THE CASE OF McDONALDS AT Rs.

20
AN ECONOMIC ANALYSIS

For
Prof. Debjani Ghose

LALIT MOHAN THAPAR SCHOOL OF MANAGEMENT,|

THAPAR UNIVERSITY, PATIALA.
November 2008
THE CASE OF Mc DONALDS AT Rs.20
AN ECONOMIC ANALYSIS

By 50802013 Bhavdeep Singh Anand

50802015 Divya Sharma
50802019 Gurinder Singh
50802024 Harman Preet Singh
50802026 Hiten Gupta
50702506 Hema Mittal

For
Prof. Debjani Ghose

LALIT MOHAN THAPAR SCHOOL OF MANAGEMENT,|

THAPAR UNIVERSITY, PATIALA.
November 2008
 APPENDIX I
Introduction to McDonald
In October 1996, McDonald’s opened its first Indian outlet in Basant Lok (Vasant
Vihar), an affluent residential colony in India’s capital, New Delhi. As of November
2008, McDonald’s has opened a total of 132 restaurants. While McDonald’s opened
34 restaurants in five years (by 2001), it has added 98 more restaurants within seven
years (by 2008). Although the initial scenes of crowds lining up for days outside the
McDonald’s restaurants in Delhi and Mumbai are no longer seen, Indian consumer
response to McDonald’s products still remains very strong.
McDonald has established close relationship with local suppliers who provide them
with the highest quality, freshest ingredients to make their products. All of
McDonald’s India products are prepared using the most current state-of-the-art
cooking equipment to ensure quality and safety. On an average 20 different quality
checks are carried out before any product is served to their customers.
The McDonald’s we visited in Chandigarh was packed with young people, children,
and young parents enjoying ice creams, spicy potato wedges (instead of the usual
french fries), and Happy Meals. Its growth is nevertheless impressive. How did
McDonald’s do it? How did a hamburger chain become so prominent in a cultural
zone dominated by non-beef, non-pork, vegetarian, and regional foods such as chola
bhatura, kababs, bhaji, samosa, dosa, vada, sambar, bhelpuri, and rice? The answer to
this question lies in McDonald’s carefully planned entry and expansion strategy in
accordance with India’s changing political, economic, and cultural landscape in the
1990s.

Indian Market Spending

Much of the McDonald’s growth in India can be attributed to its pricing strategy.
Since, on an average, each household spends about 50% of income on food and
beverages in India, food prices are always a sensitive issue. Even the Indian middle
class, despite their much improved income level, remains very price sensitive.
Accordingly, McDonald’s has pursued what Amit Jatia, the company’s managing
director in the Western region, calls “purchasing power pricing” or the customer’s
ability to pay. The adoption of such a pricing strategy in India offers a useful
country-specific insight on possible price differences of the company’s products on
the basis of purchasing power parity (PPP) calculations across countries. See Exhibit
No.1.
 APPENDIX – II

Exhibit No.1
 MCDONALD’S IN INDIA
Happy Price Menu @ Rs.20

Introduction
The McAloo Tikki Burger

With an ambition to penetrate deeper into the new and existing markets, the forever
young brand McDonald’s introduced ‘Happy Price Menu’ at Rs.20/- in the year 2004
in India. This ‘value for money’ proposition has been well accepted by the discerning
customers. The communication towards this proposition has graduated over the
years, but the Happy Price Menu platform has been consistent.

In the pursuit of reinforcing its value proposition, McDonald’s India has unveiled its
new campaign titled “Aap ke Zamaane Mein, Baap Ke Zamaane Ke Daam” for its
Happy Price Menu. The campaign led by the television commercials shot in three
renditions showcase Bollywood’s famous dad-son duos where it accentuates the
message of enjoying the tongue tingling taste of the Happy Price Menu comprising of
following items, which is comparable to the yester years.

