McDonald s India Entry Strategy The case provides insights into McDonald s international operations, and its entry strategy for India. The case outlines McDonald s marketing, growth and supply chain strategies and the adaptations that have made McDonald a success in India. McDonald International The McDonald Brothers Hamburger Stand was started by McDonald family in San Bernardino in California in 1940 and was a very popular restaurant, offering burgers, fries, milk shakes and coffee at an economical price with superfast service. In 1954, Ray Kroc, a salesman of milkshake mixers, convinced the brothers to franchise the restaurant into a chain, obtained the sole franchise and started expanding across cities in America. In 1961 Kroc bought out the brothers stake in the business for $2.7 million. In 1965 McDonalds was the number one food chain in the US with over 300 outlets, and by the late 1970s operated across Europe and Asia. As shown Table 1, McDonald s in 2011, operated 33,510 restaurants in 117 countries, of which over two third were franchised. McDonald s global sales were $27 billion with net profit of $5.5 billion and served 68 million customers or 1% of the world s population, daily! Table 1 McDonald International 2011 McDonald 2011 Market cap Sales $ 79b $ 27b Sales Growth 6% Net Profit $ 5.5b Outlets 33,510 Operates in countries 117 Total employees including franchisees Daily customers Source- McDonald Annual Report 2011 1.7 m (World s 3 rd largest employer) 68 m
McDonald s India Entry Environmental Scan McDonald s Asian entry started through Japan in the 1970s. Before entering India in 1996 McDonalds had over 3600 restaurants in Asia, with Japan accounting for approximately 2500 restaurants. Demographic analyses of India in the 1990s showed that less than 8% of India s population could possibly be targeted by McDonald. The key reasons for such a low target group were- McDonald s focus on the urban market where less than 30% of India lived, the low income levels in India which would make McDonald s unaffordable to most, and food habits in India that would take years to transform to western tastes. India is a sub-continent, strategically placed between Europe and Asia, with a middle class population equivalent to the entire population of the US. India is the world largest democracy, Asia s third largest economy, has fairly stable governments, its armed forces are neutral, but the bureaucratic red tape is omnipresent. India has 20 major languages and over 1,800 dialects, with a 50% literacy level. Although the Indian economy opened up in 1991, entry into many sectors was controlled by the government with restrictions on Multi National Company (MNC) operations and investments. The infrastructure in the country was under developed especially the roads and the power sectors. There were many pressure groups in the country opposed to foreign investments, and a socialist or Swadeshi mind set prevailed in many sections of society in the early nineties. Figure 1 Perceptual Map of Fast Food players in India
Source- Survey of 100 MBA students in Mumbai in 2005 The Indian Eating Out market was substantial but highly fragmented with no organized pan India player. There were a multitude of fast food options across cuisines like Udipi, Chaats, Namkeens, Pizza, Sandwich and Burgers, Frankie, Pav Bhaji, Wada Pav and Chinese. Few regional or city specific chains with limited outlets existed like Nirulas, Wimpys, Sagar Ratna, Kwality, Havmor, Woodlands, Monginis, Kamat s and Tibb s Frankie. Few leading MNC players had invested in India in automobiles, sports footwear, beverages, cereals and apparels due to the huge potential. However, a mix of over confidence, incorrect market research inputs, rosy assumptions, lack of understanding of local tastes, low level of indigenization and inappropriate pricing had led to mixed results and low demand. KFC opened its first outlet in India in Bangalore in 1995, faced political turbulence, and closed down in 1996. Due to this setback the long term business expansion plans of KFC were severely affected. Although cornflakes were very selectively available in India, Kellogg popularized the concept across India. But Kellogg did not succeed initially due to factors like- high pricing, targeting family than kids, and resistance to the new concept. The average Indian breakfast like Dosa, Idli, Upma, Poha, Paratha, Puri Bhaji or similar such dishes plus milk, tea or coffee did not cost more than Rs 8-10 per head in the early 1990s. However Kellogg s cereals, although much healthy and nutritious, with milk, cost more than 50% higher and old breakfast habits took very long to change. Secondly the benefits were not evident and pouring cold milk over cereals was a foreign concept across India, where hot milk is preferred. But to the credit of Kellogg and KFC, after the initial struggle, both have met with tremendous success. McDonald s India Entry Strategy Surveys commissioned by McDonald s, showed a large eating out market in India with an increasing propensity to spend by customers. Indians wanted to taste American fast food, but it could not be a substitute for Indian food. Hence adapting McDonald s menu to Indian tastes was
