Bigger bites

How McDonald's is trying to get more out of its stores.

It’s nine in the morning and the only sign of life is the McDonald’s at the corner. All the other showrooms in the Noida market are shut and the parking lots are empty. But Nazir, who stands behind a counter at McDonald’s, has already served customers for a couple of hours. Short and slight of frame, he dexterously guides customers through the new breakfast menu which is on offer till 11:00 am, shouts orders, counts change and fetches the grub.

In the dining area upstairs, quite a few of the 20-odd tables are occupied. There’s a family of four (it’s Saturday), a young man in a hurry to finish his meal and at least four young couples exchanging sweet nothings over breakfast (it’s Valentine’s Day). The wedge between the buns tastes like kebab and the one in the vegetarian option is like idli. “There is hardly any time to rest,” says Nazir.

What Nazir means is that the new breakfast on offer at McDonald’s is a hit, though he has to report for duty a couple of hours earlier. What he might not know is that the store’s business is up 8 per cent ever since it included breakfast on its menu in December last year. It is a pilot that McDonald’s will run right through the year. If successful, its other stores in the country too will have special breakfast hours every morning.

The world’s most ubiquitous chain of quick-service restaurants is trying every trick in the trade to increase its business in India. With an average of 2,750 walk-ins in each of the 155 stores, India counts itself amongst the top 10 per cent of the busiest markets for McDonald’s anywhere in the world. But the ticket size is small — in low triple digits, though it has improved from double-digit four to five years ago. And a quarter of the sales are at the lowest price point of Rs 20. In terms of earnings, therefore, India is at the bottom of the heap.

Some observers say McDonald’s has fallen into the Rs-20 trap. Having launched several campaigns highlighting this price, it cannot vacate the spot. In another way, the low prices have become McDonald’s’ strength in the current business environment as people want value for money in food as well.

So, while expensive restaurants have seen a slump in business, McDonald’s’ grew 14 per cent in the last quarter (October-December 2008). “January was up 20 per cent,” says Vikram Bakshi, managing director, McDonald’s India (northern and eastern region).

McDonald’s has two joint ventures in India: One with Bakshi (Connaught Plaza Restaurants) for the North and East and another with Amit Jatia (Hardcastle Restaurants) for the West and South. The two companies collaborate on marketing (single creative and media buying agency), menu and supply chain management.

Through the two companies, McDonald’s has launched initiatives to improve sales, without stretching the infrastructure too much. “Having created a strong brand, McDonald’s can now monetise the time and footfalls from its stores by increasing both the value purchase and incidence of purchase,” says retail consultancy Technopak Associate Vice-president Purnendu Kumar.

Kiosks at stores
In 2003, McDonald’s opened its first dessert kiosk at Faridabad in the outskirts of Delhi. It was meant for customers in a hurry. Since then, McDonald’s has opened ice-cream and beverage kiosks at 23 stores. These are right at the entrance. The customer doesn’t have to get in to the regular queue if all he wants is an ice-cream or a beverage.

According to Bakshi, these kiosks have added 10 per cent to the sales of the stores. The enhanced cost works out to 10-12 per cent of the total cost. Six years into the initiative, Bakshi needs more sales from the kiosks if the initiative has to fetch him profits.

Bakshi says he is in negotiations with some banks to set up ATMs in the McDonald’s stores and charge them a monthly rent for it. This will add another stream of revenue. Already, about half-a-dozen McDonald’s stores in the country have these machines. Bakshi says all new stores in the future will necessarily have a slot for an ATM. By 2010, there will be 40 new McDonald’s stores in the country, which will require an investment of almost Rs 150 crore.

Home delivery
In 2004, McDonald’s introduced home delivery for the first time in New Delhi. Customers wanted the stores to deliver at home, like the other quick-service restaurants in the country. Heavy traffic and parking woes have made home delivery a runaway success in urban India. The company saw this as an opportunity to augment its revenues at an incremental cost. Stores could easily be leveraged to deliver food at homes in the neighbourhood.

Thus was born McDonald’s Delivery Service or simply McDelivery — customers could order on the phone and the meal would be delivered within 30 months. In the congested lanes of Chandni Chowk in old Delhi, the delivery is done on bicycles. For the record, McDonald’s does home delivery only in Asia.

According to Bakshi, stores that do home delivery have seen sales grow as much as 12 per cent. “Overall, this will raise our turnover 6 per cent,” says he. At the same time, it has enhanced the costs of the 30 stores that offer this service by 3-5 per cent — additional equipment, packages, delivery boys and their scooters. In addition, McDonald’s now runs a call centre for this purpose. Still, Bakshi admits that profits have started flowing in. “We have broken even now,” says he.

However, the model is not rapidly scalable, say sector experts. There are practical problems like finding a parking slot next to the store. Bakshi is only too aware of it and, therefore, says home delivery cannot be extended to more than four or five stores in a year. Also, he is reluctant to start home delivery in a city unless he has enough stores there. In Delhi, for instance, Bakshi feels the 34 McDonald’s cover just a third of the potential market (socio-economic category B and above).

Extra hours
About six months back, restaurants got a concession from the Delhi government — it allowed them to stay open till 1:00 pm. This was a result of some intensive lobbying by the Hotels and Restaurants Association of India as well as the National Restaurants Association of India (McDonald’s is a member of both). “We argued if pubs could be allowed to open till late, why not restaurants,” says Bakshi.

