market. Analyze the positioning strategies as well as the process
of evaluating its overall strategy. How would you assess the
positioning against the existing competition?
- Read The Case Below Regarding Mcdonald S Entry Into The India Market Analyze The Positioning Strategies As Well As The 1 (79.65 KiB) Viewed 31 times
The Indian venture had been operational for more than four Exhibit 2 McDonald's outlets in India (existing years and had recorded healthy growth but no profits. and planned Commenting on the progress until that point in time, Vitae Batchi (MeDonald': partner in Delhi) said: "Our growth and பணியாம் - expansion in India over the last three years has definitely been very encouraging.' Only a few months previously, Amit Jour 10 Jatia, (McDonald's other partner in charge of the Mumbai outlets) had said: 'We are still to recover our investment. You need a very large base and break-even is normally after seven to ten years.' Despite the venture': lack of profits, Jatia, also showed his enthusiasm for expansion when he said, "Having cracked the Indian market, McDonald's is ready to leverage its initial investments in infrastructure to - Mainty Broek rapidly expand.' - Mening by 2000 - பாயாத பாப்பாக | of March 2001 Observers were wondering about the appropriateness of McDonald': bold strategic move. Was the additional investment wise, especially in view of the lack of profitability of the existing operations ? Since many of the new cities to be entered vere less Westernized than Mumbai ox Delhi, many observers doubted whether the demand potential would be sufficient to justify the economic operation of outlets. The cost and availability of prime real estate in major Indian cities was another issue. Opening a new outlet required an average investment of Ba 30 million. In Mumbai and Delhi, where prime real estate was expensive, the investments could be higher. Finally, some analysts doubted whether McDonald's could afford to spend big amounts on advertising to create a strong brand-name reputation if its outlet base and customer base remained relatively narrow. McDonald's the global fast-food powerhouse | McDonald's is, by far, the world's biggest marketer of fast food. In 2000, it operated nearly 30000 restaurants and had 1.5 million people serving 45 million customers each day in 120 countries. The company had built an impressive set of financial figures, with US$40.2 billion in system-wide sales (out of which US$24.5 billion was accounted for by franchised restaurants), U3$21.7 billion in assets, US$3.3 billion in operating profits and US$2 billion in net profits. (See Exhibit 3 for a geographic analysis of McDonald's operations.) It was also routinely cited by the business press as being a savvy marketer. In June 1999, with a value of US$26.231 billion, the McDonald's brand was rated as being the eighth most valuable brand in the world, ahead of well-known brands such as Sony, Nokia and Toyota. McDonald's has had a long history in Asia. It entered the Japanese market in 1971, which was followed by entry into other newly industrializing economies (such as Singapore and Hong Kong, among others) in Asia. Entry into China occurred only in 1990. McDonald's entered India in 1996. (See Exhibit 4 for McDonald's start-up dates in East Asian and South Asian countries.) The late entry could be attributed to several factors, such as the fact that a significant percentage of India's population is vegetarian, the limited purchasing pover of the population and the closed nature of the economy. The Indian market India is a vast subcontinent with an area one-quarter of that of the United States, and a population almost four times that of the US, at about 950 million. The per capita GDP is quite lov, at US$390 in 1999. However, after adjusting for purchasing power parity, India vas zanted the fifth-largest economy in the world (ranking above France, Italy, the UK and Russia) with the third-largest GDP in Asia in 1999. (See Exhibit 5 For income distribution in India.) Among emerging economies, India is often considered second only to China. India's economic diversity is matched by its social diversity. There are more than 20 major spoken languages and over 200 dialects. The Indian currency (Rupee) has its denomination spelt out not only in English and Hindi, but also in 13 other languages. About 50 per cent of the population is considered to be illiterate, and advertising reaches them via billboards and audiovisual means. For national launches, at least eight languages are used. In addition, the country faces a poor infrastructure with frequent power outages, even in New Delhi (the capital city) and Bangalore (India's Silicon Valley).
