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Home > Business > Business Headline > Report


Big Mac takes a big bite

Surajeet Das Gupta | April 12, 2003 13:13 IST

What does a fast-food chain do when it can't get the right type of potatoes in India to make its hotselling French fries? That's easy enough: it imports the raw fries so that customers can munch the same products that are ladled out in all its outlets around the globe.

But McDonald's, the world's most famous fast-food chain, knows that it can't import raw fries forever. So it is working closely with its foreign collaborators and a group of carefully selected Indian farmers to produce large potatoes that have the right amount of solid parts needed to turn out the perfect French fry.

Says a senior executive: "We expect that in two years potatoes will be sourced from India. We have already got the solid part requirement right. Now we are working on the size."

Welcome to the world of Ronald McDonald. The world's most famous fast-food chain may be slowing down in other parts of the world, but in India it is just getting into high gear. In the next two years more than Rs 400 crore (Rs 4 billion) will be poured into a string of new outlets all emblazoned with the Golden Arches.

That's on top of a whopping Rs 800 crore (Rs 8 billion) that has already been spent to establish the chain in India. The money has been spent on everything from cold storages to buying real estate and, of course, actually setting up its 48 outlets.

The company knows that it will have to sell an awful lot of burgers to bring that much money back into its cash registers. But it reckons that it can be done.

In the next 12 months it will be moving out of the metros and concentrating its efforts on four mid-sized cities --Chandigarh, Ludhiana, Jallandhar and possibly Agra.

At the same time it will be starting a long journey on India's highways and launching two roadside outlets that will welcome hungry travellers.

"Our plan is to enter a new city, understand the market and then multiply by opening up more outlets in these cities rather than spreading to too many cities at a time," says Vikram Bakshi, managing director, Connaught Plaza Restaurants Pvt India. Bakshi is one of McDonald's two joint venture partners in India.

Certainly, McDonald's has managed to create the right buzz around its name. That's partly because of its global reputation and partly because it has played its cards smartly in India.

When it launched a few months ago in Jaipur, for example, more than 12,000 customers tramped through the restaurant on the opening day. Last year it reckons 52 million customers turned up at its 48 restaurants around the country.

That's not bad going for a seven-year-old which is still keeping the heat in the kitchen at carefully adjusted levels. But the food chain is also making a series of mid-course corrections to ensure that it reaches out to more Indians than ever before. So far it has ensured the crowds at its counters by positioning itself as a family restaurant and the ideal place for kids and teenagers.

It isn't turning away from kids but it is looking for ways to focus more sharply on adults. The company is making sure that the products aren't overly focused on children and that there is something for the adults -- whether with family or otherwise -- who turn up for a quick bite and drink. The new target audience: married adults between the age of 24-38 years who have children.

Says Bakshi: "The common criticism was that McDonald's is a place for kids and teenagers. This is what we are planning to change by bringing in menus, which cater to these people's needs."

That isn't the only change that is taking place beneath the Golden Arches. McDonald's is carefully tailoring its menus -- keeping Indian tastes in mind -- so that the crowds keep pouring through the doors.

It has just launched a dish called the McCurry Pan, which resembles a pizza. In January it introduced the crispy Chinese burger and before that it launched wraps, which are a chicken and paneer combination.

And customers can wash all that down with Georgia coffee or one of several other hot beverages that were introduced last year. Surveys showed that adults wanted hot beverages but had to buy them elsewhere.

All these moves have one goal in mind. In India, McDonald's wants to transform itself into a high-volume, mass-market brand.

Says Bakshi: "McDonald's has been growing at a compounded growth rate of 40 per cent every year. We expect this to stabilise at around 30 per cent to 35 per cent in the next few years."

To support these ambitious growth plans McDonald's will throw in large amount of cash. The company has two super-franchisees -- Vikram Bakshi and Amit Jatia -- who've been given the mandate to spread the burger cult throughout India.

So far they've both been investing the bulk of the money in the new outlets that have been launched. But in the future, they are looking at sub-franchising to make the move to smaller towns easier.

Says Bakshi: "At the moment all our outlets are company owned but we will be looking at getting local talent to be our franchisees in our expansion in non-metros. However, we will tread carefully."

At the same time it will tie up with the giant petroleum companies to make life on the road a bit less bumpy. The petroleum companies will be setting up large numbers of new highway petrol stations in the coming years and some of these will have eateries attached.

McDonald's, of course, already has an attractive customer base to support these ambitious moves. Bakshi reckons that about 3,000 customers drop in each day at every McDonald's outlet in the country.

That's compared to around the 800 who drop by at every outlet of Barista, the coffee chain. Another comparison: Nirula's, the Delhi-based chain, gets about 60,000 people daily at 64 outlets compared to 144,000 at 48 McDonald's. Also, the Indian McDonald's are among the top 10 worldwide for the high number of transactions that take place.

How serious is McDonald's about becoming a food chain for the masses?

Consider the figures, which have already changed dramatically: in the beginning about 80 per cent of its customers came from the upper-level SEC A category.

