Name : Gururaj Raibagi

USN : 01FE17BCS409
Case 1: McDonald’s expansion strategies in India
Key characters:
Mcdonald's, KFC, The government of India, Vikram Bakshi, Amit Jatia, , Pizza Hut, Wimpy’s

About McDonald's:
McDonald’s is by far, the world’s biggest marketer of fast food. In 2000, it operated nearly 30
000 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), US$21.7 billion in
assets, US$3.3 billion in operating profits and US$2 billion in net profits.

McDonald’s has had a long history in Asia. It entered the Japanese market in 1971, which was
followed by entry into other newly industrialising economies (such as Singapore and Hong Kong, among
others) in Asia. Entry into China occurred only in 1990. McDonald’s entered India in 1996.

Background:
In March 2001, the McDonald’s Corporation’s Indian operation was at a critical juncture in its
evolution. Over the previous few months, the company had expanded its retail base from Mumbai (10
outlets) and Delhi (14 outlets) to Bangalore (one outlet), Pune (one outlet), Jaipur (one outlet) and the
Delhi-Agra highway (one outlet). During 2001, McDonald’s had plans to open 15 more outlets. By 2003,
the company planned to increase the number of outlets to 80 and the cumulative investment in India to
more than Rs 10 billion.

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 low, at
US$390 in 1999. About 50 per cent of the population is considered to be illiterate, and advertising
reaches them via billboards and audiovisual means, the country faces a poor infrastructure with
frequent power outages, even in New Delhi (the capital city) and Bangalore (India’s Silicon Valley).

The government strictly controls the entry and exit of domestic as well as multinational
corporations (MNCs) into different sectors.
McDonald’s entry strategy in India:
McDonald’s 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
(Vikram Bakshi) to own and operate the Delhi Restaurants; and Hardcastle Restaurants (Amit Jatia) to
own and operate the Mumbai outlets.

The degree of adaptation required in India was significantly greater. McDonald’s replaced its
core product, the Big Mac, with the Maharaja Mac, the menu included the McAloo Burger (based on
potato), a special salad sandwich for vegetarians, and the McChicken kebab sandwich

In 1998, McDonald’s India set up a menu development team to collect consumer feedback. Two
different menu boards were displayed in each restaurant – green for vegetarian products and purple for
non-vegetarian products. McDonald’s printed brochures explaining all these steps and took customers
on kitchen tours.

The average price of a ‘Combo’ meal, which included burger, fries and Coke, varied from Rs 76
for a vegetarian meal to Rs 88 for a Maharaja Mac meal.

In February 1999, the company was offering ‘economeals’ for as low as Rs 29. The company reduced the
price of vegetable nuggets from Rs 29 to Rs 19 and that of its soft-serve ice-cream cone from Rs 16 to Rs
7. A Happy Meal film was consistently shown on the Cartoon Network and the Zee (a local channel)
Disney Hour.

In terms of the selection of cities, McDonald’s followed 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.McDonald’s often
found that there were positive spillover effects, in terms of its reputation, from the metropolitan cities
to the satellite towns.

McDonalds’s Competition:
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 meal inclusive
of chicken, rice and gravy for Rs 39. For b, Pizza Hut was offering a whole family meal, including two
medium pizzas, bread and Pepsi. Wimpy’s was offering mega meals at Rs 35. A typical vegetarian ‘set
meal’, or ‘thali’ (which included Indian breads, rice, vegetables and yogurt) at a mid-range restaurant
cost around Rs 50, which was considerably lower than a McDonald’s meal.
 In October 2000, the company introduced two new Indianised products to its menu – the
Chicken McGrill and the Veg Pizza McPuff. At 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.

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.

McDonald’s spent as much as Rs 500 million (US$12.8 million) to set up a supply network, distribution
centres and logistics support.

McDonald’s identified suppliers and helped them in a broad range of activities, from seed selection to
advice on farming practices, helped them to gain access to foreign technology, it encouraged the
supplier of cheese, to establish a program for milk procurement by investing in bulk milk collection and
chilling centres.

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.

Conclusion:
During its first 12 months of operations, McDonald’s opened seven outlets , 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 , In June 2000, McDonald’s outlets were doing
(on average) about 1 500 transactions 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.