In terms of political system, India is a democracy. Since independence from the British in 1947, the economic system has historically been modelled on the socialist style. Under this system, the government strictly controls the entry and exit of domestic as well as multinational corporations (MNCs) into different sectors. NC's also face a variety of other restrictions. Since 1991, India has started deregulating the economy. However, the socialist mind-set cannot be erased overnight. A Member of Parliament said of fast-food chains such as McDonald'. and KFC, 'We want computer chips and not potato chips.' The country has a few anti-Western factions, which have opposed the entry of MNCs in general. The mistrust of MNCs could be at least partially attributed to the fact that the British rule of India was rooted in the entry of the British East India Company (for trading purposes) into the country. There are also several small but vocal groups of health activists and environmentalists that are opposed specifically to the entry of fast-food giants such as McDonald's and KFC. When KFC opened its restaurant in Bangaloze in 1995, local officials found that KFC had excessive levels of monosodium glutamate (MSG) in its food and closed the outlet. The outlet soon reopened, however. Said Vandara Shiva, a vocal exponent of environmental and animal welfare issues, in an audio interview with MeSpotlight The McDonald's experience, which is really the experience of eating junk while thinking you are in heaven, because o the golden arches, which is supposed I guess to suggest that you enter heaven, and the clown Ronald McDonald, are experiences that the majority of the Indian population would reject. I think our people are too earthy. First of all, it would be too expensive for the ordinary Indian - for the peasant, or the person in the slums. It's an experience that a very tiny elite would engage in, and most of that elite - which knows what good food is all about - would not €221 for it. McDonald's is doing no good to people's health, and in a country like India where first of all, we are not a meat culture, and therefore our systems are ill-adapted to meat in the first place, and where people are poorer - shifting to diet like this will have an enormous impact. Since 1991, when the Indian economy began opening up to foreign investments, many multinationals have rushed in - lured by the attraction of serving a large middle class, estimated at 300 million. However, even some of the well-known global brands failed with their initial strategies and were forced to reposition, including, in some cases, drastic reduction of prices. Some multinationals (for example, Peugeot) even had to close shop Kellogg's, which entered with high-priced cereals (several orders of magnitude more expensive than a traditional Indian breakfast), faced a lack of demand. KFC initially failed to realise that Indians were repulsed by chicken skin, which was vital for the Colonel's secret batter to stick. Thus, apart from a lack of understanding of the local tastes, a combination of circumstances - including overestimation of the demand potential, rosy assumptions about the dismantling of bureaucratic hurdles to business, infrastructural inadequacies and finally, inappropriate firm strategies (for example, pricing) - led to many failures and disappointments. McDonald's entry strategy in India McDonald': India was incorporated as a wholly owned subsidiary in 1993. In April 1995, the wholly owned subsidiary entered into two 50:50 joint ventures with Connaught Plaza Restaurants (Viteve Batshi) to own and operate the Delhi Restaurants and Hardantis Restaurants (Amat Jatia to own and operate the Mumbai outlets. Although McDonald's had done product adaptation to suit local tastes and cultures in several previous ventures, such as the Teriyaki Burger in Japan, rice dishes in Indonesia, noodles in Manila and Metex 3almon sandwiches in Norway, the degree of adaptation required in India was significantly greater. McDonald's replaced its core product, the Big Mac, with the Maharaja Mac. The latter had a mutton patty (instead of the beef patty in the Big Mac), to avoid offending the sensibilities of Hindus (80 per cent of the population), who consider killing cows as sacrilegious, and Muslims (12 per cent of the population), for whos pork is taboo. In addition, since 40 per cent of the market is estimated to be vegetarian, the menu included the Metter Burger (based on potato), a special salad sandwich for vegetarians, and the McChicken kebab sandwich. It also offered spicier sauces, such as Melawala and Metata (made from tamarind). Other elements of the menu, such as chicken nuggets, fillet fish sandwiches, fries, sodas and milkshakes, were in common with the rest of the McDonald's system.
