 41.5 billion in sales
$ 25.7 billion (62%)- sales of franchisees
$ 2.1 billion operating profit
$ 893 million Net profit
Assets- $ 24 billion
8 th Most valuable brand in the world, ahead of Sony, Nokia, Toyota in 1999
Among Top 100 companies worldwide in 2000

Asian Presence 3653 0 0 9 103 184 114 61 233 110 157 105 140 2437 Outlets’97 68 6148 Asia $ 2 Sri Lanka 1998 $ 20 Pakistan 1998 411 46 India 1996 2 105 Indonesia 1991 197 546 China 1990 213 357 South Korea 1988 64 100 Thailand 1985 50 350 Taiwan 1984 49 149 Malaysia 1981 50 236 Philippines 1980 24 130 Singapore 1979 54 216 HK 1975 60 3891 Japan 1971 % Change Outlets’02 Country Entry

Income Distribution in India 165 1 Billion Total >125000 0.006 0.03 Super Rich 50000-125000 0.02 0.14 Sheer Rich 25000-50000 0.07 0.44 Clear Rich 12500-25000 0.25 1.55 Near Rich >12500 0.35 2.18 Rich Total 6000-12500 5 25 Strivers 3000-6000 8 45 Climbers 1000-3000 20 120 Aspirants <600 131 763 Deprived Household Income $ US Household (Mn) People (Mn) Classification

Indian Market
Huge Sub-continent
4 times the population of the US
Middle Class estimated at 300 Million
Per Capita GDP $ 400- but at PPP- $2540
4 th largest economy- ahead of France, Russia,UK, Asia’s 3 rd largest-Behind China & Japan (PPP)

KSA Technopak Survey
Eating out sector growing, consumer spend increasing
Rs 40000 Cr eating out market growing @ 6%
Rs 1500 Cr urban fast food segment growing @ 20%
“ McDonald’s is not a substitute for Indian food, it’s just one more option for people to exercise.”
Local taste preference- “Indians want a slice of America, but only once in a while. Inflexibility in their product mix could be their undoing.”

Indian Market
Size of ‘Eating Out’ market- substantial
India’s food expenditure- $77 Bn / world $ 4000 Bn (2%)
Highly fragmented food market
Millions of roadside stalls / carts- major market share
Udipi, Sandwich, PavBhaji, Chaats, Chinese, Namkeens, Pizza
Organised chains- Narula’s, Wimpys, Udipis

Social Diversity
20 major languages, 800+ dialects
50% population literate
Advertising-Billboards, Print , Electronic
8 languages for National launch

Infrastructure
Poor roads
Power situation grim even in New Delhi (Capital) and Bangalore (Silicon Valley)

Political
World’s largest democracy
Fairly stable governments
Armed Forces- Neutral
Bureaucratic red tape omnipresent

Economic
Entry & Exits in sectors controlled by Govt
MNC restrictions
Deregulation since 1991 but socialist / swadeshi mindset continues
MPs comment on MNC in consumer sector
“ We want computer chips, not potato chips ”

Pressure Groups
Anti- Western / MNC factions
Health activists
Environmentalists
Animal welfare activists
Sons of the soil campaigners

1991- MNC Invasion
Indian economy open to FDI
Huge potential
Over confidence
Faulty Market Research inputs cost dear
Major failures, Peugeot closed shop
Repositioning & price reduction helped
Lack of demand

KFC
1 st Restaurant Bangalore, 1995
Excessive MSG levels, outlets closed
Restaurant ransacked –1996
Business closed for long periods
No major expansions

Kelloggs
Initial High price
Much higher than average Indian breakfast cost + Milk
No off take
Targeted at family than kids
Old habits took very long to change

Reasons for failure
Low level indigenisation, high costs
Lack of understanding of local tastes
Over estimation of demand potential
Rosy assumptions- Speedy bureaucratic clearances
Infrastructural inadequacies
Inappropriate strategies- Pricing