• McAloo Tikki™ Burger

• Pizza McPuff™
• Ice Tea
• Small Soft Serve

Irrespective of the variance in prices of its key ingredients, the Happy Price Menu has
been retained at Rs.20/- price point for the last 4 years.
 UTILITY
Utility is the power to fulfill psychic satisfaction of a human want. Any good which
has the power to satisfy the human want by its consumption is said to have utility.
Thus utility is psychological concept.
Capitalists believe that utility though a psychological process was measureable. They
proposed utility could be measured indirectly by finding out how much a man is able
to sacrifice in order to get one unit of a certain thing. Thus utility could be measured
either in:
• Money
• Goods
• Numbers

The Concept of Total and Marginal Utility

Total utility obtained is measured as total satisfaction enjoyed from the consumption
of burger. If we consider utility of multiple burgers i.e. a couple of burgers rather
than a single burger then Total Utility will be total satisfaction obtained from the
consumption of the burgers.
TU = Sum of satisfactions from each burger
= ∑ S1 + S2 + S3 + . . . +Sn
Marginal Utility, on the other hand is the relative measure of the satisfaction on each
consecutive consumption.

No.of Total Marginal

Burgers Utility Utility
1 80 80
2 150 70
3 210 60
4 260 50
5 290 30
6 305 15
7 310 5
8 300 -10
9 290 -10

* Hypothetical assumption by
presenters
Observations
Here increasing Burgers will decrease the utile. Therefore as more and more
commodities consumed continuously the utility derives steadily and monotonically
decreasing. Therefore we have total greater amount of satisfaction. However with
each burger consumed satisfaction derived is lesser and lesser.

DEMAND FUNCTIONS
Demand is the variation in the purchasing of given commodity (or service) which
consumers would buy in one market in a given period of time at various prices or at
various incomes or at various prices related good.

Demand = Fn (price, consumer taste, hygiene, site, conduct)

Price
With the same price since last 6yrs, it has contributed to the foot-fall to McDonald’s
for Burger, the dedicated customers are still going to McDonald’s.

Consumer Taste
McDonald’s has modified the taste of its products according to the Taste of the Indian
Tongue.

Hygiene:
Open Kitchen, Clean Surroundings, Frequent Cleaning, Gloved Hands & Cooking
Masks are few to mention practices McDonald’s has incorporated to increase its head
counts

LOCATION:
It plays an important role in developing the business strategy. Apart from
economically & logistically feasible location, possibility of Drive-Thru is a major
advantage.

CONDUCT:
A cheerful wish to the customer is their way of starting the business. Even the Drive-
Thru has a trained executive for customer interaction. A delighted customer is a free
promotion,
 DEMAND
w.r.t Price

Law of Demand
When the price of a good rises, people buy less of a good. This is called the “law of
demand” – higher prices lead to a lower quantity demanded, all else equal.

As per our survey among, we got figures as below:

PRICE DEMAND
25 7
20 11
15 12

* Presenter’s Data: survey results from 18 college going

teenagers

Observations
• As price falls more quantity is purchased because Burgers being cheaper.
• At peak price only 7 will purchase burger out of 18.

Demand Curve
 Presenters’ Data: Survey on 18 consumers.

To satisfy the law of demand the slope of the demand operation must be negative so
that there is an inverse relationship between price and quantity demanded. This is
negative relationship between price and rate of demand is known as Demand
Function.

Factors of Demand:
__ __ __ __ __
D = f (p, PS, PC, Y, T, W)

Where:
PS: - Price of Substitutes
PC: - Price of Complements
Y: - Income of the Consumer
T: - Tastes of the Consumer
W: - Wealth of the Consumer
p :- Own price of the Good

As all functions except ‘price of our good’ are not under our control, hence, are
ignored
Therefore D = f (p)

Elasticity of Demand
Elasticity of demand measures by virtue by which demand stretches or contracts
under the presence of the change in price. The term elasticity expresses the degree of
correlation between demand and price. It is the rate at which Quantity demanded
varies with change in price. The concept of elasticity is used to measure the
responsiveness of demand to changing prices.
Elasticity of demand (ED) = - Percentage change in Quantity demand
Percentage change in Price