In 1998, McDonald's India set up a menu development team to collect consumer feedback. 3ubsequently, the team came up with its menu vision, and new products since then have been based on this vision. The adaptation of the strategy went well beyond the menu, encompassing many aspects of the restaurant management system. Two different menu boards were displayed in each restaurant green for vegetarian products and purple for non-vegetarian products. Behind the counter, restaurant kitchens had separate, dedicated preparation areas for the meat and non-seat products. The kitchen crew (in charge of cooking) had different uniforms to distinguish their roles and did not work at the vegetarian and non-vegetarian stations on the same day, thus ensuring clear segregation. The wrapping of vegetarian and non-vegetarian food took place separately. These extra steps were taken to assure Indian customers of the Exhibit 3 Geographic analysis of McDonald's operations and performance (financial year 2000) 7 084 Geographic breakdown Asia- Latin Total USA Europe Pacific America Others Revenues 14 243 5259 4 754 1987 949 1 294 Operating income 3 330 1 773 1 180 442 102 94 Total assets 21 684 7 877 2 790 1 856 1 069 Capital expenditures 1 945 469 798 224 246 161 Depreciation & amortisation 1011 418 297 121 69 61 Notes . All figures in US millions • Corporate accounted for US$262 milion doss) to operating income US$1009 million of assets, US548 million of capital expenditures, and US546 million of depreciation and amortisation - Figures may not add up, due to rounding Source: www.medonalds.com wholesomeness of both products and their preparation. To convince Indian customers that the company would not serve beef and would respect the culinary habits of its clientele, McDonald': printed brochures explaining all these steps and took customers on kitchen tours. McDonald's positioned itself as a family restaurant. The average price of a 'Combo' meal, which included burger, fries and Coke, varied from Ba 76 for a vegetarian meal to B 88 for a Maharaja Mac meal. This could be compared with KFC seal prices at 8 59 (Crispy Burger, regular fries and large Pepsi) and Be 79 (KEC Chicken, Colonel Burger and regular Pepsi). McDonald': Happy Meal, which included a complimentary toy, was priced at B= 46. The prices in India were lover than in Sri Lanka or Pakistan, and even the price of the Maharaja Mac was 50 per cent less than an equivalent product in the United States. To fight its premium image among the public, the company undertook selective price cutting and ran some periodic promotions. In February 1999, the company was offering 'ecosomalx' for as low a: B= 29. The company reduced the price of vegetable nuggets from B= 29 to Bs 19 and that of its soft-serve ice-cream cone from Bs 16 to B: 7. Apparently, this still afforded McDonald's a healthy margin (40 per cent for cones). As Vikram Batat, explained, 'I will never become unaffordable, as I will not then be able to build up volumes.' The lower price could be attributed to two factors: the pricing strategies of MC rivals as well as sid-range local restaurants, and the development of a local (low-cost) supply chain. McDonald's pricing strategies, as well as special promotions, were influenced by rivals. In February 1999, several competitors were running special promotions, with KFC offering a neal inclusive of chicken, rice and gravy for B= 39. Eor B350, Pissa Hut was offering a whole family meal, including two medium pizzas, bread and Pepsi. Bis was offering mega meals at Bs35. A typical vegetarian 'set meal', or thali' (which included Indian breads, rice, vegetables and yogurt) at a mid-range restaurant cost around Be, 50, which was considerably lower than a McDonald's meal.
Some analysts believed that that by introducing loss leaders for example, cones), McDonald's wanted to highlight good value for all its products. Whether customers attracted by special promotions pay repeat visits to McDonald': remains to be seen. Exhibit 4 | Dates of McDonald's entry into East and South Asian markets Year Country 1971 Japan 1975 Hong Kong 1979 Singapore 1980 Philippines 1981 Malaysia 1984 Taiwan 1985 Thailand 1988 South Korea 1990 China (Shenzhen Special Economic Zone) 1991 Indonesia 1992 China (Beijing) 1996 India 1998 Pakistan 1998 Sri Lanka SourcesWatson (edl, 1997. Golden Arches East Stanford, CA Stanford University Press). Table 2: Food and Drink Weekly, 26 October 1998 In October 2000, the company introduced two new lodiaria di products to its wenu - the Chicken VeGil and the Veg Pizza FuAt that point in time, 75 per cent of the menu in India was unique - that is, different from the rest of the McDonald's system. The Chicken McGill had a grilled chicken patty topped with onions and mint sauce, to give it an Indian flavor. The Veg Pizza was a takeoff on the populaz Indian samosa (potato-based curry pu) with differences in shape (zectangular) and stuffing (capsicum, onions and Mesaxetta cheese with tomato sauce). In keeping with the low pricing strategy in India, these items were priced at Be 25 and Be 16, respectively. With its value pricing and localised menu, McDonald': had attracted some loyal customers. One such customer said, 'A normal kebab, with all the trimmings, at a regular restaurant vould cost more than B= 25 and if the new MEGEitt is giving us a similar satisfaction with its mint chutney (sauce), then we'd rather eat in a lively McDonald's outlet than sitting in a cramped car on the road.' Some elements of the promotional strategy remained the same as in other parts of the world. One instance of this included the emphasis on