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McDonald's India Entry Strategy

Article · May 2014

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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 $ 79b

Sales $ 27b

Sales Growth 6%

Net Profit $ 5.5b

Outlets 33,510

Operates in countries 117

Total employees including franchisees 1.7 m (World’s 3rd largest employer)

Daily customers 68 m
Source- McDonald Annual Report 2011
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 Master Franchisee- Devyani,


(100% subsidiary) 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, 2e, 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

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