Observations

• When the price falls from 20 to 15, when elasticity of demand = 0.2
Therefore, the demand is relatively inelastic.
• When the price increases from 20 to 25, when elasticity of demand = 0.8
the demand is relatively elastic
 PRODUCTION FUNCTION
McDonald’s purchases raw vegetables and other raw materials from its fixed, pre-
defined suppliers only, therefore by increasing capital and labor, their production will
increase proportionately.

Q = KaLb (Cobb-Douglas Production Function)

Where:

• K {Capital}
• L {Labor}
• a, b {Parameters of Production}
• (a+b) = 1 {Constant Returns to Scale}

ECONOMY OF SCALE
As the output from any fixed setup increases, it leads to reduction in the per unit cost
of the product. Economy of Scales refers to the dealing in the bulk ordering /
production.
Economies of Scale bring advantages to McDonald's.
McDonald’s offers relatively uniform menu that include well- recognized items such
as the Big Mac, McAloo Tikki Burger, French Fries etc. These items are easily mass
produced, so the cost of making each one is small. Consumers’ pervasive familiarity
with these items also creates stability in sales, which ensures revenues are consistent
year-round and it always sells a certain volume of its highest profile menu items.
 PRODUCTION COMPARISON
The scale of production provides McDonald’s a competitive edge. It enables the firm
to enjoy the low Raw Material cost.
For the analysis, relative stats were taken from local market:

INGREDIENTS Price (in Rs. per burger)

Bread Buns 2.50
Potato Patties 7.50
Mayonnaise 1.50
Salad 0.50
Paper Wrap, Napkin 1.00
Ketchup Pouch 1.00
Total ~14.00
* Presenter’s Data: Average pricing of various burger joints across Patiala.

* Presenter’s Data: Approximate costing of the McDonalds Aloo Tikki Burger.

 SUPPLY
Keeping the price competitive, McDonald’s is planning to extend its supplier base to
the local areas. During their launch in India, there were limited distant suppliers, as
per the demand. Advancing in time, the demand rise, so did the procurement costs. It
was pretty desired to develop suppliers’ base to the nearest local markets.

Sources of Basic Ingredients:

Buns: Shah Bector & Sons, Khopoli, Maharashtra and Cremica, Ludhiana
Veg. Patty: Kitran Foods, Tajola, Maharashtra
(fresh peas, carrots, green beans, red capsicum, potatoes and rice)
Spl. Sauce: Quaker Cremica, Phillaur, Punjab
(special vegetarian eggless sauce)
Veg. Salad: State Markets
 COSTING
Opportunity Costs: The initial openings of McDonald’s outlets in Delhi and Mumbai
were driven by affordability and brand recognition factors. Given the metropolitan
culture and wide Western exposure of these two large cities, where most of India’s
rich and upper middle-class population live and are aware of McDonald’s foods, it
was logical for the company to open its initial outlets in these two cities. Besides, the
inhabitants of both Mumbai and Delhi love to experiment with a wide variety of
foods. In addition, McDonald’s has two large distribution centers in these two Metros
and later the brand became known in every part of the country. Thus the opportunity
costs in expansion were very less.

There are quite a few terms relating to cost. We will consider the following seven
terms:

• Marginal Cost
• Total Cost
• Fixed Cost
• Total Variable Cost
• Average Total Cost
• Average Fixed Cost
• Average Variable Cost

To compute these seven figures, the required data is written below in tabular form:

Q TC MC T/FC TVC ATC AFC AVC

0 130 0 130 0 0 0 0
1 250 120 130 120 250 130 120
2 390 140 130 260 195 65 130
3 600 210 130 470 200 43.33 156.67
4 840 240 130 710 210 32.5 177.50
5 1200 360 130 1070 240 26 214

* Presenter’s Data (hypothetical)

Marginal Cost
Marginal Cost is the cost a company incurs when producing one more good. Suppose
we're producing two goods, and we would like to know how much costs would
increase if we increase production to three goods. This difference is the marginal cost
of going from two to three. It can be calculated by:

Marginal Cost (2 to 3) = Total Cost of Producing 3 – Total Cost of Producing 2.