attracting children. . Happy Meal film yas consistently shown on the Cartoon Network and the Zee (a local channel) Disney Hour. McDonald's also teamed up with Delhi Traffic Police and the Delhi Fire Service to highlight safety issues, again trying to create goodwill among schoolchildren. In October 1999, in conjunction with The Walt Disney Company and UNESCO, McDonald's launched a search fox Millennium Dreamers. The program would bring together 2 000 young people from around the globe who had made a positive and significant impact on their communities. Based on the number of its outlets, India was allocated two representatives. By June 2000, the company had started rolling out its first national campaign, as it was expanding beyond Mumbai and New Delhi. The campaign, budgeted at 8., 100 million, was expected to highlight (in phased order) the brand the experience that there is something special about McDonald's), food quality and variety. The company also ran special
promotions during festivals, and vegetarian' days, and was even developing garlic- free sauces to bring in 'hard-core' vegetarian traffic. In terms of the selection of cities, McDonald': folloved the same strategy in India as in the rest of the world. Its initial focus on Mumbai and Delhi was driven by the following factors: they were the two largest cities in India, their citizens enjoyed relatively high income levels compared to the rest of the country, and they were exposed to foreign food and culture. After establishing a presence in the leading cities, McDonald's then moved to smaller satellite towns near the metropolitan cities for example, from Delhi to Gurgaon and Noida, both suburbs of Delhi, and from Mumbai to Pune). McDonald's often found that there were positive spillover effects, in terms of its reputation, from the metropolitan cities to the satellite towns. In Jaipur, the company was hoping to attract foreign tourists. Exhibit 5 Income distribution in India Number of people (millions) 763 Households (millions) 131 Income in USS 4600 120 20 1 000 3 000 3000-6000 45 8 25 5 Classification The Deprived The Aspirants The Climbers The Strivers The Rich (total) The Near Rich The Clear Rich The Sheer Rich The Super Rich 6 000-12 500 >12 500 2.18 0.3545 1.55 अ 0.444 0.25 0.074 0.024 12 500-25000 25 000-50 000 50 000-125 000 >125 000 0.144 0.039 0.0065 Source: Income figures are approximate and bored on A Catterjee, 1998, Marketing to the superrich, Business Today uwing Media India Lidl. 22 Apri, W. Berryman and I. McManus, 1998, India Turning the elephant economy. Independent Business Weekly, 24 June Developing the supply chain McDonald's search for Indian suppliers started as early as 1991. Its initial challenge was to develop local suppliers who could deliver quality raw materials, regularly and on schedule. In the five-and-a-half years until start-up, McDonald's spent as much as Ba 500 million (US$12.8 million) to set up a supply network, distribution centers and logistics support. By mid-2000, some estimates placed the total investment in the supply chain at almost Bs 3 billion. Local suppliers, distributors and joint venture partners and employees had to match the restaurant chain's quality and hygiene standards before they became part of its system. McDonald's experience in identifying and cultivating the supplier of lettuce provided an excellent illustration of the difficulties involved. In 1991, hardly any iceberg lettuce was grow in India, except for a small quantity grown around Delhi during the winter months. McDonald': identified a lettuce supplier (Mangesh Kumar from Ootacard in Taritrada, a southern state) and helped him in a broad range of activities, from seed selection to advice on farming practices. In the case of several other suppliers, such as Crenica Industries which supplied the sesame seed buns, McDonald': helped them to gain access to foreign technology. In another instance, it encouraged Damix, the supplier of cheese, to establish a program for milk procurement by investing in bult milk collection and chilling centers. This, in turn, led to higher milk yields and overall collections, as well as to an improvement in milk quality. McDonald's ended up with a geographically
diverse sourcing network, with buns coming from northern India, chicken and cheese from western India, and lettuce and pickles from southern India. There were as many as 40 suppliers in the company's supply chain. (See Exhibit 6 for McDonald's supply chain.) A dedicated distribution system was established to match the suppliers' Exhibit 6 McDonald's supply chain in India production and delivery schedules with the restaurant's needs. The first two centralized distribution centers were set Phillaur (sauces) Dehradun (lettuce) up near Mumbai and at Cochin in the Nainital (lettuce) southernmost part of India) in joint ventures with two local retailers, both of whom had to learn from international distributors of McDonald's products how the restaurant chain handled distribution worldwide and, especially, how to enhance the quality of storage operations. The Thane company estimated that each distribution Taloja. Pune lettuce) center could service about 25 outlets. (veg. nuggets Ooty lettuce) McDonald's strove to keep the storage -Baramati (cheese) volumes of products high in order to exploit all possible economies of scale. Hyderabad (mutton patties) The distribution centers were also expected Venkatapur (pickles) to maintain inventory records and to interact with suppliers and the logistics firm to ensure that their freezers were well stocked. Said Amit Jatia, "The most Cochin Supplier locations important