McDonald's; Breaking into the South African Market

McDonald's; Breaking into the South African Market

MCDONALD'S OPERATES OVER 21,000 FAST­FOOD restaurants in 104 coun­ tries. 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 Coca­Cola 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 sub­8aharan Africa, the last frontier of emerging markets. Like many

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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 non­racial general election, McDonald's finally decided to press ahead with an invest­ ment 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 first­world consumer industry. Its fast­ food companies had built up strong local brands specifically catering to South African tastes. The major foreign­owned 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 res­ taurants. 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to register the 'McDonalds' trademark for his own use, and to have the American company's rights to the trademark withdrawn (its trademark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 re­register 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 anti­apartheid 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 Drive­inn Restaurant and Dax Prop, each of which already ran a fast­food 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 'well­known 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 circum­ stances' 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 sophisti­ cated fast­food 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 market­re 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 anti­apartheid 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 small­fry, 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' im­ aginable 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 beef­obsessed. 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 chal­ lenges 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 devel­

oping 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 well­known trade­ mark must think twice before venturing into foreign markets. 1

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