critical if they were to succeed in India. One aspect unique to India was that half its population was vegetarian for whom a separate menu had to be created. The average Indian had limited purchasing power hence large investments had to be made to entice a trial at an attractive price. The India strategy was divided into four phases- entry, building the supply chain, aggressive growth and penetration. In 1993 McDonald s entered India through a 100% subsidiary MIPL (McDonald s India Private Limited) which formed two 50:50 joint ventures (JV) with Vikram Bakshi of Connaught Plaza Restaurants to manage North and East India; and Amit Jatia of Hardcastle Restaurants for West and South India. The staff was trained in India, US and Indonesia to understand the intricacies of business. While McDonald s took the JV route for an international entry into India, other international players chose various strategies to enter India, before and after McDonald s, as shown in Table 2. Domino s and Costa Coffee have appointed a master franchisee, while KFC, Pizza Hut and Subway operate through regional or zonal franchisees. Table 2 Entry strategies for Quick Service Restaurants in India Brand/ Company Franchisee / Owner Entry strategy McDonald Hardcastle & Connaught Plaza JV Domino s, Dunkin Donuts Jubilant Foodworks Master Franchisee KFC, Pizza Hut Yum Restaurants (100% subsidiary) Master Franchisee- Devyani, Dodsal Costa Coffee, Cream Bell Devyani Intl (Jaipuria) Master Franchisee Subway Subway Systems India Regional franchisee (100% subsidiary) Starbucks Tata-Starbucks 50-50 JV Source Internet
McDonald s Indian Adaptations Across Asia, McDonald s faced the challenge of adapting to local tastes. In Thailand Basil was added to the burgers, while the Japanese liked Teriyaki burgers and the Indonesians liked rice burgers. But the Indian adaptation challenge was massive due to the fundamental difference in eating habits and ingredients used, than what McDonald s. India had a significant vegetarian population, Indians like their food hot, used spices liberally, vegetable oil was used as a frying medium and due to religious reasons there was poor demand for beef and pork. Hence a special menu had to be designed to suit Indian tastes with spices and ingredients preferred across India. The Maharaja Mac with chicken replaced the beefy Big Mac, while the McAloo burger and Vegetarian Salad Sandwich were specially created for India. Special Indian sauces like McMasala and McImli were created to adapt to Indian tastes, as also garlic free and eggless sauces were formulated to cater to the vegetarians. From the original McDonald s menu, only Chicken Nuggets, Fillet-O- Fish, fries, sodas and shakes were introduced in the initial phase. Overall, the localization of menu was less than 5% in other countries, but in Asia it was 33%, while in India it was 75%! A Restaurant Management System (RMS) was created for efficient management of the operations. Considering the sentiments of the local people, no beef or pork was introduced in the menu and separate food lines were maintained throughout the various stages of procurement, cooking and serving. Separate kitchens for vegetarian and non-vegetarian food were created in the restaurants with different uniforms for the kitchen staff. Separate areas for preparation and wrapping were created. The vegetarian menu was printed in green and the non-vegetarian menu in purple to clearly distinguish the menus. Customers were given RMS brochures to assure them of clear segregation of vegetarian and non-vegetarian food, and taken on kitchen tours to build their confidence, since the hard core vegetarians usually did not prefer to enter places where non-vegetarian food was served.
The Launch The first restaurant opened in Vasant Vihar in New Delhi in October 1996 and soon Mumbai operations also started. Initially McDonald s targeted Delhi and Mumbai only, as these areas had high populations of their target groups, were areas of higher incomes and were exposed to western culture. The second phase targeted expansion into proximal towns like Pune and Gurgaon, while the third phase involved key tourist destinations like Agra and Jaipur. Phase four targeted malls, multiplexes, highways, stations and airports. The initial short-term plan did not include plans for South India, East India or Goa. Continuous research was undertaken to understand tastes and preferences of consumers, their feedback on the McDonald s experience and their attitudes towards new products. New items were developed and added to the menu based on consumer insights. Local suppliers of international standards were developed and linkages established with quality vendors. Special emphasis was laid on delivering friendly, smiling and fast service, McDonald's hallmark globally. McDonald s maintained the highest levels of cleanliness in its operations, which extended to the restaurant, kitchen, lobby and also the outside pavement. McDonald s changed its global value proposition of convenience, to provide the McDonalds experience to Indians. Within all the food restaurant formats in the organized sector, like fine dining, full service, quick service, and kiosks, McDonald s focused on the quick service restaurant (QSR) format. McDonald s targeted the young family who eats out with brightly lit, casual, comfortable and contemporary restaurants. McDonald s successfully replicated their global strategy of happy meals to attract kids, and the family followed. The brand was differentiated on the platform of taste and variety while the brand communication focused on the Indian adaptations and value for money. McDonald s products were competitively priced. Happy Meal (Small Burger, fries, coke+ toy) for Rs 39, Quick bites for Rs 25, Medium Meal Combo- Burger, fries, coke- vegetarian for Rs 75 and non vegetarian for Rs 94, and Soft serve ice creams for Rs 8, made the McDonald s experience