What he had in mind of course were people who work late, especially the young crowd of call centres. As a result, McDonald’s stores in Delhi now roll down their shutters at 1:00 am, which gives them two additional hours. That nets the stores almost 4 per cent more revenue. The additional cost of running the two stores is minimal — less than 1 per cent as money needs to be spent only on the crew and the utilities. Next on Bakshi’s agenda is to get a similar concession from other states. (The time at which shops open and shut is rigorously governed by the states.) Some stores, especially those on highways or at call-centre hubs, he wants to run round the clock.

Breakfast on the menu
Last year, McDonald’s carried out a research on breakfast habits in large Indian cities. The findings were startling: 18 per cent people in cities prefer eating out of home, driven by convenience and variety. A closer scrutiny showed that out-of-home breakfast in Mumbai was high during the whole week (21 per cent), in Delhi it peaked during weekends.

In December 2008, McDonald’s decided to run a pilot at five stores in Mumbai and three in the National Capital Region: One in downtown New Delhi with great many offices around it, another in a Noida market close to residential colonies and the third on the highway to Jaipur.

Next, the menu had to be fixed. Globally, breakfast is big business for McDonald’s. In Europe, for instance, it began offering breakfast in the 1980s. Now, it accounts for 25 per cent of its turnover. In South East Asia, breakfast fetches McDonald’s 12-15 per cent of its total revenue.

Clearly, there was an international menu that could be transported to India. Only, it had to be tweaked to Indian tastes. Thus, the vegetarian wedge (80 per cent of McDonald’s sale in India is sandwiches) was given the idli treatment and the non-vegetarian wedge made to taste like a kebab. For the unique Indian category of “eggitarians,” it came out with a special egg and cheese sandwich. In the past too, McDonald’s has customised its menu for India with products like McAloo tikki and McVeggie. Traditional Indian fare like paratha and samosa were kept out of the menu. “Our customers don’t want Indian stuff. They want the international McDonald’s format with local taste,” says Bakshi.

The next job was to fix the prices. The research had shown that consumers spend up to Rs 50 per person on breakfast. So, they would not mind paying a little more, up to Rs 65, for eating out. The price of the breakfast menu was thus set between Rs 20 and Rs 99. Opening the stores early was not an issue as most states allow shops to open as early as 6:00 am.

The initial results, claims Bakshi, are better than expected. While the downtown store’s sales are up 10 per cent, Noida sales have risen 8 per cent and the highway store has seen a jump of over 20 per cent. He now plans to run the pilot in a fourth store in south Delhi.

In the initial years, Bakshi is hopeful of adding 10-12 per cent to the topline of the stores that join the breakfast bandwagon. The additional cost of offering breakfast is 5 per cent. “Apart from utilities and people, we need special machines to make these dishes,” says Bakshi. Even before the pilot gets over, Bakshi plans to extend the option to other stores as well. Standalone stores should not pose a problem, but how will he manage stores inside malls which open later in the day? Bakshi says he had anticipated the problem and has therefore taken space close to the exit of the malls. “We are in talks with them so that the utilities like air-conditioning can be activated only for us during the early hours,” says he.

Backend challenge
It is still early days to see if the breakfast initiative will pay good dividends. In the past, not all plans made by McDonald’s have met with success. It had initiated negotiation with the Railways to serve its fare in some trains. The problem was, McDonald’s grub has to be eaten within 10 minutes of preparation. The same problem scuttled its similar offer to low-cost carriers. Some consolation for Bakshi, there is a McDonald’s at the Delhi airport and the Old Delhi Railway Station is likely to have one soon.

It needs to make money on these investments. Both the McDonald’s joint ventures are closely held and their profit & loss statements are privately circulated. But Bakshi admits that McDonald’s broke even in India only two years ago, though it opened its first store in India way back in 1996. (At that time, it was the first McDonald’s anywhere in the world without beef on its menu.)

McDonald’s has gone after costs with a hatchet. Salaries as well as new appointments have been frozen. International travel has been cut 85 per cent, domestic travel 50 per cent. Phone allowances have been cut by half. So much so, paper cups used at water dispensers have been replaced with glass tumblers. Within stores, wastage of raw material and finished products has been brought down from 2 per cent to 1 per cent, which is the global norm for McDonald’s.

To make sure that the vendors get sizeable orders, on which prices can be negotiated better, McDonald’s has restricted their numbers. About 90 per cent of the supplies come from 27 vendors.

In 2007 and 2008, when commodity prices shot up globally, Bakshi offered the vendors that the extra price could be spread over three years. While this stopped him from bleeding during those years, it has kept him from dropping prices now when commodity prices have tumbled. McDonald’s in China, on the other hand, has slashed prices. “The initial numbers show we are gaining. Let’s see how deep is the recession,” says he.

Also, to get over high real estate rentals in the past, McDonald’s locked in landlords with a revenue share of less than 10 per cent for 25 years and more. Almost 90 per cent of its stores have followed this model. Real estate experts wonder if this is the right strategy to follow now that rentals have crashed.

“Adding a breakfast menu, longer hours of service, kiosks and so on are all questions of leveraging the same area and rentals for deeper bill size. For a deeper bill size, one needs greater involvement with the consumer,” says brand domain expert, business strategy specialist and Harish Bijoor Consults Inc CEO Harish Bijoor. That is the next challenge for McDonald’s.