Mcdonald's in India

Mcdonald's in India: Capitalism and Cow Worship
by Sala Kannan
The Daily Reckoning
London, England
Wednesday, December 7, 2005

Sala Kannan explains why McDonald's has done well in India, why other companies, fast food and otherwise, have not, and things western corporations need to know to succeed in the Indian market.

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[Ed. Note: Bill is incommunicado in Madrid - having problems with his Internet connection. But never fear, our connection is just fine at The DR HQ in Baltimore, and we shall power through without him…]

We are all well versed in the comedy of errors that is G.M., but it doesn't look like Ford is too far behind.

The automaker announced today that they plan to cut 30,000 jobs and close 10 plants in the next five years, citing overcapacity issues. Apparently, their temporarily beefed-up sales from the "employee discounts for everyone!" deal back in July wasn't enough to save them…not to mention the fact that the discount most likely made up the majority of Ford's profit on the cars they were selling.

One can't help but wonder why Ford (and G.M.) continue to manufacture more cars than could feasibly be sold, when they then end up having to practically give them away - wiping out any possibility of an actual profit.

Perhaps they should take a cue from Toyota, who continues to do better than the "Big Three" (G.M., Ford and Daimler-Chrysler) month after month. Bloomberg.com reports, "By investing more conservatively in new plant capacity and forgoing peak demand, Toyota and rival Japanese automakers, Honda Motor Co. and Nissan Motor Co., have minimized the idle time in factories that kills profits.

"The theory is called 'heijunka' in Japanese, which means 'leveling,' and is integral to Toyota's production system."

Hmmm…thinking and sweating - looks like our friends to the Far East are coming out on top again…

More news, from our currency counselor:

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Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"New Zealand's debt rating is the second-highest (AA+) rating that S&P hands out. So, there's no way, even if S&P took New Zealand's debt rating to the woodshed, that it would come out bruised and battered!"

For the rest of this story, and for more insights into the world currency markets, see today's issue of

The Daily Pfennig

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And back in Baltimore…

*** Today, gold hit a new 24-year high, mainly due to buying by second and third tier central bank buying from second and third tier central banks who find themselves burdened with U.S. dollar reserves.

This diversification out of currencies like the U.S. dollar and the euro has caused the price of gold to skyrocket - it opened in London trading at $512.20 an ounce, up $5.20.

"So gold has smashed through the $500 level. But where will it go from here?" wonders Dan Denning. "Are we due for a correction, or can a gold bull market and a stock market rally exist side by side? And even more intriguingly, can a dollar bull market and a gold bull market cohabitate?

"My money is on gold and Pierre Lassonde, the president of Newmont Mining (NEM), who thinks gold is going to $1,000. In a recent interview aired on the Australian Broadcasting Corporation, Lassonde said, 'Everybody thinks inflation is going to stay at 2% - I don't believe it. There has been way too much money printing in the world for that to happen.'

"Is it sad to believe the dollar will collapse? A little. It means a great deal of change. Is it wicked? Not as wicked as the reckless spending bills passed by Congress and signed by the president…for the last 50 years. It is too good to be believed that the dollar system can fail and be effortlessly replaced by something else? Yes. In a market economy, nothing new of value is created without destroying the thing it replaces.

"That's why Lassonde and others believe in gold. It is what you'll have in your pocket or portfolio during the intermission between the current act of fiscal tragedy and the next act of political comedy.

"So be of good cheer! The gold rally will probably give way to a correction, at which time it will be a good idea to add to your holdings, both of bullion and of gold stocks."

[Ed. Note: As you can see from the above note, Dan sees a good year for gold ahead - and his friends at Outstanding Investments can tell you more about the gold exploration companies who have gold in the ground just waiting to appreciate in value in 2006. Why not get all these predictions and insights for the New Year from our editors together in one package? If you act before January 1, 2006, you can do just that. Find out how…

The Agora Financial Reserve - a 96% Discount Until Jan. 1, 2006

*** "I found myself quoting Bastiat to an audience of Tennessee farmers last night," writes Addison "We were debating farm subsidies, when all of a sudden we entered uncharted territory…"

A caller in Brownsville, TN, suggested that the war in Iraq was good for the economy. "That economic fallacy was laid to rest over 150 years ago in France," Addison responded. He then proceeded to illustrate…here we paraphrase:

Frederick Bastiat, a lawyer and member of Parliament at the time, used the analogy of a shop who's window has been broken by a thief. "There is the seen and the unseen," said Bastiat. What is seen is the economic chain of events that gets put in motion the moment the glass is broken. The policeman starts snooping around to find clues. The glassmaker makes another window. A handyman installs it. And they all get paid for their efforts. How can it be bad for the economy?

