McDonald’s India Case Study

1. Executive Summary

This case study analysis was assigned to us to examine why McDonald’s bold expansion to Tier II cities of India had not been followed.

Since its entry to the Indian market in 1995, McDonald’s had grown steadily up to 2008. In fact, it had achieved a strong market share (16%) in key markets such as Delhi and other Tier I cities even with the presence of its key competitors such as Pizza Hut, Domino’s and Nirula’s, a 72 year-old indigenous competitor who outperformed all MNCs in Delhi and neighboring states serving pizzas, burgers, ice cream and a variety of ethnic Indian dishes.

By 2009, however, it was clear that McDonald’s had not always followed up on its bold expansion plans, specifically on Tier II cities. McDonald’s seemed to be very cautious about the prospects offered by this cities. In April 2006, the company said that it would invest roughly Rs 4 billion in expanding into the eastern part of the country and setting up 25 outlets. The expansion had not been  realized either.

The company opened its first outlet in the southern city of Chennai in April 2008, and had plans to open 39 outlets during that year. However, the actual progress up to March 2009 was slower than planned. Although the company have expected to have a total of 170 outlets by the end of 2008, the actual numbers fell short of the plans.

Further research reveal that McDonald’s key rivals, such as Domino’s and Pizza Hut, hoped to achieve growth by penetrating India’s Tier II and Tier III cities. Furthermore, Nirula’s new owner had ambitious expansion plans and its CEO and Managing Director, Samir Kukreja commented “ The Tier III markets are still untapped and provide a great opportunity for the QSR format.”

McDonald’s expansion strategy carried an element of competitive risk. If its competitors succeeded in penetrating the Tier II and Tier II cities, McDonald’s would need to catch up at a later and may lag well behind its main rivals.

It is recommended:

• That McDonald’s take immediate measures to penetrate India’s Tier II and Tier III cities.
• That McDonald’s bring its experience in menu innovations, better understanding of consumers’ price sensitivities, economies of scale and strong back-end and supply-chain / logistic capabilities in Tier II and Tier III cities.
• That McDonald’s could focus on variable pricing of their food products, based on the profitability in that particular region.
• That McDonald’s, besides enhancing its delivery system, bet on alternative, healthy offerings in the face of competition.

1. Statement of the Problem

In this particular case, the prevailing problem is that McDonald’ s bold expansion plans to Tier II and Tier III cities of India had not been followed. Expansion plans to these cities are either not realized or fell short in numbers.

Upon further study of the case, this problem may be caused by:

• McDonald’s very cautious approach about the prospects offered by this cities.

1. Cause of the Problem

McDonald’s very cautious approach about the prospects offered by this cities was clearly revealed by  McDonald’s India ( northern and western region) Managing Director, Vikram Bakshi, when he said: “ We have learned from our experience in the past that expanding too quickly in these markets is not the right approach.” He argued while such approach was appropriate for some cities, other cities might not be ready. He further said: “ Our current focus is to continue to increase our penetration in 11 cities where we operate. We will continue to open on high streets and malls among others.”

These statements from a high ranking manager carried a competitive risk. Mr. Bakshi seemed not to be aggressive enough to pursue its plans to expand to Tier II and Tier III cities.

Due to the overcrowding of QSR stores in tier I cities, many QSR brands are now moving to tier II and tier III cities due to low competition and increasing demand. Though a consumer is spending more at a QSR outlet in tier I cities like Mumbai, Delhi, and Bangalore, the growth in spending is more in tier II and tier III cities.