case report - golden arches in india - rachel ronquillo

Golden Arches in India March 10, 2011 BA 236 Global Marketing – Prof. Benjie Sandoval 3

rd Trimester 2010-11

De Leon, Estanislao, Gumabon, Lope, Rojas, Ronquillo of 6

I. Problem Statement

Despite the successful adaptation and healthy growth of McDonalds in the Indian market, its

existing outlets did not report any profit. As many of the new cities to be entered into were less Westernized than Mumbai or New Delhi, how should McDonalds allocates its resources in terms of marketing and investing to ensure that the potential of demand is sufficient to justify economic operations so as to obtain profitability, growth and eventually company maturity in India?

II. Point of View

The group will take on the perspective of the senior management of McDonald’s Corporation (India). This study will aim to discuss the benefits of global strategy and local responsiveness as a way to overcome the challenges in a new market and how to achieve profitability despite growth.

III. Assumption

This study will assume that McDonalds India has not yet decided whether or not it will pursue its expansion on the year 2003 given the lackluster financial performance of the parent corporation, McDonalds U.S.A. and the unprofitable operation of the Golden Arches in India as of the end of December 2002 up to the 1

st quarter of 2003.

IV. Framework for Analysis

The group will be using the external and internal environment analysis, industry analysis of

fast food in the Indian market, competitor analysis and the core competency analysis of McDonalds India. This analysis will give us a clear picture if indeed Indian market is attractive for global fast food operators such as McDonalds. Afterwards, we will be conducting SWOT analysis, for us to be able to find suitable recommendations that will fit in the company considering its current financial condition stated on the case material.

V. Analysis

External Analysis /General Environment of India

● Economic The country has poor infrastructure with frequent power outages even in major cities. ● Global India began opening up to foreign industry in 1991 and since then a range of Macs have entered, some unsuccessfully. ● Political/Legal India is a democracy with a large bureaucracy which can inhibit business. ● Socio-cultural India contains some anti-Western factions and both McDonald’s and KFC have been targeted in the past. India’s population is 80% Hindu, who do not eat beef for religious reasons, and 12% Muslim, who do not eat pork for religious reasons. Overall 40% of the population is vegetarian. ● Demographic There are about 1 billion people in India, 20 spoken languages and a 50% illiteracy rate. Per capita income is low but ‘eating out’ is common and the middle class numbers about 300 million.




● Technology India’s technology is patchy, with areas of high technology achievement contrasted with areas of poor infrastructure.

Fast Food Industry Analysis in India

The choice of industry as ‘Indian global fast food’ (IGFF) is made because the business pattern of firms such as McDonald’s and KFC is far enough removed from fast food street vendors to constitute a different industry. It is also distinct from Indian high end restaurants because of its focus on ‘fast’ food. The ‘global’ element in the differentiation suggests a common pattern of assumptions about food valuing cleanliness and general ambience.

IGFF is a relatively new industry with a significant global brand recognition factor in the Indian middle class because McDonald’s (the only current player) KFC and other firms are well known.

Globally, fast food is a mature industry with a number of competitive players.

Risk Analysis

Enumerated below are the possible risks/threats of new market entrants. Then, we analysed how McDonalds respond to overcome the possible losses from these risks.

● Bargaining power of suppliers

Global fast food requires steady supply of guaranteed high quality products as well as stable infrastructure. Consequently this poses a high threat.

Between 1992 and 1996, when McDonald's opened its first outlet in India, it worked very hard to put the perfect supply chain in place. It trained the local farmers to produce lettuces or potatoes to specifications and worked with a vendor to get the perfect cold chain in place. McDonald's was aware that supply chain management was undoubtedly the most important factor for running its restaurants successfully. These efforts paid off in the form of joint ventures between McDonald's India (a 100% wholly-owned subsidiary of McDonald's USA) and Hardcastle Restaurants Pvt. Ltd, (Mumbai) and Connaught Plaza Restaurant (New Delhi).

● Bargaining power of buyers

This is a high threat, because buyers have many alternatives to global fast food. Also, there is already rivalry amongst existing competitors.

The competition from the local food retailers in India was intense. The food retailers had been doing business for years. Their familiarity with the market and the understanding of the local taste gave them a competitive edge. There were numerous eating joints which offered snacks and meals with affordable price tags.