Late Indian Entry
Closed economy pre 1991
Significant Vegetarian population
Limited purchasing power

India Vision
To be India’s " best " quick service restaurant experience - supported by principles and core values

Targeting Markets
Initial focus on metros- Mumbai, Delhi
Relatively high incomes
Exposure to western food & culture
Move to smaller satellite towns (Gurgaon, Pune)
Positive spillover effects of reputation
Jaipur & Agra- To attract foreign tourists

India-Entry Strategy
Wholly owned subsidiary- MIPL
Incorporated in 1993
McDonald's opened its doors in India in Vasant Vihar, New Delhi in October 1996
Entered into two 50:50 JVs with Connaught Plaza Restaurants-Vikram Bakshi- North & Hardcastle Restaurants-Amit Jatia- West
Trained extensively, along with their Indian management team, in McDonald's in Indonesia and the US before launch

Product Adaptation
Asian product adaptations to local tastes
Burgers with Thai Basil- Thailand
Teriyaki Burger- Japan
Rice dishes- Indonesia

Product Adaptation-The Indian Challenge
Much higher degree of adaptability
40% Vegetarians – Vegetarian selections to suit Indian taste
Maharaja Mac replaced Big Mac, Chicken Patty instead of Beef
Respect for local culture- Special Indian menu, No beef or pork items in India
McAloo burger, Veg Salad Sandwich, McMasala & McImli sauces

Product Adaptation-The Indian Challenge
Common Menu- Chicken Nuggets, Fillet-O- Fish, fries, sodas, shakes
Garlic free sauces to get in “hard core” vegetarian customers
Re-formulated own products using spices favoured by Indians
Eggless sandwich sauces, Soft serves & McShakes
Freshest chicken, fish and vegetable products
Only vegetable oil used as a cooking medium

Menu Development
1998- Menu development team
Consumer feedback & research findings
Do not entirely localise menu
Wider product range
More Hot food
Low entry level prices
Veg Pizza McPuff
India-75% localised menu, 33% in Asian countries, Other countries < 5%

Restaurant Management System (RMS)
2 separate menus; green- veg, purple- nonveg
Separate veg, nonveg kitchens with dedicated staff , preparation and wrapping areas
Different uniforms for kitchen crew to distinguish roles
Clear segregation: Kitchen staff
Printed brochures of RMS to customers
Customer kitchen tours to assure

International Standards
India's local suppliers provide highest quality, freshest ingredients.
Adherence to Indian Government regulations on food, health and hygiene, benchmarking with own international standards.
Fast, friendly service - the hallmark of McDonald's restaurants world over
Stringent cleaning standards, trays sanitised several times each hour.
Meticulous attention to cleanliness beyond lobby,kitchen to pavement & area outside

Family Restaurant
The McDonalds XP for the family
Focus on kids, gifts galore
High chair concept
Brightly lit, casual, comfortable & contemporary look
Friendly, smiling, fast service
Emphasis on cleanliness

Value Pricing
Happy Meal- Small Burger,fries, coke+ toy
Medium Meal Combo- Burger, fries, coke- Veg Rs 75, Maharaja Mac meal- Rs 94
Family dines under Rs 300 (2003)
Pricing lower than Pak, SL, 50% lesser than US

Cost Control / Pricing Strategy
“Customers attracted purely by these unsustainable but attractive low prices would not pay repeat visits”
Development of a low cost supply chain – crucial enabling factor

Competitive Pricing
KFC- Rs 59- Rs 79 ( Burger/KFC, Drink)
Chicken, rice, gravy meal for Rs 39
Pizza Hut- Family meal (2 medium pizzas, Pepsi- Rs 350
Wimpys- Mega meals starting @ Rs 35
McDonalds- Value meals @ 39, Quick bites @ 25, Soft serve ice creams @ Rs 8
Even these low prices afforded a 40% margin
‘ I will never become unaffordable, as I’ll then not be able to generate volumes” Vikram Bakshi

