McDonalds Breaking into the South African Market

MCDONALD'S OPERATES OVER 21,000 FAST-FOOD restaurants in 104 countries. Its golden arches overlook piazzas and shopping malls from Moscow to Manila. And it's also the world's most famous trademark - in 1996, it was rated the world's top brand by Intcrbrand, a consultancy, beating Coca-Cola into second place.

In recent years, faced with greater competition in the United States, the company has increasingly relied on overseas markets as a source of profits. Its forays into international markets had generally been successful. In 1995, as part of its overseas empire building, McDonald's nuide its first venture into sub-8aharan Africa, the last frontier of emerging markets. Like many

American multinationals, McDonald's had long had its eye on the South African market, but waited until the end of apartheid before it felt ready to enter. It had, however, registered its world famous trademark in South Africa as early as 1968. In 1993, a year before South Africa's first non-racial general election, McDonald's finally decided to press ahead with an investment in the country.

However, by the time the first McDonald's restaurant opened in 1995, it was clear to the American giant that it was entering a rather unusual market. For years, behind the shelter of sanctions and its own protective tariffs, South Africa had spawned a first-world consumer industry. Its fast-food companies had built up strong local brands specifically catering to South African tastes. The major foreign-owned operators included KFC (with 320 outlets) and Wimpy (220 outlets), but the remaining operators were primarily home grown. The established ones included Nando (a Portuguese-style spicy chicken burger chain with 105 restaurants in South Africa), Qiicken Lickeri. with 275 outlets, and Steers, which runs 215 burger restaurants. The company also discovered that a local trader had applied both to register the 'McDonalds' trademark for his own use, and to have the American company's rights to the trademark withdrawn (its trademark registration had technically expired). McDonald's instantly filed a case against the trader, and applied to re-register the trademark for itself.

As one of the world's leading brands, McDonald's was plainly associated with the trademark around the globe and the company could reasonably expect the South African courts to protect it from lookalikes. Although its trademark registration had expired in the country, McDonald's argued, under a clause in South African law, that 'special circumstances' had prevented it entering the market: namely, trade sanctions against South Africa and pressure from the anti-apartheid lobby in America,

When the case came to the Supreme Court, in October 1995, things did not turn out quite the way McDonald's had expected. Three eases, in fact, were heard at the same time. Two were brought by South African traders, Jo burgers Drive-inn Restaurant and Dax Prop, each of which already ran a fast-food restaurant under the name 'McDonalds' and each of which wanted to deprive McDonald's of the right to trade under that name. The third case was brought by McDonald's, which was suing the other companies for using and imitating its brand.

The cases rested on two questions. One was whether McDonald's was a 'well-known murk'. If it was, then the company would be instantly entitled to protection from imitation by local traders, and die impostors would have to pack up shop. The second was whether McDonald's claim of 'special circumstances' could be justified.

For McDonald's managers, the answer to the first question was self-evident. Though they recognized that South Africa had a relatively sophisticated fast-food industry of its own, the idea diat such a famous global brand might not be well known on the southern tip of Africa seemed preposterous. Two market-re search surveys conducted in South Africa confirmed that the brand was indeed well known. The judge presiding in the Supreme Court case, however, argued that the surveys were conducted among whites living in posh suburbs and could 'by no stretch of the imagination be regarded as representative of the entire South African population', 76 per cent of which is black. The judge threw McDonald's case out.

What of the second question, concerning the firm's claim that 'special circumstances' had kept it out of South Africa's market? McDonald's had first registered its trademark in South Africa in 1968, and then renewed it at

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regular intervals until 1985. Under South African law as it stood at the time, a company lost its right to the trademark it it' languished unused on the books for five years, unless there was a good reason. Again, the judge did not believe that 'special circumstances' - pressure from anti-apartheid groups and sanctions - were the real reasons that McDonald's had left its trademark unused for so long: 'there is no explanation for the failure to commence business in South Africa,' he declared, 'other than the fact that South Africa simply did not rank on McDonald's list of priorities'.

These legal setbacks were temporary. McDonald's was allowed to press ahead with opening restaurants while it prepared its case for the Appeal Court. In 1996 the American burger chain won this second battle: the Appeal Court. In essence, applied a less strict test of what it meant to be well known in South Africa, and accepted the evidence in the two surveys because it thought that whites represented McDonald's target markets.