affordable to Indians. The prices in India were less than Pakistan and Sri Lanka and half the prices in the US. In comparison KFC charged Rs 59- Rs 79 for a meal (Burger/KFC, Drink), Pizza Hut charged Rs 350 for a family meal (2 medium pizzas + 4 small Pepsi) for Rs 350. Local brands like Nirula priced its Chicken, rice and gravy meal for Rs 39 while Wimpy s priced its Mega meals from Rs 35 onwards. In 2003, a family of four comprising of two young parents and two small kids dined at a quick service restaurant (QSR) for under Rs 400. McDonalds communication focused on the family. The tagline at the introduction stage was McDonalds mein hai kuch baat which indicated a special place for the family to celebrate. In the growth phase the tagline changed to To aaj McDonalds ho jaaye conveying an acceptable and an enjoyable place for the family to visit. In the growth phase McDonald s used its global tagline i m lovin it conveying a comfort zone for young families. The tagline was also internalized by the McDonald s staff globally, in activating every touch point with customers. Initial promotion was through print and television media communicating new products, modifications, kid contests, and special offers on festivals and occasions. Currently television accounts for 80% of the media spend with advertisements on strategic channels, followed by a combined budget of 20% for print, radio and online media. Below the line in-store activities for kids are also regularly undertaken. The focus is to generate repeat visits, widen the customer base, and entice trial through selective price cuts. Inspite of the value offered, post launch surveys revealed that McDonald s was perceived as premium and bland. The most popular products were Vegetarian Pizza McPuffs (Samosa + Pizza ingredients) and Chicken McGrill (with extra tangy Indian spices). With less than ten percent of India s population as a possible target, customers were attracted only by the low and unsustainable prices. Hence it was imperative to reduce costs by developing own efficient local supply chain and logistics, and better reach, to deliver better value to consumers.
Setting Up Exclusive Supply Chain McDonalds s exclusively set up quality local suppliers and distributors of international standards in India. Trikaya Agriculture, Talegaon, farmed Iceberg Lettuce, special herbs and oriental vegetables using advanced agricultural practices, and cold chain. This ensured that Iceberg Lettuce could be produced in India throughout the year than only for two months as earlier. Vista Processed Foods, Taloja, a JV between OSI Industries US and McDonald's India, manufactured a range of frozen chicken & vegetable foods on separate lines, using blast freezing techniques to retain nutrition and freshness. Dynamix Dairy, Baramati, supplied cheese to McDonald s, Amrit Food, Ghaziabad, produced homogenised UHT (Ultra High Temperature) processed milk and supplied milk and milk products for frozen desserts. Cremica Industries, Philaur, supplied sauces, buns, toppings, breading & batters. Over a period of time most of these players also supplied to McDonald's in Europe and Asia. The procurement, warehousing, transportation and retail of McDonald s products were all under controlled temperatures to ensure freshness, nutrition and low operational wastage. Fifty two percent of McDonald s products need to be stored or transported within a temperature range of -18ºC to 4ºC, so creating own cold chain was critical. For their food distribution management, Radhakrishna Foodland, Mumbai, was appointed as the sole agent. They managed the procurement, quality inspection, storage, inventory, delivery, data collection, recording and reporting of food products and maintained dry and cold storage facility to store, transport perishables at temperatures up to - 22 C. To ensure quality and freshness, McDonald s had quality inspection checks at 20 points in the supply chain. Overall, McDonald s invested over Rs 500 million before selling their first burger in India. McDonald s operate through four categories of suppliers. The Tier II suppliers are raw material producers (poultry, vegetables) who supply to the Tier I suppliers, who process the raw material and supply finished / semi finished goods like patties, breads, batters, sauces, beverages to the food distribution management company, Radhakrishna Foodland, who operate four