Widening the Customer Base
Surveys indicated “Perceived as Premium”
Ensure trials thro’ selective price cutting & periodic promotions
Harness the prosperity & feel-good-factor around festivals across regions & religions

Children’s painting competition across cities
Maintaining gardens, parks, heritage structures
Effluent treatments, Pulse Polio, recyclable paper bags
‘ Litter Patrols’ to ensure a cleaner neighbourhood.
Huge donations to Latur/ Bhuj / Gujarat earthquakes
Co-Sponsor of Inter-School Science Quiz Competition.
2002, tie up with Nalanda Foundation - education of the underprivileged Girl-Child.
Community Partnership / CSR

Marketing Strategy
Promotional strategy to convey world class xp, Indian adaptations, freshness, nutrition & value
Shift from worldwide positioning of drive-in convenience and speedy service
Segment- The Young family (<30 years)
Target- The young family who eats out
Focus- Attracting children, so family follows
Positioning- ‘ McDonalds mein hai kuch baat’ –
a place for the entire family to enjoy
Differentiation- highlighting brand, food & variety
Happy meal film on Cartoon Network, Zee
Special promotions during festivals

Get Lucky- Promotional scheme
Collaboration with Coke, MTV, Hungama.com, Sony Music & GM
Scratch cards on Large combo meals
Prizes- caps, tshirts, CDs, internet cards, free tickets to a Lucky Ali contest
Purchase of a 2 nd meal in a month qualifies for- Opel Corsa / NZ trip
Snags- Neither Lucky Ali contest materialised nor Corsa nor NZ trip- issues of credibility

Promo Spends
June’00- Rs 10 Crore
March’01- Rs 20 Crore- Doubled
March’02- Rs 18 Crore
March’03- Rs 24 Crore
Emphasis on generating repeat visits
Positioning changes from
“ McDonalds mein hai kuch baat” to
“ To aaj McDonalds ho jaaye ”
A Shift from ‘ special ’ to ‘ acceptable and enjoyable ’
McDonalds positioned as a comfort zone for young families

Target Markets
Only < 10% population- possible target market
“ We want to first concentrate on metros, then open branches in other cities. We want to set up outlets only in cities where we can ensure the quality of products” Vikram Bakshi
Phase I- Focus on cities of relatively high incomes where citizens are exposed to western food & culture
Phase II- Move to smaller satellite towns (Gurgaon, Pune)- Positive spillover effect of reputation
Jaipur & Agra- To attract foreign tourists
Phase III- Malls, Multiplexes, Highways, Stations & Airports
No plans for South, East, Goa?

Supply Chain
Critical for success
Local network for supply chain & distribution
Local suppliers, distributors to match international quality
Operations & training to match international quality and hygiene standards
Invested Rs 50 crore in setting up, before opening 1 st outlet
By 2000- Investment in supply chain – Rs 300 Crore

Cold Chain
Integral to Supply Chain
Network- Food procurement, warehousing, transportation and retailing under controlled temperatures
Cold Chain cuts down on operational wastage
Necessary to maintain food temperatures to retain their freshness and nutritional value.
Products to be used on a daily basis, stored within a temperature range of –18ºC to 4ºC.
52% food products need to be stored under these conditions before they are used.

Supply Chain
Trikaya Agriculture –
Supplier of Iceberg Lettuce
Advanced agricultural practices enabled specialty crops like iceberg lettuce, special herbs and many oriental vegetables.
Farm infrastructure - Specialised nursery, agricultural experts, pre-cooling room, cold room for handling, refrigerated truck for transportation.

Supply Chain
Vista Processed Foods
JV of OSI Industries-US & McDonald's-India
Range of frozen chicken & vegetable foods at world class infrastructure plant at Taloja, Maharashtra.
Separate processing lines for chicken and vegetable foods
Capability to produce frozen foods even at -35 Degree C temperature to retain total freshness.