Total Cost
The total cost is simply all the costs incurred in producing a certain number of goods.
Fixed Cost
Fixed costs are the costs that are independent of the number of goods you produce, or
more simply the costs you incur when you do not produce any goods.

Total Variable Costs

These are just the opposite of fixed costs; these are the costs that do change when we
produce more. These

Average Total Costs

Our average total cost is our fixed costs over the number of units we produce.

Average Fixed Costs

Our average fixed cost is our fixed costs over the number of units we produce, given
by the formula:
Average Fixed Cost = Fixed Costs / Number of Units

Average Variable Costs

Formula for average variable costs is:
Average Variable Cost = Total Variable Costs / Number of Units
Explicit Cost Function:
These costs fall under actual business costs that are entered in the books of business.\
Explicit Cost Factors are:
• Wages / Salaries
• Raw Materials
• Electricity & Water bills
• Equipments

All the raw material for buns is ordered and supplied in bulk (economy of scales), to
reduce the company overheads.

Implicit Cost Function

These costs do not take the form of cash outlays nor do they appear in accounting
system.
Implicit Cost Factors are:
• Risk involved in forecasting the Demand
• Costs involved in preventing the legal action against foul product / service.
• Employees’ consumption
• Food Scraped / Spoiled
 PRODUCT LIFECYCLE
Customers’ requirements change over time. What is fashionable and attractive today
may be discarded tomorrow. In order to meet these changes, McDonald’s has
introduced new products and phased out old ones, and will continue to do so.
Demand of McAloo Tikki Burger would not be same for all the time. Therefore, they
introduced another product in the same range, Veg. Pizza McPuff.

Care is taken not to adversely affect the sales of one choice by introduced a new
choice. McDonald’s knows that items on its menu will vary in popularity. Their
ability to generate profits will vary at different points in their life cycle.

Products go through a life cycle, which is illustrated below:

 PRICING DECISIONS
For each country, there is a rigorous pricing process that is used to determine the price
for that particular market. The process, as described by Vignali et al. (1999) [14] is
listed below:
• Selecting the Price Objective
• Determining demand
• Estimation costs
• Analyzing competitors' Costs, Prices and Offers
• Selecting a Final Price

Cost to Price Model

P = f (O,D,Ce,Cc,R)
Where:
• O = objective
• R = raw material
• D = demand
• Ce = cost estimates
• Cc = compietitors cost price

McDonald's overall pricing objective is to increase market share. They look at the
demand for their product as a barometer for setting price. To measure demand and to
look after their raw material supply they started their franchised operation.

In New Delhi, India, McDonald's was looking at market penetration in October 1996,
and set price through looking at Nirula's, a local food chain. They used this local
example as a guideline to what the Indian would perceive as an acceptable price and
hence what they should charge.
 MARKET
Is it Oligopoly or Monopoly type? The theory of monopolistic competition has
elements of both monopoly and perfect competition. After much consideration our
team agreed it to be monopolistic competition. McDonalds has control over price
because of their products are differentiated & this advantage pushes them far ahead of
others.