But the carefully calibrated pricing levels have made it possible to attract a different level of society. Currently, about 43 per cent of its customers come from the less affluent SEC B category.

At the same time the effort to draw in more adults have also shown dividends. The number of 24-38 year olds walking into outlets has gone up dramatically by over 30 per cent in the last six months.

Another indicator that more adults are coming in is the fact that coffee sales now account for 5 per cent of total sales. It goes without saying that adults spend more money than impecunious teenagers living on tight allowances.

How much of McDonald's rapid growth should be attributed to its powerful global brand? And how much should be attributed to smart moves that it has made after coming here? Consider one figure: about half the products up for sale at its counters have been developed by the company's product development team in India.

Nevertheless, McDonald's could be moving into very dangerous territory in the coming months. The biggest problem is that it must urgently push up revenues per customer.

Barista, for example, says that it gets about Rs 110 per customer. By contrast, McDonald's won't reveal figures but admit that it is far below Rs 100.

There are others who say that it faces tough competition from coffee chains. Says R S Roy, editor of Images, a retail magazine: "McDonald's big challenge will be coming from the Baristas and Coffee Cafe Days, which will have no choice but to increase their food offerings to make money. Also the adult market is strong on pizza products where McDonald's is not present."

Executives at Barista disagree with that analysis. Says Ravi S Deol, managing director, Barista Coffee Company Ltd: "We are in different businesses. McDonald's is product-driven. It is more physical need-driven and satiates hunger. Barista is emotional need driven. It is really an experience."

He also points out that customers who feel strongly about their coffee will come to them and not go to McDonald's which offers the beverage as part of its overall menu.

But there are others who say that the returns on the large investment the company has made do not make economic sense. Says a merchant banker who is an expert on retailing: "Even assuming a turnover of Rs 300 crore (Rs 3 billion) to Rs 400 crore (Rs 4 billion) their return on equity capital at net margins of around 5 per cent is as low as 2.5 per cent to 3 per cent. In this business we would not put in money if returns were less than 20 per cent."

Adds Deol: "The real challenge is the steep real estate cost which is as high as 15 per cent and 20 per cent. So while the only cost that is lower for operating a retail chain in India is labour, all other costs are similar or more. But price points are very low."

Certainly McDonald's has made a slow but sure entry into the Indian market place. The question is whether it will be able to generate large volumes which will be needed to justify the large investments that it has made.

Says a senior executive of a rival fast food joint: "What McDonald's is trying to do is to build a new generation who will stay with the brand. They are a long-term player."

The smarter money

It's the only venture capital fund that is spending lots of time and money on the retail sector.

"We believe that there is a large opportunity in retailing and our aim is to help create dominant retailers in the country who will have turnover of Rs 1 billion (Rs 100 crore) plus in the next few years." says Bala Deshpande, chief, Private Equity Investments in  ICICI Venture Funds Management Company Limited.

The fact is that ICICI Venture Funds is taking slightly different bets from other venture capitalists. It has put big money on organised retail and restaurants and has, for instance, made high profile investments in companies like Mars Restaurants owned by Sanjay Narang, which has opened several restaurant chains.

That isn't all. ICICI has already invested over Rs 120 crore (Rs 1.2 billion) in seven retailing companies ranging from apparel, grocery stores, food chains and lifestyle stores.

It is reckoned that ICICI accounts for 90 per cent of the venture capital money that has gone into retailing. Also, it has floated a Rs 600 crore (Rs 6 billion) India Advantage Fund, which will focus investments in sunrise industries, which will include matured retail companies.

What does ICICI look for when investing in the retail sector? It checks for four criteria: is the company run efficiently; what's the format (is it a mall or a fast food convenience outlet); is the consumer ready to shift from the unorganised sector to organised retailing; Finally, does the company have the ability to build a brand.

Says Desphande: "Apparel retailing has been the first category to move into organised retailing and we have invested in  companies like Pantaloons, Shoppers Stop (where garments and ready-to-wear constitute a large portion) and Indus Clothing."

ICICI also invests in companies which are frontrunners. That's why it invested in Trinethra, Hyderabad's leading supermarket chain.

ICICI executives say that Trinethra is already making profits at a turnover of Rs 80 crore (Rs 800 million) through its 65 outlets. That's because it has large economies of scale, runs on low costs and is limited to a regional market.

But novel niches and new concepts have also caught ICICI Venture's fancy. ICICI, for instance, has funded Mars Restaurants which has developed a range of strong brands like Dosa Diner (south Indian), Pasta Bar (continental), Not Just Jazz (casual dining) and Birdy's (pastries and cakes) and Roti (north Indian).

What returns does ICICI expect? Deshpande expects a 20 per cent return and hopes to exit either through an IPO or a strategic sale after a four to five year period.

It always insists on at least a 10 per cent stake. Says Deshpande: "Typically our stake is in the range of 10 per cent to 30 per cent. We actively support these companies by participating in their board."

ICICI predicts that the share of organised retail will go up from around 2.5 per cent currently to at least 5 per cent by 2005. And if that happens it could reap the advantage of being a first mover in a fast-moving arena.

Additional reporting from Shuchi Bansal


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