What McDonald did to compete on the local retailers was through product adaptation wherein it localized most of its menu to suit the Indian tastes and culture. It even cuts down the prices so the low income earners will afford its food. Aside from the price advantage, it also satisfies the customers by providing a lively ambiance and clean outlets. It also entered into various advertising and promotion tools to divert the market perception from previously negative outlook to positive one.




● Threat of new entrants

There are major barriers to entry within Indian society and bureaucracy as well as in relatively poor infrastructure. The failure of KFC has also inhibited new entrants. This is a low threat.

McDonalds outperformed KFC in the Indian market. KFC closed its outlets in India for a long period and had no opportunity to expand as well. This is supposedly due to the high MSG level of the foods it catered. Failure of new entrants will provide lesser incentive for business players to venture in a new market.

● Threat of substitute products

Because the industry is IGFF substitutes are common – any street stall is fast food and a substitute for a quick meal.

McDonalds makes sure that it’s not just a quick meal that they provide rather a quick service restaurant experience supported by principles and core values.

The pattern of threats is obvious. Buyer, suppliers and substitutes pose major problems. The industry will be unattractive if these issues are not anticipated beforehand. McDonalds as a key player had already addressed the following issues before it went operational in India.

Internal analysis

Tangible resources ● 40 restaurants – hasty expansion by opening 40 outlets in span of eight years ● A coherent first world standard supply chain – excellent supply chain management by having accredited and reliable suppliers. ● (Implied) good finances given that breakeven point was forecast several years ahead Intangible resources ● The McDonald’s fast food brand which is globally known. ● Knowledge of Indian society-McDonalds gain local knowledge from its local joint venture partner. ● Knowledge of Indian government – the company is aware of the existing law and policies of the Indian government. Any barrier to its market entry will be addressed immediately. ● Well-trained staff

Core Competency Analysis of McDonalds:

Core competency analysis is interesting in this case because McDonald’s has a number of capabilities which meet the four-part test for a capability to become a core competency. However, the issue of added value is questionable because the joint venture has not yet achieved breakeven in 2003, eight years after initiation, and is in trouble. Certainly the capabilities deliver value in that they allow for exploitation of opportunities, but so far they have not yielded value that translates to above-average profits (compared to other McDonald’s franchises or JV regions).

As stated in the case, McDonalds spent so much in its advertising and marketing expenses. On year 2000, the promotional campaign of McDonalds was budgeted at Rs 100 million which was done mainly to highlight the brand. On the year 2001, McDonalds India increased its marketing expenditures from the budgeted Rs 150 million to actual spending of Rs 200 million. In June 2002, having induced trial for potential customers, McDonalds change its slogan to “Let’s have McDonalds today “from the previous theme “There is something special about McDonalds”. The objective of this




new campaign is to position McDonalds as a comfort zone for young families. The company’s advertising and promotional budget was fixed at Rs 180 million on that year.

Given the following information, it is evident that McDonalds will suffer losses on its first years of operation not just because of its expensive advertising and promotional expenses but also on the fixed costs it incurred before going operational which form part of the company’s pre-operating expenses. On early years of operation, it is normal for a company to incur losses due to the pre-operating expenses such as the cost of market study and setting up the business by developing a supply chain, creating brand name and inducing trial among potential market.

Eight years of operation in a new market is still considered young and essentially, its success should not be measured on its financial performance alone.

In this case, McDonalds became successful in getting market share through aggressive and expensive marketing strategies in exchange of nil profit. Indians started to embrace McDonalds’ product. Introducing a brand to a certain country means you have to deal with the distinct culture and tastes of its people. These will induce higher threat and risk for the new market entrants. However, McDonalds is willing to pay for the incremental risk just to penetrate the market. The group believes that this spending leads to the poor financial performance of the company.

Growth is recommended provided that the capitalization of the company and its target cash flow will require it to do so. Since McDonalds is still young in the Indian market, it has a lot of growth opportunities to look forward to. In a span of eight years it was able to position the brand and made the product loved by the people who previously perceived it negatively.

The core competency of the company having a globally known brand and responsiveness will lead to its success in India. Competitor Analysis

Listed below is the brief analysis of McDonald’s competitors:

KFC/ New Entrants

Local Fast Food Outlets

Date of entry: 1995 Date of entry: already existing for many years

Food Perception: High MSG Level Food Perception: Suits the local taste

Operations: Business closed for long periods/ no opportunities for expansion

Operations: Street stall fast food is abundant with lesser emphasis on ambiance and customer satisfaction

Possible Reasons of failure: lack of understanding of local tastes and there is an overestimation of demand potential

Possible Reasons of failure: Unable to satisfy emerging demands and varying taste of locals. Low priority on service marketing.