Well, what you don't see is the capital that is destroyed in the transaction. The shopkeeper must divert money away from productive use to repair the window. Instead of buying more goods to sell at a profit, replacing a roof on the store that might keep the goods dry or even saving for a future investment…he has to pay taxes for the policeman and employ people to fix a window that he had already shelled out money for.

After is all said and done, the broken window takes money away from a wealth producing activity and redistributes it to "service" providers, or consumers of wealth.

"The same can be said of war," says Addison. "There's no accounting for how much capital is destroyed in support of a war like we're seeing in Iraq. It's Bastiat's 'unseen' writ large. Only we've added a huge twist to the equation. We have to borrow the capital in the first place."

How were the comments received on Tennessee radio? "They were stunned," says Addison "At the end of my explanation, the air was dead silent. I think the radio host had gone off to do something else."

*** Empire of Debt has now gone into its fourth printing.

*** If you want to buy more than one copy of the book (you know, it would make a great Christmas present for coworkers and family alike), you can place a bulk order for Empire of Debt here:

CEOReads.com - Tell Jack that Addison sent you.

*** Here's what a few readers of the book have to say:

"I read the book Empire of Debt and have since recommended it to every one of my good friends and clients. I am a commercial Mortgage Broker in B.C. Canada and by necessity, a part time investor in the Stock Market Canadians are not far behind Americans in being overly leveraged in the real estate market.

"All the things you describe in your book about 'Easy Bank Money' are absolutely true. I see it first hand every day. I had a client who bought a property in Whistler, B.C., 10 years ago for a mere $200,000. Since then he has made many miserable choices and poor business investments. Every two years or so I have refinanced his Whistler property and taken equity out for him from the property's appreciation in value. He has used these funds to supplement his poor stock market investments and paid his living expenses without having to work. The last refinance was this year when the property appraised for $1,500,000!!! This man has never made any success of any investment other than the property that he bought in the right place 10 years ago. We have finally started to see prices come off in the Real Estate market in Whistler. He may have to look for a real job next year!"

"A few weeks back I ordered a copy of your most recent offering, Empire of Debt," another reader writes. "I began reading the book a few days later and couldn't put it down. I thoroughly enjoyed it! The wisdom of the lessons learned in the 1930's by my parents and grandparents are forgotten by some and have never been learned by the most recent generations. With the detrimental excesses that have been created or nurtured by this country's central bank, the next lessons to be relearned will be much more severe and long lasting I fear. I only wish I could communicate ideas in the wonderfully relaxing and enjoyable manner in which both of you write.

"In the meantime, I will sit with my precious metal bullion and stocks, regularly read your columns, and watch my solvency increase as the market becomes more and more irrational. Congratulations! I've even ordered a few copies for friends."

And one last comment, by a reader who accuses us of having lost our sense of humor…

"I contacted my congressman, Jimmy Duncan, who represents us here in East Tennessee. I've known him for a good while and I told him to read the book. He is already a conservative and he broke with the party and did not vote for the Iraq War. I hope to see him over the holidays and get his feedback. Great book by the way. The humor is a little lacking but then I have suffered thru the Daily Reckoning for years and have learned to tolerate it somehow. Gold is really on a run right now and I sense the masses are now dipping their toes in the river of real money and pushing it along at a quicker pace. Better up your entry-level price or get left on the riverbank without a boat or a paddle."

Tomorrow…an update on our campaign to get Congress to respond. Stay tuned.

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The Daily Reckoning PRESENTS: How is it that a country with a very large vegetarian population and a high reverence for cows, has a fast food industry that is growing by 40% a year? What's McDonald's without a Big Mac? Sala Kannan explains…

CAPITALISM AND COW WORSHIP
by Sala Kannan

It was 4 a.m. I was asleep in the Fairmont Vancouver Hotel when the phone rang. "Thangachi!! (Sister!!)" yelled an enthusiastic voice from the other end. It was Perumal, our old cook from India.

As youngsters growing up in India, my mother always warned, "Perumal won't be here forever, you girls have to learn to cook." She worried that hiring help around the house was getting increasingly difficult. No one wanted those jobs anymore. What would we do if Perumal left?

And leave he did.

"I'm in Malaysia now!" he yelled into the phone. For some reason he felt the need to be louder. Maybe it was out of habit; rural Indian telephone systems in the '80s were so bad that if one made an international call, one always spoke a few notches louder.

"I work in a Malaysian restaurant in Ipoh. I like it here. They pay me well." He said. Perumal worked for my family in India for 26 years. We paid him 5,000 rupees (about $114) a month. He worked six days a week, often seven.

Today, he sends money home to his family, and his daughter is going to college next year. "I want her to study computers," he told me proudly. "Maybe I'll come back to India someday and start a restaurant. It's not like before, you know. Everyone wants to eat out these days."

"I'll start a nice vegetarian restaurant," he thought aloud.

