Factors Affecting the Success of Localization Strategy of Fast Food Companies - Literature review Example

? Factors affecting the success of localization strategy of fast food companies in Asian countries Introduction Multinational food chains like KFC, McDonald and Dominos have spread their operations worldwide adopting different strategies for growth in various markets. In order to be successful in their business, localization strategies therefore need to encourage indigenization, reduce import content in the products and increase employment in the society benefiting commercial and economic developments of the respective countries. Integrating national economy to the global economy calls for sustainable developmental approaches through efficient use of local resources with the underlying cause of welfare to the society with environment friendly processes. According to Bruntland report “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” is called as sustainable development (Business Dictionary.com). This paper seeks to study and analyze the issue with reference to the following questions: 1. Why localization strategy is important for fast food industry in Asian countries?  2. How to use the localization strategy for fast food industry in Asian countries?  3. What are the key factors affecting the success of localization strategy of fast food companies in Asian countries?  Localization strategy in Asian countries Asian markets are highly heterogeneous in nature, especially in the case of food industry with different ethnic groups, languages, vast cultural differences and divergent climatic conditions. The religious mix varies from region to region with a very long history. Food security and alleviation of poverty are the major concerns for the most of the Asian countries which are heavily populated compared to European or American countries. The government policies are oriented towards building a sustainable food economy. Therefore, a successful localization strategy for a sustainable growth has to be in line with the basic objectives of the State taking into account the income levels, local spending choices, nutrition and health, rural bias of the economy, urbanization process at various stages in different countries, employment generation, educational and technological developments of the regions, the use of agricultural lands, climatic conditions, efficient utilization of natural resources and its environmental impact. Business Monitor International (2011, p. 6) states “Health and hygiene scares continue to be a major concern in China’s food industry, with the government implementing crackdowns on chemical additives in food products”. Adoption of the best industrial and commercial practices by the fast food companies is essential for the desired effect in reshaping the food system and food habits in the communities. Localization efforts go beyond menus and the organization needs to integrate itself with the cultural mainstream of the host country to strike a chord with the consumers. Lee, M. et al (2011) state, “Yum’s cultural flexibility doesn’t end with the localized menu. While fast-food restaurants in the West often host kids’ birthday parties, KFCs in Urumqi, capital of the Xinjiang autonomous region that’s home to the Muslim Uyghur people, advertise parties for the families of boys who have just undergone the religious ritual of circumcision”.  The Asian markets hold potential for growth in future on account of growing population which provides a huge market coupled with high growth in economy over the period of time in the past which is expected to continue in future. Davies, R. (1996, p. 2) states “The interest in Asian management is primarily a recent phenomenon, facilitated by the growth in Asian markets within the global economy, and a realization in the West that Asia is both a region that will be central to any serious global business, and also a region that can offer the West much wisdom in management techniques”. The subsequent developments in the continent have justified this assessment greatly. China is the world’s largest consumer of instant noodles, and the country’s vast instant noodle market is dominated by Taiwan's Tingyi Master Kong brand. (Business Monitor International, 2009, p. 31) In the past five years the value of chocolate confectionery sales in China has nearly doubled, to $813.1 million, while sales in India have increased 64%, to $393.8 million, according to market researcher Euromonitor International. (Fishbein, J., 2008) However, the growth in the same period in Europe has been hardly 1 to 2%. According to Vietnam Briefing (2008), many Vietnamese are still willing to spend more on fast food restaurants even if it is around 2 to 4 times more expensive than the regular rice or noodle shop. Western fast food chains tend to introduce menu items that cater to local tastes to increase sales. One common factor for most of the Asian countries is that the population consists of youngsters in teen ages or up to 25 years. Another common factor could be the emerging economies of these countries, whether it is China, India or other countries. When the disposable incomes of the parents are increasing, they spend more on the children and try to satisfy their needs. The children have new ideas new ideas, liking for new tastes and amenable to new lifestyle. In view of the huge population with a greater proportion of children compared to the west, market penetration has been easier for the fast food chains with innovative localization strategies. The younger generation of the income earners’ preference for fast food chains is influenced by several factors. A recent survey conducted by Nielsen about trends in the Vietnamese fast food market, showed that more than 70% of respondents said they go to fast food shops because they like the atmosphere and the service there. The regular customers of the fast food shops are high income earners. 