The case was a harbinger of the sort of trouble that McDonald's was to experience throughout South Africa. But, McDonald's had not given up so easily. The firm continued to invest in opening new outlets after that. At the end of 1997, it operated 35 restaurants in the country - a small-fry, though, compared to the 337 it runs in Brazil. It has scored well against local rivals in slick service and a studied appeal to children. However, there are still worries that McDonald's is treating its South African market as if it were uniform. It offers its standard worldwide menu — hamburgers of even' imaginable size, with a few chicken products as alternatives. Some of its loeal managers have expressed how odd the choice is given that the majority of local black consumers tend to favour chicken, which is cheaper than red meat. White consumers, by contrast, tend to be beef-obsessed. They argue that 'politically correct' McDonald's seems unwilling to acknowledge, in the overt way that its local rivals do, the point that the split between beef hamburgers and chicken has as much to do with race as with products, McDonald's judged that the South African market was not different enough to merit product adaptation from the start. It would wait instead to see how well the standard McDonald's menu went down.

McDonald's experience in the market is a stark reminder of the challenges facing companies seeking to penetrate new country markets. Even the most powerful, established, global brands from developed countries can hit a number of unexpected barriers to entry into a foreign market. Importantly, the company cannot expect to trample all before it in developing or emerging country markets — particularly when local consumers can choose established local alternatives. If the owner of the world's leading brand encounters such troubles, companies with a less well-known trademark must think twice before venturing into foreign markets.1

When deciding to take advantage of an international marketing opportunity, firms should consider a number of questions.

QUESTIONS

You should attempt these questions only after completing your reading of this chapter. International marketing is more than simply taking what products or services are successful at home and exporting to a foreign market. It requires huge investment and long-term commitment to the target market, cultural sensitivity, and a willingness to adapt one's product and marketing strategies. Tailoring the firm's offering to suit target customer needs cannot be over-emphasized. Once the firm learns to do this, overseas markets can be lucrative and a recipe for success.

1. What are the attractions of international market expansion?

2. What might be the risks attached to expanding into a foreign or emerging market?

3. How can these risks be minimized?

4. Outline the key lessons we can draw from McDonald's experience in die South African market.

5. What criteria must the firm consider when deciding on which country-market to enter?

6. What constitutes an effective marketing programme for the target country market?

Introduction

This chapter discusses the importance of global marketing and explains the key elements of the planning process: analyzing international market opportunities; deciding whether or not to go abroad; establishing market entry mode; allocating resources; developing the marketing plan; organizing for international marketing; implementing the marketing strategy; and evaluation and control.

Companies pay little attention to international trade when the home market is big and teeming with opportunities. The home market is also much safer. Managers do not need to learn other languages, deal with strange and changing currencies, face political and legal uncertainties or adapt their products to different customer needs and expectations. This has been the attitude of many western companies, which saw little need to sell in overseas markets because their domestic market alone seemed to offer attractive opportunities for growth.

Today, however, die business environment is changing and firms cannot afford to ignore international markets. The increasing dependency of nations around die world on each other's goods and services has raised awareness among companies of die need for a more international outlook in their approach to business. International markets are important because most firms are geared towards growth and so must seek new opportunities in foreign countries as their domestic markets mature. As international trade becomes more liberalized, firms are facing tougher foreign competition in the domestic market. They must develop the ability to fight off competitors on tlieir own home ground, or to exploit business opportunities in foreign markets.

Furthermore, time and distance are shrinking rapidly with the advent of faster communication, transportation and financial flows. Products developed in one country are finding enthusiastic acceptance in other countries. Across western Europe and North America, names such as Toyota, Sony and Toshiba have become household words in the same way McDonald's, Toys 'ff Us, Philips and IKEA are familiar names to most young consumers in Asian countries like Japan, Singapore find Hong Kong.

Thus, as global competition intensifies, local companies that never thought about foreign competitors suddenly find these competitors in their own backyards. The firm that stays at home to play it safe not only misses the opportunity to enter other markets, but also risks losing its home market.

Consider, for example, Japanese victories over western producers in ninny sectors - motorcycles, cars, cameras, consumer electronics, machine tools,

photocopiers. These markets used to be the stronghold of US, German and British companies in the 1970s, but are now dominated by .lapanese manufacturers. The latter are not insulated from foreign competitors either. Increasing competition from lower-cost newly industrializing countries (NIGs) in the Far East, notably South Korea and Taiwan, are posing a big threat to established Japanese firms in traditional industries like steel, chemicals and heavy machinery.