McDonald's in India: The Food Industry

Perumal is right about it not being like before. The Indian middle class has grown so affluent that they can easily afford to eat out more often compared to a decade ago. In fact, according to a McKinsey report, the Indian food industry grew faster than the information technology industry over the last 10 years.

The fast food industry in India is even bigger business. India's fast-food industry is growing by 40% a year and is expected to generate over a billion dollars in sales this year.

Perumal is also on the money with his "nice vegetarian restaurant" idea. My five-foot-tall, stub-nosed, curly-haired cook, who has never set foot in a school, who knows nothing about marketing, has got it right.

Let me explain. Consumerism is big business in India. There will be 628 million middle-class Indians by 2015. And already, their net income has doubled over the last 10 years. Obviously, every multinational company now wants to sell in India. Some companies have failed and others succeeded. The ones that failed did so because they were not sensitive to the cultural factors that affect consumer behavior in India.

Kellogg's introduced corn flakes in India in 1995. But the product failed miserably. It achieved less than 20% of its initial sales target. How could Kellogg's have gone wrong? Corn flakes are cheap, more and more Indian women are working and don't cook breakfast anymore and people want a nutritious yet quick meal, right? Kellogg's seems like the perfect answer, doesn't it?

Why, then, did Kellogg's suffer years of losses in India? The answer, dear reader, lies in the quirks of Indian consumption patterns. Something my uneducated cook understood, but the suits at Kellogg's didn't.

Indians consume differently. Just like how what people buy in any country is defined by local culture. Very simply, different strokes for different folks.

And in this case, Indians like hot milk in their cereal. Kellogg's cereal is made for cold milk and didn't hold up to hot milk. It became soggy. Nobody wanted to eat it. For years, Kellogg's struggled in India. It was only after revamping its product and making a cereal suitable for hot milk that Kellogg's became profitable in India.

McDonald's in India: Cultural Quirks

So here are some cultural quirks multinationals should keep in mind when marketing in India:

1. Indians like hot cereal.
2. Most Indians worship cows; part of the country is vegetarian.
3. Indians don't kiss (at least not in the movies).

It was point number two that my cook Perumal drove home. You see, not only are many of us vegetarian, we are a cow-worshipping, non-beef-eating lot. About 20% of India's population is completely vegetarian, and about 82% does not eat beef.

Yet McDonald's revenue in India has grown a whopping 50% annually since 1997. How does McDonald's, the world's largest beef-based food chain, thrive and flourish in cow-revering, vegetarian India?

Enter the Maharaja Mac. A 100% ground lamb burger served with lettuce, tomatoes, special sauce, cheese, onion and pickles on a sesame bun. Other items include the Chicken Maharaja Mac, the McVeggie and the McAloo Tikki (with potatoes). The vegetarian items are advertised with a "100% pure veg" stamp on them.

Seventy-five percent of the McDonald's menu in India is Indianized. In 2001, McDonald's also introduced the Veg Surprise burger, a veggie burger with Indian spices. Not surprisingly, sales volume shot up 40%.

As for the flagship Maharaja Mac and the McVeggie, not only are they profitable, they are also politically correct burgers. Indian political activists are always eager to protest again so-called "cultural imperialism." And foreign-based fast food chains are easy targets.

Take KFC, for example. After an ambitious start in the late 1990s, KFC scaled back its expansion plans after major protests. KFC was also accused of using illegally high amounts of MSG and frying its chicken in pork fat (India's 150 million Muslims don't eat pork). Activist groups protested outside the restaurant in Bangalore, holding placards reading "Quit India" and "Stop Playing Foul." KFC now has just one restaurant in India.

McDonald's has 58 restaurants in India. And it seems all set to "beef up" more profits in the country.

As Managing Director of McDonalds India, Vikram Bakshi says "When you go into any country, very clearly, you have to understand the culture; you have to understand how you intend to be relevant to the consumer in that country. I don't think any brand, no matter how big it is, can take the market lightly. And I think the biggest mistake is when you think you have a big brand and that everyone is overwhelmed by it. Because whatever the brand, it has to be relevant to the consumer of that country."

Regards,

Sala Kannan
for The Daily Reckoning

P.S. McDonald's only has franchises in India as of now. But very soon, an important law will be passed that will allow McDonald's to enter India directly. Already, Wal-Mart, Nike and Microsoft are getting ready to set up shop in India in anticipation of this law. And once it's passed, these four stocks will skyrocket. This law is going to be the turning point for the Indian economy - and for smart investors who have their money in the right places. You can get all the details in my new special report:

India's $200 billion Secret

Editor's Note: Sala Kannan, a native of India and a graduate of the University of Cambridge, boasts connections with economists and industry insiders worldwide. An expert on global economic trends, she's especially well-versed in developing nations, such as India, Brazil, Argentina and China.

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