The recent debate in Parliament on foreign direct investment in multi-brand retail has been interesting, to say the least. The highlight was that McDonald’s found itself in Sushma Swaraj’s line of fire. The fast-food retailer, she thundered, was importing basic inputs like potatoes and was procuring little from Indian farmers. “Ask McDonald’s about their fries. They never buy potatoes from local Indian farmers, saying the potatoes are too small here,” she said. Her argument was that Indian farmers stand to gain little from the entry of large transnational retailers like Walmart — they will import all their stuff from their existing low-cost suppliers spread across the world, mostly in China.
This is the time to analyse the French fries served by McDonald’s in India. French fries, and therefore potatoes, are integral to McDonald’s business. Till recently, it was found that as many as 30 per cent of the people visited McDonald’s only for its French fries. Naturally, the company takes it seriously. (Unlike our leaders, McDonald’s is one company that has all data at its fingertips all the time: footfalls, ticket sizes, impact on business of menu change, et cetera.) Thus, 40 per cent of the fries in a pack should be above four inches; another 40 per cent should be between four and two inches; and only 20 per cent can be below two inches. If the store manager finds that the consignment doesn’t fit this description, he is entitled to reject it.
It’s a fact that when McDonald’s came to India in 1996, it had a problem with locally produced potatoes. Indian potatoes had high moisture (85 to 88 per cent) and low solid content. The problem with such potatoes was that they soaked up a lot of oil while frying. This made them lumpy, not crisp. The sugar content was high in the potatoes; the sugar caramelised upon frying and gave the fries a brownish tinge. Lastly, Indian potatoes were short and round, where McDonald’s was looking for big and oblong potatoes: the ideal size is four to six inches and the ideal weight is 200 to 250 grammes. So McDonald’s sought the government’s permission to import potatoes and promised to develop the local crop in the near future.
In 1997, McDonald’s asked McCain Foods, its global partner, for help. McCain Foods sent two agronomists to India. The right varieties of potatoes were identified, and the saplings were transported to the Lahaul region of Himachal Pradesh. The seeds derived from these saplings were given to farmers in Gujarat. The cultivation of potatoes requires ample sunlight, cool nights and porous soil. This makes it a winter crop. Uttar Pradesh, Punjab and West Bengal accounted for almost 90 per cent of the country’s output. McCain chose Gujarat because it does not get any rain in the winters. The farmers were advised to use drip irrigation and not flood their fields with water. This was done to reduce the moisture content in the potatoes.
The yield improved, farmers began to grow potatoes in large numbers, and McCain set up a processing plant at Mehsana in Gujarat with an investment of $25 million. This unit meets McDonald’s entire demand for French fries and potatoes. It does not import potatoes. That’s not all. McDonald’s buys fresh lettuce from Pune, Delhi, Nainital and Ooty; cheese from Dynamix Dairies at Baramati in Maharashtra; fresh buns and sauce from Mrs Bector’s Foods at Phillaur in Punjab and Khopoli in Maharashtra; chicken and vegetable patties from Vista Processed Foods at Taloja in Maharashtra; and dairy products from Amrit Food in Ghaziabad, Uttar Pradesh.
McDonald’s had got East Balt Commissary of Chicago, which supplied buns to the first McDonald’s outlet, over to India to train the people at Mrs Bector’s. It also brought Schreiber Foods International, its global supplier of sliced cheese, in touch with Dynamix Dairies. After that, many other food companies have started to do business with Dynamix Dairies. McDonald’s prices in India are amongst the lowest in the world. Its India operations took more than 10 years to break even.
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Ms Swaraj’s next target was PepsiCo. The beverage and snack maker, she said, had reneged on its promise to buy from local farmers. “Pepsi promised to buy potatoes and tomatoes from farmers [in Punjab], but backed out later,” she said. In response, the company said that it buys all its potatoes locally. In fact, its potato procurement has more than doubled in the last five years.
The treasury benches did little better. Replying to Ms Swaraj, Information Technology Minister Kapil Sibal said the fear of multinational retailers was blown out of proportion; had not, he asked, Kentucky Fried Chicken been made to bite the dust by the dhabas? “Many said KFC will drive the dhabas out of the market. [The] dhabas have driven out KFC,” he said. The facts are different. KFC has 221 outlets in the country and wants to raise the number to 500 by 2015, it has been reported. Mr Sibal was perhaps right when he said there won’t be a mushrooming of Walmart stores overnight, thanks to the sky-high real estate prices. The large-format stores will become unviable even before they start. There could be another reason, as Business Standard reported: of the 53 cities with a population of a million or more where Walmart and others can go, only 16 fall in states that are in favour of opening up the sector.