SWOT Analysis of McDonalds India:

Strengths

Weaknesses

One of the world's most recognizable logos (the Golden Arches) and spokes character (Ronald McDonald the clown).

No profit on its existing outlets and the stagnant financial performance of its parent corporation (McDonalds USA) might halt its expansion.

McDonalds is a community oriented, socially responsible company.

Expenses are not properly monitored. There is a large variation between the budgeted and actual amount of spending.

They successfully and easily adapt their global restaurants to appeal to the cultural differences.

The concept of break even will limit the company from utilizing its resources to attain higher profits




in the future.

The world’s biggest marketer of fast food. They have an efficient, assembly line style of food preparation and supply integration.

Expenses are not closely monitored and there is no cost-benefit analysis before entering into an investment.

Joint venture to local partners will promote sharing of risk and ability to combine the local in depth knowledge with a foreign partner with know-how on technology process.

Joint financial strength brought about by the joint venture 50:50 agreement.

Opportunities

Threats

Expansions on locations wherein demand has potential though market study and conservative customer trial.

Changing customer lifestyle and taste

New set of menus that will exploit Indians raw materials

Increase competition from local fast food outlets

Franchising agreements to local Indian businessmen

Financial distress due to price risk.

Creating a more rich, satisfying experience for consumers

New market entrants.

Expand Happy Meal choices to attract and retain customers

S-O Strategy

McDonalds, given its strengths should continue to expand to be able to exploit it’s opportunities in the market. Since Indians are starting to appreciate the products and services they provide, the firm should take this opportunity to expand. The reliable supply chain management, unique and localized product tastes, lively ambiance and excellent customer service McDonalds provides will definitely yield profit for the firm in the future. S-T Strategy

McDonalds having a strong brand name should not be too complacent on its current market position. Overestimation of demand potential might lead to adverse result. Existing local fast food outlets and new entrants may find ways to become more competitive through innovation and price differentiation.

The requirements of customers change over time and thus the product offering has to be changed accordingly. What is the fashion today may be out of market within few weeks. Thus continuous innovation is required. W-O Strategy

Growth opportunity by opening new outlets on strategic locations should take place. Achieving break even immediately after more than five years of operation may limit potential gain from new investments. If the financial performance of the company hinders the company from expanding, then McDonalds should find alternative ways to finance these new outlets. Financial resources can be derived from various means such as local bank loans or even entering into another joint venture agreement from an established local company with diversified investments and portfolios. A local company that will share not only the business risk implied to the new venture but also it’s technological and market know-how and financial resources to mitigate the burden of generating cash on part of McDonalds.




W-T Strategy

Profitability lies on how efficient and effective the operations of the business are. We are all aware that even how successful the marketing strategy of the firm without proper monitoring and matching of revenues against expenses it would be useless. Owners are looking for the added value to the firm which can be derived from accumulated earnings. In order to avoid the risk of possible losses, McDonalds should learn to stick with its budget. Huge spending that will not yield value to the firm should be minimized or avoided.

On the other hand, negative effects of new market entrants can be prevented if the company will continue to improve its products and services. The company should learn to revise its product portfolios and to revisit its product market to understand changing needs, expectations and perception of different market segments. VI. Recommendation/Conclusion

McDonalds undoubtedly is a successful firm with a popular brand name and spokes character (Ronald McDonald). Penetrating a new market is not easy because of different culture and tastes hence paying more due to the inherent risk involved cannot be fully avoided. McDonalds is willing to pay for that premium provided that it will be able to position its brand and achieve demand in the market.

Adaptive strategy, local responsiveness and making locals part of the firm enable McDonalds to survive the Indian market. However, for eight years of operation the firm has no recorded profit thus hampering its expansion. Financing is critical, on this case McDonalds should find ways to exploit the opportunities it has at this moment to recover. Infusing additional investment by the parent company or entering into joint venture or franchising agreement will help the company stretch its finances without sacrificing its growth and potential earnings.

Likewise, the firm should continue to improve and innovate to mitigate the negative effects of new market entrants and competition from local fast food outlets. Finding locations with potential of demand through extensive market study can help the firm decide whether the proposed investment will add economic value to the firm or not.

case report - golden arches in india - rachel ronquillo

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