Distribution Centers (DC) across Mumbai, Noida, Kolkata, Bangalore and Kolkata to store and transport the supplies to all McDonald s restaurants. A unique feature of McDonald s relationship globally with their associates is that they have no formal agreements with any of their suppliers or distributors, and the relationship is based purely on mutual trust and support. For most of their needs McDonalds appoint a single supplier only. However the systems and controls that McDonald s integrates into the supply chain are world class and ensure the supply chain runs smoothly and efficiently. McDonald s current portfolio comprises of only 30-35 items, which can be transformed into 150 combinations and stock-keeping units (SKU). The inventory is manageable as many items are common like the breads, sauces, batters and patties. Secondly the suppliers are limited to 42 vendors, of which 80% procurement is from the core 14 vendors. Future Plans McDonald s strategies to increase footfalls in their restaurants are to add new products, increase seating, add birthday party areas, home deliver the products, and penetrate across India. McDonalds has launched their new breakfast menu, McSpicy and McEgg among new products and also extended the restaurant timings from morning to night than the earlier noon to night. Besides the Metros and the Class I towns, McDonald s is present in smaller Indian cities also. McDonald s plans to open vegetarian only restaurants near the Vaishno Devi shrine near Jammu and the Golden Temple in Amritsar. It already has restaurants in cities close to these shrines, so the supply chain is in place for the region. McDonald s rivals like Subway, Domino s (8 restaurants) and Pizza Hut already have vegetarian only restaurants in India. Even KFC contrary to its name has planned to increase its vegetarian menu in India. In India vegetable products account for half of McDonald s sales. The indigenously developed popular McAloo
Tikki burger accounts for 25% of the company s total sales and is also gaining popularity in other countries. McDonald s is expanding across airports, railway stations, bus stations, highways, as also in malls, multiplexes, and limited menu kiosks. These are all areas of heavy footfalls and where their target segment is omnipresent. Future plans are to target drive-throughs by tying up with petrol pumps on highways, where the current 40 outlets are to be expanded to 100. McDonald s currently operates over 250 restaurants across 50 plus cities in India, attracting close to 400,000 consumers daily. Among the JV partners Hardcastle operates 130 restaurants and Connaught Plaza operates 120 restaurants, which would be doubled to 500 restaurants in the next 3 years. Table 3 highlights the penetration of the quick service restaurant chains in India in 2009 and the proposed expansion plans till 2012 including cities covered and number of outlets. It is surprising that even after fifteen tears of entry none of the organized players have been able to cover 100 Indian cities. Domino s operate over 400 outlets in 90 plus cities, Subway over 300 outlets in 50 plus cities, KFC operates over 250 outlets in 50 plus cities, and Pizza Hut operates over 200 outlets in 40 plus cities. All these restaurants are drawing huge footfalls from the youth, a sign of the growing acceptance and westernization of food and culture in India. Table 3 Penetration of Quick Service Restaurants in India Outlets Cities Food Type Position 2009 2012* 2009 2012* Dominos 300 430 70 95 Pizza Delivery McDonalds 187 219 44 54 Western Experience Subway 183 300 26 36 Sandwich, Rolls Health Pizza Hut 160 200 37 40 Pizza Experience
Nirula s 75 150 10 10 North Indian NV Taste KFC 74 230 14 40 Western Experience Sagar Ratna 52 88 24 39 South Indian Veg Taste Yo China 42 100 12 15 Chinese Convenience Bikanerwala 35 148 13 27 Namkeen, Chaats Taste Haldiram s 15 26 5 5 Namkeen, Chaats Taste Source India Today, 17 May 2010, * Estimated Case Questions 1. What are the strategies formulated by McDonald s to successfully counter the business environment factors that other international players faced during their launch in India? 2. McDonald s introduced a menu in India that had only 25% of their original products while the rest were adaptations to Indian tastes. Has the Indianisation diluted the brand equity? 3. Comment on the segmentation and positioning strategies of McDonald s, what would be your suggestions to McDonald s to remain relevant to their target segment, the youth? 4. Railway stations and highways Profits v expansion 5. McDonald s have mass marketed their products at low prices to ensure trials, what can be the other targeting and pricing approaches McDonald s can apply? 6. What are the competitive challenges McDonald s will face as they scale up in India? 7. How can McDonald s align their global strategies with their strategies in India? References Beefy McD s to Open Veg-Only Outlet in Vaishno Devi, W Mukherjee and Rasul Bailay ET 4 Sep 2012
Business Strategy in India, 2 e, Singh, Pangarkar, Heracleous; 2004, Thomson Interview Amit Jatia, Vice Chairman, HRPL, Mumbai 2004 Interview 8 McDonald India restaurant employees, 2004 Low prices & vegetarian options have won fans for McDonald s in India, 16Mar11, Financial Times http://www.ft.com/intl/cms/s/0/f7664202-4fef-11e0-9ad1-00144feab49a.html#axzz25z2jtgkp McDonalds Annual Report 2011. Accessed 5 May 2012. http://www.aboutmcdonalds.com/content/dam/aboutmcdonalds/investors/investors%2 02012/2011%20Annual%20Report%20Final.pdf McDonald s to spend Rs 500 mn on marketing in India, ANINDITA SARKAR http://www.indiantelevision.com/mam/headlines/y2k9/july/julymam4.php 2 July 2009 Survey 110 McDonald customers in Mumbai, 2005 Western chains flock to India as fast-food craving grows, Nandita Bose and Neha Singh Reuters, Apr 28, 2011 http://www.mcdonaldsindia.com/pdf/press-release-mcdonalds-plans-21feb.pdf