| India as an Innovation Lab|
The old paradigm was think global, act local. At Hindustan Unilever, we've turned it on its head. We think local - and act global.
Nitin Paranjpe, CEO, Hindustan Unilever
In 1995, McDonald's entered the country by setting up joint ventures with two partners-turned-franchisees, Hardcastle Restaurants and Connaught Plaza Restaurants. McDonald's India has been growing fast and plans to expand its outlets from 275 in 2012 to 500 by 2015. "How did you pull that off?" I asked Amit Jatia, the forty-year-old entrepreneur who manages the franchise in southern and western India. He replied: "Glocalization, in a word. We couldn't cut and paste business models from other countries, but we needed to bring the McDonald's brand and its expertise in supply chains and restaurant operations to India, and combine it with local requirements and culture."
At the outset, the Indian partners had to convince McDonald's that to succeed in India, it would need an entirely different menu, low price points, and a highly localized business model. Customer feedback had shown that many Indians would not even enter a restaurant that served beef or pork. India therefore became the first country in the world where McDonald's does not offer beef or pork items. Other than fries, beverages, the McChicken sandwich, and the Filet-O-Fish, there is little in common between a McDonald's in Bangalore and one in Boston.
It took McDonald's and its partners five years to figure out a customer value proposition and business model that would deliver results in India. Called "branded affordability," the strategy is to keep prices low while making profits. McDonald's introduced a Happy Price Menu for Rs 20 (around $0.40) and refined its Indian business model to make profits on it. Since McDonald's is a high-volume, lowmargin business, both Jatia and Vikram Bakshi, the franchisee for north and east India, figured out that at that price sales would have to be three to four times US store sales to break even. Since that was not likely initially, they had to find a way to reduce costs while maintaining global food safety norms and customer service standards.
McDonald's identified the must-haves in India as safe food and one-minute service. Everything else was only nice to have, so they eliminated most of it. For instance, the Indian franchisees localised most of the equipment, except for a few key pieces. For instance, McDonald's specifies foodgrade stainless steel under the counters, but the India team, realising that was not critical for food safety, replaced it with less expensive material. The team found a lot of excess equipment, such as large vats, in the standard store design, so it developed three formats based on store size. Such tweaks together brought down the investment in each store by between 30 per cent and 50 per cent.
The India team also brought down taxes in several ways. For instance, branded fries attract a 20 per cent excise duty, but McDonald's India saved that by removing the supplier's name. Similarly, it found that transporting chopped lettuce and milkshake mix attracted duties from the city government, but lettuce heads and milk didn't do so. That seemed illogical, so it lobbied for change. Finding utility costs high in India, the company worked with IIT Bombay, one of India's top engineering colleges, to design a system that recovers waste heat to boil water and to reduce the power consumed by air conditioners in each outlet by 25 per cent. Electronic ballast for all lighting and LED signs reduced costs further. All this saved about 20 per cent to 25 per cent in power costs. Such systematic examination of costs allowed the Indian partners to become profitable despite the low prices they charge Indian consumers.
McDonald's success is also due to its supply chain. It spent six years and around $90 million (around Rs 450 crore) to set up a food chain in India well before opening its first restaurant. Creating the cold chain involved the import of state-of-the-art food processing technology from its international suppliers. It has brought about major changes in vegetable farming, benefitting India's farmers.
McDonald's was fantastic in transferring knowhow," says Smita Jatia, Amit's wife and the managing director of Hardcastle Restaurants. To learn the McDonald's way, the start-up team went through a month-long training program in Indonesia. A global team then flew to India to figure out every aspect of the business. McDonald's India hired people with high school degrees and invested millions of dollars in training them in Chicago and Asia. That investment has paid off in commitment and performance.
The final element of McDonald's success came from investing heavily in creating a trusted and aspirational brand. The challenge was to change consumer perceptions from American don't-know-what-to-expect discomfort to Indian values, families, culture, and comfort. In short, it's a friendly place where families can enjoy themselves and feel they are having a special time. The team designed everything around this - from the menu to the layout and decor.
Even with rising prosperity, most products and services from the developed world cater only to the top 10 per cent of the developing world - the superpremium and premium segments. Those goods and services are a stretch for the aspiring middle class and are out of the reach of millions of poor people. However, the big opportunity for companies Indian and Western isn't the bottom of the pyramid, but the rapidly growing middle market, which could be nearly $1 trillion in size by 2020. This segment is very demanding and driven by the desire for value for money. Middle-market customers have limited disposable incomes but big aspirations; they will not accept products that compromise quality or functionality. That's true not just of cellphones, fast foods, and shampoos but of trucks and tractors, too.
Reprinted by permission of Harvard Business Review Press. Excerpted from Conquering the Chaos: Win in India, Win Everywhere. Copyright»2013 Harvard Business School Publishing Corporation. All rights reserved.