27% of those polled said they go to fast food shops once a week at least. (vietnamnet.vn, 2009) Further localization efforts are necessary and important to sustain the growth level experienced by the fast food industry in the Asian countries, in the long run. Localization efforts are important from the angle of food miles, food security, adapting to the tastes of the people of the country, taking indigenization efforts to the maximum extent with the purpose of value addition and reduction in imports, employment generation and economic development aiming balanced growth on a global basis. Food miles Labeling the food products with their carbon foot print is gathering momentum worldwide. Greenhouse gas emissions contributed by the products from the farm to the retail point influence the purchasing decisions of the consumers. By disclosing Carbon footprint of the food products, the companies seek to highlight the absence of negative environmental impact of the food products, so that the environmental conscious consumers would prefer such products and even be prepared to pay premium for such products. M&S has taken specific initiatives to reduce “food miles,” which will increase transportation efficiencies (Parry, Martha and Grenon). Therefore, locally produced but globally branded food has an advantage of adding lesser food miles to the food products, and useful in localization strategy. Food security Food security in a country is very important and the international trade on food products is guided by the policies of the governments. Agriculture and farming in most of the countries are supported with subsidies of various sorts for the growth and self-sufficiency in the food front. Therefore, the strategies should be evolved on the basis of these government policies with good spirit for using local inputs and also to avoid high import duties levied by the host countries to discourage imports. Lima, B & Giovani, M. (2008, P.1) state that with the phenomenon of globalization, food systems have become increasingly integrated worldwide. Cash-crops have replaced subsistence agriculture; traditional farming methods have given place to intensive, industrial ones (relying on monocultures, chemicals use, more machinery, etc.); and in many areas the focus of agriculture has shifted from local consumption to food exports. Food being perishable commodity or commodity with limited shelf life, wastage of food should be avoided by putting in place proper supply chain to avoid transit delays or deterioration in quality. Globalization and Localization Instead of viewing localization as a countervailing force to globalization, it should be understood that coexistence of globalization and localization is eminently not only possible, but also logical, and the process of localization need not be considered as a counter measure to globalization. Interdependence of local and global factors and their relationship needs to be appreciated in its proper perspective. A relatively recent term that has come into favour to shed light on the transformative processes of globalization has been "glocalization." In a very general sense, "glocalization" has come to suggest the interplay between the global and the local to produce very different kinds of political, social, and economic relations. (Roman, J, 2006, p. 1) Google is an example for glocalization with different versions for different users in different languages. While intensified operations, large scale production, distance and networking involved, corporate profitability, homogeneity in operations, industrial structure and so on are the characteristics of a globalized company, small scale production, relationship and proximity with the consumers, community background, conservation of resources and regeneration, regional diversity, etc. are the hallmarks of localization. Nevertheless, they are complementary to each other and this need to be leveraged by the companies for their growth and development. Skouras, M. (2011) states “as with all major fast food chains in Malaysia, the beef and chicken is Halal to ensure that all customers, including those of Islamic faith, can dine there” is a case in point for localization. Factors affecting localization strategy Apart from the macroeconomic factors that a company in food industry is required to take into consideration in general before or at the time of entering into a country, there are several other factors which affect the success of localization strategy in day to day operations of the fast food companies in Asian countries, of which the local economic conditions, cultural background of the people, consumer behavior, tastes and fashions of the consumers, customer profile and pricing can be considered as the most important ones. The experience of the fast food chains like McDonald’s, KFC, Pizza Hut and Domino in the Asian Countries confirms the impact of these factors in their operations. When these companies entered a new country in Asia, for instance, India, it faces competition from the already established multi-national fast food chains as well as local food chains such as Jumbo King and Nirula. Impact on the local economy The Asian countries are yet to come out of licensing system completely, especially in respect of establishment of new companies. At least, there are several regulations governing foreign direct investments in various fields, which usually hinges on the future impact of these companies on the economy. There are various pressure groups within the system to monitor the foreign direct investments in relation to its desirability. Media plays an important role; for instance, Gapper (2010) states “H&M, which was caught by the New York Times shredding unsold clothes from a Manhattan store, rather than donating them to the homeless”. Food being an important element in the