In the United States, American firms are fighting off aggressive assaults by international European companies: Die's successful attacks on Gillette and Nestle's gains in the coffee and confectionery markets are a reflection of the growing level of international competition in 'safe' home markets. In the European Union (Ell), foreign firms' direct investment is on the increase and ititra-Union flows of investment in all kinds of business sectors - cars, clothing, retailing, financial services - are particularly active. Many sophisticated and aggressive foreign companies also see the emerging eastern European economies as longer-term opportunities. So, more than ever, firms must learn how to enter foreign markets and increase their global competitiveness.

Although some companies would like to stem the tide of foreign imports through protectionism, this response would be only a temporary solution. Suppressing a free flow of foreign imports would lead to fewer choices for the consumer and higher prices for indigenously produced goods. In the long run, it would raise the cost of living and protect inefficient domestic firms. It also means that consumers' needs and wants would not be met effectively and efficiently. A better solution is to encourage more firms to learn to make the world their market.

The importance of internationalization is also reflected by the fact that most governments run an export promotion programme, which tries to persuade local companies to export. Denmark pays more than half the salary of marketing consultants who help small and medium-size Danish companies get into exports. Many countries go even further and subsidize their companies by granting preferential land and energy costs - they even supply cash outright so that their companies can charge lower prices than do their foreign competitors.

Today the pressure on firms operating in global industries is not just to export to other countries, but to strive to be a global firm. A global industry is one in which the strategic positions of competitors in given geographic or national markets are affected by their overall global positions, A global firm, therefore, is one that, by operating in more than one country, gains research and development, production, marketing and financial advantages in its costs and reputation that are not available to purely domestic competitors,2 The global company sees the world as one market. It minimizes the importance of national boundaries, and raises capital, sources materials and components, and manufactures and markets its goods wherever it can do the best job. For example, Ford's 'world truck' sports a cab made in Europe and a chassis built in North America. It is assembled in Brax.il and imported to the United States for sale. Thus global firms gain advantages by planning, operating and co-ordinating their activities on a worldwide basis. These gains are a key reason behind recent global restructuring programmes undertaken by leading German car producers, BMW and MercedesBenz. Global marketing is concerned with integrating or standardizing marketing actions across a number of geographic markets. This does not rule out forceful adaptation of the marketing mix to individual countries, but suggests that firms, where possible, ignore traditional market boundaries and capitalize on similarities between markets to build competitive advantage.

Because firms around the world are globalizing at a rapid rate, domestic firms in global industries must act quickly before the window closes on them. This does not mean that small and medium-size firms must operate in a dozen countries to global industry An industry in which the strategic positions of competitors in given geographic or national markets are affected by their overall globed •positions, global firm

A firm that, by operating in more than one country, gains R & D, production, marketing and financial advantages in its costs and reputation that are not available to purely domestic competitors.

global marketing Marketing that is concerned toit/i integrating or standardizing marketing actions across different geographic markets.

succeed. These firms can practise global nichernanship. The world, however, is becoming smaller and every company operating in a global industry - whether large or small - must assess and establish its place in world markets.

Firms that confront international competitors in their existing markets must ask some basic questions; What market position should we try to establish in our country, in the geographic region (e.g. Europe. North America, Asia, Australasia) and globally? Who will our global competitors he and what are their strategies and resources? Where should we produce or source our products? What strategic alliances should we form with other firms around the worldV

This chapter surveys the global marketplace and addresses the important decisions that firms have to make in international marketing planning. Each decision will be discussed in detail. First, however, let us take a look at the risks in doing business abroad.

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Responses

  • halfred greenhand
    How to break in sales in a south african market?
    8 years ago
  • frank
    Which entry mode strategy is used by mcdonald to enter south african makert?
    3 years ago
  • Adaldrida
    What lesson did mcdonalds learnt by entering the south african fast food market?
    3 years ago
  • taimi
    How has McDonald's become localised in the south African Market?
    3 years ago
  • ESSI
    How has McDonald's impacted the south african market?
    3 years ago
  • uta
    WHAT ARE THE KEY LESSOS WE CAN DRAW FROM McDONALD'S EXPRIENCE IN DIE SOUTH AFRICA?
    2 years ago
  • Lucile
    What is the reason behind the die of McDonald's in south africa?
    2 years ago

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