How to make a success of investing in India

With a rapidly expanding middle class, consumerism is big business in India. But plenty of big multinationals have come a cropper on the sub-continent, says The Daily Reckoning's Sala Kannan. So what's the secret behind the success of those who do make it?

It was 4am. I was asleep in the Fairmont Vancouver Hotel when the phone rang.

'Thangachi!' yelled an enthusiastic voice from the other end (meaning 'Sister!'). 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?

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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.' 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.

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 5-foot-tall, stub-nosed, curly- haired cook, who has never set foot in a school - and 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 behaviour 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. Indeed, 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.

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 No.2 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 Indianised. 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 the 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.'

Hence the Maharaja Mac.

By Sala Kannan for The Daily Reckoning

P.S: McDonald's only has franchise outlets in India right 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 could 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.

Look out for a special report from MoneyWeek magazine very soon.

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.