economy in any society, unless the strategies are primarily aiming welfare of the society in terms of nutrition, health, local customs, environmental protection, consumption of the local agricultural produces, they are at least politically incorrect as it is against the economic development of the region. The Corporate Responsibility Report of TESCO states that new stores built between 2007 and 2020 to emit half the CO2 of a 2006 new store and reduce emissions per case delivered by 50% by 2012, and plan for zero carbon by 2050. Value addition is another important aspect which contributes to employment and economic development. However, according to Muthaly, S., Ratnatunga, J. & Schroder, W. (1999), this depends on each country's competitive advantages in terms of raw materials, costs of manufacturing and availability of infrastructure for downstream activities. An example of value adding with local raw materials in a host country can be seen in Kellogg's manufacturing of 12 breakfast cereal brands in South Africa. Cultural background Considering the heterogeneity of the communities, not only the business model but also the advertisements and the approach to the marketing should be in tune with the cultural background of the society. Clark, A. (2010) states “The Australian arm of the fast-food chain KFC has been accused of racial insensitivity over a television commercial…” For instance, consumption of beef is taboo in majority of the Hindu communities, like pork in the case of Muslim communities, in India. The multinational food chains had to avoid beef and pork and substitute mutton for the same in its menus. According to the Financial Express (2006) ‘The People For Ethical Treatment of Animals’ group had held peaceful demonstrations outside the Bangalore restaurant in August 2003, carrying placards that said ‘Quit India,’ to protest against the alleged ill-treatment of chickens in poultry farms that supply to KFC. This reflects the CSR policies of the companies need to be reoriented in this regard. Meyers (2010, P. 7) states that “If the product is not in-line with the cultural needs of the consumer, then attitude towards the product and resulting purchase intent will be adversely affected by the marketing efforts”. The companies like Domino’s came out with Indian flavors for its food items; in fact with different flavors for South Indian and North Indian consumers. The customer behavior is conditioned by their cultural background. Though it is not very easy to define Corporate Social Responsibility, according to Mallen Baker, “CSR is about how companies manage the business processes to produce an overall positive impact on society”. Consumer behavior Kulkarni, S. & Lassar, W. (2009, p. 2) state “The perceived value of the customers about McDonalds was high as the evidence of cleanliness, quality and sophistication of service made a lasting impression on their minds. They were Indian customers who considered McDonald’s as a symbol of the American culture. Availability of McDonald’s in their country reflected the beginning of globalization…” Consumer behavior in respect of food industry inter alia is guided by nutritional aspects, ethics, food habits such as non-vegetarianism and religious values. Krysinfo (2008) states, “KFC admits that Halal chicken IS NOT used in any of its stores...When the chicken is not halal, it is HARAM for all Muslims”. There is a growing feeling among the people that the use of pesticides and herbicides pollutes the environment and can cause health problems. Peterson, B. H. (2011) writes “Contrary to claims by the U.S. government and Monsanto et al, who claim that GMO crops are beneficial, independent studies have been conducted with shocking results”. GMO or pesticide used crops could harm livestock as well. Moshavi, S. (1995) writes that Karnataka Farmers Association “argues that KFC's chicken is carcinogenic: too much monosodium glutamate”, and protested vehemently for closure of KFC in Karnataka State in India. Therefore, these factors should be taken into account in the localization strategies to gain goodwill of the consumers. However, consumer behavior is also influenced by some of the fundamental factors relating to the style of living, rising disposable income and the emerging trends in the demographics and the employment of women in the Asian countries. Nuclear family structure and exposure to western culture resulted into eating out behavior prompted by affordability, time constraints and easier solution to the domestic management issues. This has not only helped the fast food industry in these countries, but also the restaurant business in general. Amit (2010) points out that Pizza Hut for example, is one of the flagship brands of Yum! Brands, Inc., which also has KFC, Taco Bell, A&W and Long John Silver’s under its umbrella. Pizza Hut has 143 stores across 34 cities in India. Localization played an important role in the market penetration, and the relentless efforts are needed in this direction to consolidate their position. Paul, B. (2010) writes “multinationals are growing at a much faster rate than their domestic counterparts”.  The home delivery of fast food has also been picking up. Wharton School (2009) observes that localization doesn't work for all products. Many high-end luxury goods, for instance, rely on their country-of-origin tag to enhance their brand appeal. Brand value According to Burns (2010, p. 3) many theories of consumer behavior suggest that consumers evaluate products based on their subjective perceptions of the products (perceptions based on signs and symbols) rather than on objective physical reality. This may be only partly true in the case of Asian countries where people in general expect value for money. Mishra & Datta (2011, p. 34) state that customers and brands are the two most important intangible assets of any organization. Brand promotion plays an important role in shaping up these perceptions of the consumers. Shama & Hassan (2011, p. 12) states “Product branding includes all the tangible and intangible associations that customers have about a product brand”. The behaviour of the consumer when it is influenced by certain principles dear to his heart, the unwavering commitment to the brand is established.  