Rarely Homogeneous
In the markets with a large number of sellers, the products of individual firms are
rarely homogenous. There are many Burger Points in India like KFC, Nirula’s, Local
burger points and McDonalds but whenever we hear the word Burger the only name
came in our mind is of McDonalds. Which is highly differentiated McDonalds in the
mind of consumers

Product Differentiation
This product differentiation may reflect materials and workmanship of the good sold
in a particular store, or it may be the result of effective advertisement. The manner in
which the store displays the good can be another source of product differentiation.
McDonalds introduced McAllu Tikki Burger where as KFC introduced Student
Burger. Here both sellers are selling the same product with different ingredients.
McDonald’s's offers drive-through service while KFC doesn't.
Product differentiation is the key to survival. Least costly branded burger from
McDonald’s is capable to beat even the local fast-food joints. Though they are not
entirely homogeneous among producers, as McDonald’s McAllu Tikki Burger is 99%
the same quality food, but the ingredient selection makes it largest selling among the
segment.
To survive, there is increasing need for Ads and promotional activities. Aggressive
ads, inducing ‘affordable’ ‘economical’ like terms, are suited best to lure Indian
consumers, away from Hot Millions, KFC, Mr.Burger Nirula’s and various other well
established Fast Food joints.

Location
Location is another source of product differentiation. Sellers in a nearby will be more
likely to obtain a consumer’s business than stores on the other side of town.
McDonalds and KFC are not adjacent to each other they are far away from each other
same in the case with the local burger points and with McDonalds.

Perfect Competition
It assumes that there are a large number of small sellers like local Burger points.
Thus the actions of any single seller do not have a significant effect on the other
sellers in the market. Also there are many numbers of buyers and that resources can
be easily be transferred into and out of the industry.

Monopoly
The monopolistic competition resembles the monopoly models in that products of
individual firms are considered to be slightly differentiated. That is, the product of
one firm is assumed to be a close, but not a perfect, substitute for that of other firms.
The result is that each firm faces a demand curve with a slight downward slope
implying the individual firm has some control over price. Although increasing its
price will cause the firm to lose sales, some consumers will be willing to buy at the
higher price because the product is highly differentiated from that of the competitors.
Like McDonalds is selling their burger at Rs 20 where as KFC is selling its burger at
Rs 25.
• Number and size distribution of sellers
• Number and size distribution of Buyers
• Product differentiation
• Conditions of early and exit
 OBJECTIVES
Long-Term Plans...

In a business when a number of brains are working together, there are always
different views on a certain aspect, therefore aims and objectives are used to help
them focus on one view on the aspect which either seems right or is right. Aims and
Objectives help an organization grow; it is used as a guideline, a plan and a goal.
What the organization is heading for and how it is heading there and where it is
heading? All the answers for these questions are answered by Aims & Objectives.

The Main Objectives of McDonald’s Business are: -

Sales – Sales revenue is the total amount of money a company has earned by
providing their service or selling their stock.
Growth – An increase in the Business capacity to produce more stock or provide
better or greater service.
Profit – Residual value gained from business operations after cutting out
expenses such as stock cost etc.
Customer Satisfaction – Providing service to customers to their satisfaction level
such as hygienically clean place or high quality food.

SMART
Before a business can set objectives it is important that they follow the SMART
criteria.
• Specific – Detailed and Exact
• Measurable – Targets should be measurable
• Achievable – Something that can be achieved
• Realistic – Targets must be realistic, so that they can be met
• Time Specific – That can be achieved by a deadline

“It’s What I Eat And What I Do…I’m Lovin’ It”

PLAN – Their plan is to deepen their connection with the customer by providing
great service ad experience “in every restaurant, every time.” Their usage of different
activities allows McDonald’s and the Customers to have a relation between them.
 REFERENCES

Mr. Kastoori Ram

Owner, Burger Joint, Patiala

McDonalds India website:

http://www.mcdonaldsindia.com/

Encyclopedia:

www.wikipedia.org
www.britannica.com
encarta.msn.com

Research Papers:
www.scribd.com

Search Engines:
www.altavista.com
www.google.com

Others:
www.financialexpress.com/news/mcdonalds-plans-more-eateries-franchise-
model/109889/
www.rediff.com/money/2001/apr/10mac.htm
www.thehindubusinessline.com/2006/04/20/stories/2006042004621200.htm
www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/BSTR142.htm