The growth rate in McDonald’s sales had been 70 per cent over the previous two years (1998–
2000) and was expected to be sustained until 2002. In 1997, customers rated McDonald’s food as bland.
By September 2000, the perception had changed, however. Customers thought that McDonald’s food
had a unique taste.
Case 2: Webvan – (where and why webvan failed)

About Webvan:

Webvan was founded in the heyday of the dot-com bubble in 1996 by Louis Borders (He and his
brother, Tom), was a dot-com company and grocery business that filed for bankruptcy in 2001 after 3
years of operation. It was headquartered in Foster City, California, United States. It delivered products to
customers' homes within a 30-minute window of their choosing. At its peak, it offered service in ten US
markets, The company had hoped to expand to 26 cities by 2001.

The board members and its executives saw the company as a tech startup, not an online
supermarket. They felt an online grocery store offered people:

 Greater convenience than traditional grocery stores.

 A wider variety of products.
 Better prices (they advertised their products would cost 5% less than other stores).
 Free delivery within a 30-minute window.

Webvan took its first orders in June 1999, then shut down in June of 2001. Management burned
through over a billion dollars in just two years.

Webvan’s Mistakes:
1: Lack of Experience.

Neither Louis nor his executive staff had any prior experience in the retail grocery business. They
didn’t seem to know grocery stores have one of the smallest profit margins of any industry — between
1% and 2% of sales.

To survive in 2000 and 2001, the company needed an average order size of $103. In February 2000, the
average order was $80. By the end of that year, it had increased to only $81.

In 2000, the company’s daily expenses averaged $1.8 million. Daily sales averaged only $489,000.

2: Webvan did not understand its customer.

No focus groups or surveys were done to see what the average American wanted when grocery
shopping. If these had been done, the company would have learned:

 Most people prefer to pick out their own vegetables, fruits and meats.
 Many grocery shoppers are impulse shoppers; while shopping, they select other items not on
their lists.
 Many use coupons (Webvan did not accept coupons until late in their existence).
 Some buy economy sizes to save money (Webvan did not carry these larger sizes).
  People do other things when out grocery shopping. They pick up prescriptions, dry cleaning and
go to other stores.
 Some stay-at-home moms believe they’d look bad if they shopped online rather than go out to
buy groceries. This has since changed, but Webvan was early to the game.

Webvan also required orders to be placed 24 hours in advance. Shoppers also had to specify a 30-
minute window when they would be home to accept delivery. While this was geared to accommodate
busy working people, many found last-minute changes prevented them from being home at the
specified time.

Many people tried Webvan once; half of them never returned to buy again.

3: Webvan built its own infrastructure rather than using what was already available

Webvan opened in San Francisco and got its first order on June 2, 1999. In early July, it signed a
contract with Bechtel to build 26 distribution centers across the country within 2 years. Webvan paid a
billion dollars for the distribution centers.

 Each center was 350,000 square feet and fully automated (there were over 4 miles of conveyor
belts in each).
 The design of these centers was never tested in advance.
 Each distribution center contained a butcher area; those all went unused when the company
decided to outsource their meat business.
 Each distribution center had Lazy Susans in refrigerated areas. They did not work properly.
 Products were crushed on the conveyor belts.
 Totes with orders fell over.
 Orders were incomplete.

Each center only operated at 35% of its capacity.

Solutions:
1: Know the Industry

 Are the profit margins sufficient for your company to achieve success?
 How many sales can your company realistically expect to make in the first six months and then
in the first year?
 How many customers do you need for those sales?
 What do you need to charge per sale?

2: Know Your Customer

 Do people want your product or service?

 Are there enough customers who will buy it?
  How much competition will you have?
 What will you have to do to get customers to buy?
 How long will it take to generate a profit?

3: Don’t Reinvent the Wheel

 Use existing infrastructures whenever possible.

 Test and refine early versions before building new ones.

Conclusion:

Back in the Dot Com era, the mantra of entrepreneurs was to Get Big Fast. Venture Capital firms
loved this model because they thought being the “first mover” was a huge advantage.

Today, most Venture Capital firms still believe in the Get Big Fast method, but they temper their
excitement by embracing the Minimum Viable Product (MVP) approach — the rapid expansion phase
only begins once a company has achieved a minimum level of market acceptance using the minimum
viable product.

This approach seems to work better, and definitely reduces the likelihood of catastrophic early-
stage business failures. At Ground Floor Partners, we generally focus on businesses that grow more
organically. That doesn’t mean they can’t grow quickly, but it does mean their business model doesn’t
depend on landing huge amounts of capital before generating reasonable cash flow.

Webvan falls on the opposite end of the spectrum; they raised massive amounts of capital long
before they had a single customer.

But the lessons from Webvan’s arrogant and catastrophic failure are universal. Anyone who
plans to start a business should pay attention; otherwise they just might end up where Webvan did:
broke and out of business.