Mintel (2010) states “Markets change, but the need for intelligence doesn’t … how we are adapting in response to their ever changing needs, while maintaining the stability…” The growth of fast food industry globally in the recent years has been phenomenal. Khan, M. A. (2008) states “When looking at year-on-year growth of brand value by category, mobile service providers, technology, personal care, fast food and luxury products ranked highest in the Millward Brown list”. Brand strategy is a dynamic concept reviewed on a continuous basis in tune with the trends in the consumer behavior. Tastes and fashions The consumption of organic food is on rise. Anderson, C. (2011) states “Food is a market that will always exist.  Many people are turning away from industrial farmed food, seeking healthier choices and getting back to the basics”. According to Johnson, N., (2011) many people are much more aware of problems arising from industrially produced food thanks to Michael Pollan’s book The Omnivore’s Dilemma. The spread of awareness among the consumers necessitated the food industry to revise their strategies. Grijp, N.M.V. and Hond, F.D. (1999, iii) observed ‘companies in the conventional food industry and retail trade are taking initiatives aimed to increase the market share of food products produced with substantially less or no pesticides.’ For the Multinational fast food chains, catering to the needs of the different ethnic groups in the Asian countries would be a challenge. They have to customize their menu in tune with the tastes of the people of these countries. ICMR (2001) states “In 1997, McDonald's was facing several problems. Most Indians thought McDonald's was expensive, and many didn't like the fact that it served only non-vegetarian meals”.  The home delivery concept which are successful elsewhere for the food chains, proved to be not of much use in the Asian countries initially. However, over the period of time the companies have adapted well in line with the level of service demanded by the consumers. Customer profile Catch them young is the marketing policy of the international brands whether it is BMW car or burgers. For instance, the growth in chocolate sale in China and India has been fueled by the school going or college students. It is also important to note that the flavors had to be adapted to the tastes preferred by the consumers in these countries. The economic development in the BRIC countries (Brazil, Russia, China and India) has introduced new breed of consumers with great financial strength to the world market. Therefore, strategies concentrating with ‘catch them young’ policy, targeting these consumers would pave for the steady growth by shaping up their consumption pattern. Consistent and innovative efforts made by the companies in product promotion have yielded good results in the Asian countries, because the younger generation’s attitude would be in tune with the trends and the latest developments. According to a survey conducted by the Korean Chamber of Commerce, Raj, P (2008, p. 78) states, the consumption and leisure pattern among the young population reveals they preferred Western and fast foods, dining out was more dependent on mood rather than expense. Taylor, S. L. & Cosenza, R. M. (2002, p. 394) state “teens tend to influence the spending habits of their parents…the sheer size of the teen demographic makes them extremely important from a marketing perspective (MMR, 2000)” Pricing plays an important role in brand management especially in the new markets of the developing countries. MapsofWorld.com (2008) states “Mc Donald's is stressing on the value acquired by the consumer on per unit of money spent. Primary goal of this strategy is to woo the middle class families which itself is a huge market in the developing countries, especially India”. Brand positioning strategies of the fast food chains should aim to attract different types of customers by expanding the product range. Ries, A. and Trout, J. (2001, p.19) define positioning as "an organized system for finding a window in the mind. It is based on the concept that communication can only take place at the right time and under the right circumstances." Conclusion Globalization is the order of the day accompanied with privatization and liberalization. The supermarket chains in the countries across the word sell all types of fruits and food products available throughout the year irrespective of the seasons. Therefore, it is imperative that the localization strategy of the multinational companies should side by side take into account the need for marketing of the local agricultural produces or the food products using the agricultural inputs of the Asian countries in the world market for the economic growth of these countries. In this manner, globalized agro-food system should be able to not only develop but also support the markets of these countries for a comprehensive and sustainable development in the long run, ensuring food security in the world. A company’s localization strategy also calls for following a well developed Corporate Social Responsibility (CSR) policy for its sustainability and growth. The CSR policy covers social issues since the community is a stakeholder to the company by providing facilities for its existence; as well as environmental issues related to emission of green house gases, conservation of natural resources and environmental pollution since the company is part of the community. 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