Supply Chain
Dynamix Diary , Baramati
Supplier of Cheese
Capability to convert milk into cheese, butter/ghee, skimmed milk powder, lactose, casein, whey protein and humanised baby food
Supplier to McDonalds & Nestle

Supply Chain
Amrit Food
Milk and Milk Products for Frozen Desserts
Installed capacity of 6000 lit / hour for producing homogenised UHT (Ultra High Temperature) processed milk and milk products.

Supply Chain
Radhakrishna Foodland
Distribution Centre- Specialises in handling large volumes, provide entire range of services like procurement, quality inspection, storage, inventory management, deliveries, data collection, recording & reporting.
Effective process control for minimum distribution cost
1-stop shop for food distribution management services.
Dry / cold storage facility to store/transport perishables at temperatures up to - 22 C

Supply Chain
Cremica Industries , Philaur, Punjab-
Working with McDonald's European suppliers to develop technology & expertise allowed Cremica to expand businesses from baking to provide breading & batters to McDonald's India & other companies.

Dilemma
“ In some cases, Indian suppliers had the technology - but no market for the products they produced besides McDonalds”

Geographically diverse sourcing
Buns from North
Chicken & Cheese from West
Fish, Lettuce & Pickles from South
98% paper, locally sourced
French fries imported from Indonesia
40 suppliers in the chain

Local Sourcing
Committed to local sourcing from suppliers and farmers.
Restaurants constructed using local architects, contractors, labour and maximum local material content
Relationship mutually beneficial as supplier gets opportunity to expand business, access to latest technology, exposure to advanced practices and the ability to grow or export.

Distribution
Dedicated
Matching supplier production with deliveries to meet schedules & restaurant needs
2 centralised distribution centers at Mumbai & Kochi, each capable of catering to 25 outlets
Aim to enhance quality of storage operations
Emphasis on economies of scale-storage volumes high

Interaction with suppliers & logistic firms to ensure optimum stocking
QIP (Quality Inspection Program)- Quality checks at 20 points in the supply chain movement
HACCP (Hazard Analysis Critical Control Point) Food safety standards emphasizing prevention of faults than detection thro inspection
“ With a Cold Chain in place, there is practically no need for a knife in the restaurant. Chopping & food processing is done in the plants. Restaurants are confined to only the actual cooking” Amit Jatia
Distribution

Logistics to move RM to restaurants
AFL logistics- 50:50 JV between AirFreight & FX Coughlin of USA- McDonalds international logistics partner
AFL responsible for temperature-controlled movement of all products from suppliers to distribution centers
Distribution

Inculcating a Service Orientation
Physical logistics important to retain food freshness
“ The truck drivers had to be explicitly and specifically conveyed not to switch off the truck’s ignition to save on fuel & electricity as the refrigeration system also automatically shuts off. We installed trapping devices to log temperature charts through the entire journey” Amit Jatia

An Employer Of Opportunity
Employer of opportunity, providing quality employment and long-term careers to the Indian people.
Average McDonald's restaurant employs 60-80 people from crew to restaurant manager.
World class-training inputs to 2000 employees in Mumbai and Delhi annually.

Export Base
Indian Cheese & Lettuce exported- Sri Lanka, Hong Kong & UAE
Plans to export to Russia, EU, SE Asia
“ Things are becoming global in nature. Once you set up a supply chain in a strategic location, it can service other countries as well.” Amit Jatia

Past Performance 51 Nov 2003 46 Dec2000 13 Del, 10 Mum, Pune, Jaipur 25 Mid 2000 8 Del,6 Mum 14 End 1998
6 Million customers (2002)
3.5 Lacs Maharaja Macs
50% revenues from veg menu
40000 customers daily (2003)
No of transactions grow @ 15%
Average spend / customer Rs 45 (2002)
4 Del, 3 Mum 7 First 12 months Milestones Place Out lets Period

Indian XP
In 1997 consumers classified food as bland
By 2000, it was sought for its taste
Most popular-
Veg pizza Mcpuffs (Samosa + Pizza ingredients)
Chicken Mcgrill (with extra tangy Indian spices)