part of our operations was the - Distribution centres development of a cold chain [the process of procurement, warehousing, transportation and retailing of food products under controlled temperature:). There is practically no need for a knife in any restaurant. All the chopping and food processing is done in the plants. Only the actual cooling takes place in the restaurants.' Even with the suppliers and distribution system in place, McDonald's needed a distribution link to move raw material: to its zestaurants. Logistics management was contracted out to AFL Logistics - itself a 50:50 joint venture between Air Freight (a Mumbai-based firm and EX Coughlin of the United States, McDonald's international logistics provider. AEL logistics was responsible for the temperature-controlled movement of all products by rail, road or air, as appropriate) from individual suppliers to the regional distribution centers McDonald's had to work extremely hard at inculcating a service orientation in its employees, especially those involved in physical logistics, since the freshness of the food was at state. The truck operators had to be explicitly and clearly instructed not to switch off the truck's refrigeration system to save on fuel or electricity. The corporation went to the extent of installing trapping devices, which would show the temperature chart through the entire journey. Since 1999, McDonald's had started using India as an export base for cheese, lettuce and other products that went into its burgers. Exports had already begun to Sri Lanka, where it had opened in October 1998, and trial shipments had commenced to Hong Kong and the Middle East. Said Amit Jatia, 'Things are becoming global in nature. Once you set up a supply chain in a strategic location, it can service other countries as well.' Past performance and planned strategies During its first 12 months of operations, McDonald's opened seven outlets (four in Delhi and three in Mumbai), had 6 million customer visits and served 350 000 Maharaja Macs. By the end of 1998, the number of outlets had gone up to 14, and, by mid-2000, it had expanded to 25 outlets with an outlet in Pune and Jaipur. The estimates for average daily customer visits to a McDonald's outlet differed widely. According to a mid-range estimate conservative estimates were half as much, whereas generous estimates could be about 40 per cent higher), in June 2000, McDonald's outlets were doing fon average) about 1 500
transactions for bills raised) a day, serving over 3 500 visitors. This was a significant improvement over 1998 when a typical McDonald's restaurant was doing only 900 transactions per day according to the same source). Industry sources, however, were in agreement that the spending per customer visit at McDonald's was around Bs 45. The growth rate in McDonald': sales had been 70 per cent over the previous two years (1998- 2000) and was expected to be sustained until 2002. This growth rate included the effect of starting up new outlets. Even with this growth, analysts were expecting that the Indian operation would take three to four more years to break even overall. This was attributable to the heavy investments made in vendor development, infrastructure and brand building. One gratifying aspect of McDonald's success was the fact that, by mid-2000, it derived as much as 50 per cent of its revenues from vegetable food items, thus disproving its critics especially those who were skeptical of its ability to serve food that suited Indian palates. In 1997, customers rated MeDonald's food as bland. By September 2000, the perception had changed, however. Customers thought that McDonald's food had a unique taste. To exploit the opportunities created due to its better brand awareness and customer acceptance, McDonald's was following a three-pronged strategy: increase the seating capacity in existing outlets to cater to additional traffic: open new outlets in Mumbai and Delhi; and, finally, penetrate new cities. McDonald's was also in talks with Delhi Metro Rail Corporation, Airports Authority of India, Indian Railways and Delhi Development Authority to open smaller McDonald's outlets in airports and railway stations, among others. The investments required to open these smaller outlets were only half that of the regular outlets. High real estate prices were a thorny issue in nationwide expansion. In metropolitan cities such as Mumbai, prime real estate was extremely expensive and sometimes not available at all. The costs were also high in other cities such as Bangalore. 'Cuz expansion plans are always relative to the availability of real estate, Batabi said. McDonald's also had plans to set up several outlets along the Delhi-Agra national highway in a tie-up with a major petroleum zefining and marketing organization, Bharat Petroleum Corporation Limited. Jatia said, "He feel both local tourists and foreigners travelling by road don't have many reliable eating options right now.' The first such outlet, a project estimated at B= 35 million, was already in operation. The company proposed to offer highway travelexa parking space and a play area for children. The emphasis on quality, service, cleanliness and value (Q3CV) had been quite successful in drawing highway towellers in its home market (the United States). Some analysts, however, believed that highway travete in India, who were typically truck and bus drivers, would not be willing to go in for the type of food or prices that McDonald's currently offered. In addition, McDonald's was looking at tie-up: with other oil companies, as well as retail vehicles such as malls, multiplexes or cinema halls.