Well recognized for the consistency of taste & quality of popular products including burgers and french-fries across India as well as the globe, little is known about the processes and planning that has made such consistency a daily chore at McDonald's. It boasts of a worldwide network of 33,000 restaurants in 118 countries serving more than 67 million customers each day. Within India, it operates a franchisee model through Hardcastle Restaurants and Connaught Plaza under which it has 250 restaurants serving more than 6.5 lakh customers daily.

Such a scale and consistency requires meticulous planning and McDonald's spent its first 6 years (1996-2002) in India to understand consumers' needs and preferences, adapted its menu offering to suit local conditions and established the backend network that ensures unhindered availability and consistency of food products. These are the critical success factors and have helped McDonalds in being a successful restaurant chain across every country it operates. Below are the details of each of them.

Establishing the backend network (1996-2002)

Even before the company entered India, it was working with local suppliers and farmers to source its requirements. During initial 6 years, it spent around INR350cr to set up the food supply chain even before opening its first restaurant in the country. It spent years in developing its unique cold chain management system that now enables it to cut down on its operational wastage and retain the freshness and nutritional value of raw and processed food products. This immensely benefited the farmers at one end and enabled customers to get the highest quality food products, absolutely fresh and at a great value. Below is the illustration of the depth of planning and investments incurred in ensuring the perfect burger every time a customer demands for it.

Nurturing suppliers to ensure the perfect burger

Glocalisation - global menu modified to suit local needs

McDonalds has a great respect for local culture. Considering the religious sentiments of Hindus & Muslims, there are no beef or pork items on menu. There are separate kitchens, utensils and equipment for vegetarian and non-vegetarian food items and such segregation is maintained throughout the entire cycle of procurement, cooking and serving. For veggies, ingredients used are completely vegetarian - eggless and fully vegetarian mayonnaise, vegetable oil being used for cooking etc.

Menu is especially designed to cater to local tastes and preferences. McDonalds has moved from Global favourite 'Big Mac' to chicken burger called 'Maharaja Mac', McAloo Tikki for India. Attractive price points and quick delivery is McDonald’s way to cater to the growing fast food generation in India. Once its basic menu was well accepted by the local population, it has also launched a number of premium products - McSpicy Burger and the McSpicy Wrap. A point to note is that McAloo Tikki burger was available for Rs22 when it was launched in 2002 and continues to be available at Rs25 as on August 2013.
 

Strong growth & profitability - the next stage

Completing about 17 years in India, McDonalds has now reached a stage where its earnings are about to explode. A healthy mix of same store sales growth (18% CAGR over FY10-12), opening of new stores (73 new outlets over FY10-12), launch of new products to cater to the Indian palate will help in McDonalds India grow profitably over next five years.

Westlife Development, the parent company of Hardcastle Restaurants (owns the McDonalds franchisee for West & South India) is listed on the stock exchanges. It is expected to post profits of Rs90cr in FY15E and currently has a market capitalization of Rs3,100cr. While it is still not very expensive, the low liquidity in the stock makes it a difficult investment.
 

What opportunity does it offer to the investors?

The Quick Service Restaurant (QSR) industry in India is estimated to be over Rs. 20 billion growing at a CAGR of around 40%. India increasing urbanisation rate, wage growth of 12-15% CAGR and increasing working class and youngsters will drive domestic consumption. Companies that are able to build scalable business model with hugely benefit from it. In the listed space the prominent names in the QSR space are Westlife Development (McDonalds), Jubilant Foodworks (Dominos) and Specialty Restaurants (Mainland China).

Although none of them are under our recommended list currently, they are worthwhile businesses and can offer investment opportunities in times to come. We at Prospero Tree would bring such opportunities when the opportunity becomes compelling.

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