Growth Strategies
Increasing seating capacity
Adding Birthday party areas
Enter new ‘A’ cities- Ludhiana, Ahmedabad, Baroda- lower spending power , population density
ISBT terminal Delhi
Airport & Railway station- Mumbai & Jaipur
Highways & Petrol Pumps
Malls & Multiplexes- Lower outlet investment than traditional

Points to Ponder
Would customer profile on highways & railway stations be appropriate
Would they generate enough traffic
Dispersed outlets- effective catering?
Expanding too fast? Break even ?
Successful in developing supply chain & creating a satisfied customer base, opportune time to expand

CEO Speak
“ Meticulous planning went in before opening a restaurant. It took us 6 years to open our first outlet because we carried out a detailed survey, then identified the local sources, closely studied the Indian food habits and tastes, before taking the plunge.”
“ We have been very careful with regard to our expansion plans. McDONALD’s currently operates 50 fast food restaurants in India. We are satisfied with the progress in India so far and want to take the total number of restaurants to 100 by 2006”
“ McDonald’s fits in neatly with the multiplex culture as our restaurants provide a bright and cheerful ambience and a pleasurable dining experience for the family.
McDonald’s has so far invested Rs 500 crore in its operations in India. This figure would be raised to Rs 800 crore by 2005.

The Compliment
“ McDonald’s products sold in India have been Indianised & produced in accordance with Indian tastes & preferences. Hugely popular products like aloo-tikki burger are now being exported to the Middle East where too they have proven to be a big hit. These evolved products are being studied closely in western countries”
“ On any given day, McDonald’s restaurant at Doraha near Ludhiana on NH 1, serves up to 2000 customers which is as good as a restaurant in Connaught Place”
“ We want the right location, right size for a 150 seat restaurant & the right deal which does not involve subletting of the premises. In Chandigarh, we find most commercial properties rented out or embroiled in disputes. We don’t want to get involved in any such deal”

MIPL- points to ponder
Investment / outlet excluding real estate- Rs 3 Cr
Jun 2003, 50 outlets, Planned- 80 outlets by end 2003
30 additional outlets = investment > 100 Cr
Area, Location, Size, Seating- Crucial but expensive
Scale back expansions by 20% to 64 outlets in India, close 250 outlets in emerging markets
Can lead to delayed Break-even as huge investments in supply chain, branding, infrastructure
Figures NA
Recent lackluster financial performance of parent
Critical juncture in evolution

Urban Indian Fast Food Market-03 (Estimated 1500 Cr)

MCIL Today
“ We’ve established ourselves firmly in the mind of the consumer. Now is the time to expand and extend the brand in whatever manner we can” Vikram Bakshi

Reaching Out
Gunning for volumes through home delivery
Extend reach at home, malls, food courts, multiplexes, highways , area with heavy footfalls (metro, stations, bus stands)
Kiosks stocked with beverages, desserts
Limited menu restaurants offering most popular fare
Consumer reach minus expenditure of a full restaurant

Home Delivery
Home delivery in Mumbai & Delhi outlets to areas within 15 minutes
Extreme action for a company that prides itself on trashing anything that remains in the ‘ bin’ for longer than 8 minutes .
Slowly waking up to the fact that every player in the eating out sector in India door delivers .
McDonald’s only delivers in Indonesia & Egypt .
Traffic, parking issues deter consumers due to heavy traffic where McDonald’s are located as a matter of strategy.

Increasing Operational Excellence
Footfalls up 25% per outlet per day
“ We’ve reached a stage where operational excellence is going to drive the growth from now on. So the focus is back on training , which had taken a back seat due to the needs of rapid expansion in the last few years. We’ve increased the number of managers who are going back to training, and are sending more senior managers abroad to gain international exposure ,” Bakshi.

Strategic Analysis
SWOT
Trend Analysis
Performance Key Uncertainties Key Certainties

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McDonalds India launch

by Dr Amit Rangnekar

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