Latin CEO / March-April 2002
By Larry Luxner
Four teenagers sit quietly at computer terminals, surfing the Internet. Artsy prints add splashes of color to the pastel wall above them, while Stevie Wonder's "Ribbon in the Sky" plays softly in the background. Adding to the refined ambience are huge potted plants, hardwood floors, a tall glass cylinder filled with coffee beans and a newspaper rack holding today's edition of Folha de S. Paulo.
Starbucks? Not a chance. This is the newest of five McDonald's restaurants in Alphaville, an upscale community about an hour's drive from downtown São Paulo.
Of the fast-food chain's 1,191 eateries throughout Brazil, this particular outlet -- sandwiched between an Outback Steakhouse and a Blockbuster Video -- happens to be the one that Marcel Fleischmann, president and CEO of McDonald's Brazil, most frequently visits from his office just down the street.
"Usually, I eat once a day at a McDonald's," says Fleischmann, estimating he has wolfed down over 28,000 hamburgers in his career. "I've eaten in every single restaurant. I taste the quarter-pounder, the fries and the shakes."
McDonald's is by far the most successful fast-food chain in a country that thrives on fast food. And as president of McDonald's Comércio de Alimentos Ltda. (the subsidiary's official name), Fleischmann oversees an empire that as of mid-March 2002 encompassed 619 kiosks and 572 restaurants in 21 of Brazil's 26 states, plus the Federal District. More than half are company-owned, the rest by 142 franchisees.
"We are one of the Big Eight of McDonald's -- Australia, Japan, Canada, England, Germany, France, the United States and Brazil," boasts the 51-year-old Rio de Janeiro native, who is remarkably fit considering all those Big Macs he's put away. "No country outside the 'First World' has close to this number in terms of sales."
In 2001, an estimated 514 million people ate in a McDonald's restaurant somewhere in Brazil, generating revenues of R$1.57 billion (US$674 million at current exchange rates) a 10 percent increase over the R$1.46 billion in sales reported in 2000.
Fleischmann says McDonald's Brazil has been profitable every year since 1988, though company policy prevents him from saying by how much. What he will say is that, of the top 10 McDonald's outlets in volume worldwide, three happen to be in Brazil (the others are in Germany, Russia, Hong Kong and England). And the company even operates its own Hamburger University at corporate headquarters in Alphaville -- making Brazil one of only six countries, and the only one in Latin America, to have one.
More importantly, McDonald's is Brazil's leading private-sector employer, with 36,000 Brazilians on its payroll, 87 percent of them under 21 years old.
"Our philosophy is quite simple," Fleischmann recently told LatinCEO. "We are a family restaurant business. We never target our business to a specific type of customer or social class, such as teenagers or parents or kids. We appeal to the entire family. When you are aiming for the entire family, this requires investments year after year."
McDonald's, with worldwide headquarters in Oak Brook, Ill., arrived in Brazil back in 1979 as a joint venture with Rio de Janeiro entrepreneur Peter Rodenbeck. Its first outlet opened on Rua Hilario de Gouvea in Rio's upscale Copacabana neighborhood. A year later, Fleischmann joined the chain as a store manager, "flipping burgers, wiping the floor, cleaning the windows and working the cash register."
In 1981, a second joint venture began in São Paulo between McDonald's and businessman Gregory James Ryan. In 1995, the Rio and São Paulo ventures were merged into a single entity, McDonald's Brazil, and the following year Rodenbeck and Ryan sold their shares to the company. The local operations then became a wholly owned subsidiary of McDonald's, and Fleischmann was named vice-president, eventually becoming president.
"We were the first country where McDonald's did business in a hostile economic environment and really succeeded," says Fleischmann. "After Brazil, McDonald's went into Eastern Europe. I've received delegations from Hungary, Poland and Russia. We run seminars for other countries. When Mexico devalued the peso [in 1994], I sent my entire team over there for one month."
It's hard to imagine McDonald's having such a dominant market share in Brazil. According to Fleischmann, Brazil's informal dining sector is worth R$4.1 billion a year (US$1.75 billion). McDonald's claims 25 percent of that market. Habib's, an Arab-themed fast-food chain, shares another 15 percent slice with local hamburger rival Bob's and other, smaller chains. The remaining 60 percent is controlled by a host of independent hot-dog vans, bakeries, cafeterias at Metro stations and other informal eateries.
"When McDonald's came here, we changed the entire way of doing business. We brought uniforms and sanitation procedures, put in air-conditioning and made a lot of investment in kitchen equipment," said Fleischmann, noting that the largest McDonald's restaurants in Brazil today are both in São Paulo: an outlet on Avenida Paulista, which seats 450 patrons, and a drive-through on the Marginal Pinheiros, which sits on a 6,000-square-meter site.
Saleswise, the most important outlet is the one at São Paulo's Shopping Center Norte, which serves over two million customers annually. More eateries are on the way, says Fleischmann, adding that "we have been opening at a rate of 85 to100 restaurants per year."
Therein lies one of the company's biggest problems.
Of its 142 individual franchisees throughout Brazil, 25 are now suing the parent company, accusing McDonald's of charging outrageously high rents and cannibalizing their sales by opening new company-owned outlets literally in their backyards, which they say "violates the essence" of franchisees' contracts.
The plaintiffs' ringleader is John Rowell, a Connecticut native who's lived in Brazil since 1966 and owns two McDonald's outlets, both in São Paulo.
"In my first store, I used to sell the equivalent of US$500,000 a month. Today, I'm selling about US$100,000," says Rowell, chief of the unofficial Independent McDonald's Operators Association (IMOA). "When I bought my store, there was only one other McDonald's within a two-mile radius. Today, there are 18 other stores, and 16 of them are owned by McDonald's. If these were franchises, I'd be dealing with an equal competitor, another small businessman. But since they're company-owned stores, I have to deal with a mega-corporation."
Rowell told LatinCEO that he negotiated unsuccessfully with Fleischmann for three years before finally deciding to sue McDonald's for US$3 million in damages. Since then, he's unveiled a website -- www.mcdonalds-problems-in-brazil.com -- whose stated purpose is to inform the public "of the potentially illegal and criminal manner in which McDonald's Brazil operates."
Not surprisingly, McDonald's doesn't recognize the IMOA, insisting that it will deal only with the Associação Brasileira de Franqueados McDonald's (ABFM), which claims to represent more than 90 percent of all Brazilian franchisees.
"ABFM solemnly disapproves of the approach adopted by a minority segment of franchisees," the organization's president, Marcio A.A. Moreira, said in a prepared statement. "In support of our franchisees, we are going to act firmly and with determination against the opportunism and very short-sighted vision of those who do not share our values and common practices."
Yet Dick Adams, a former McDonald's executive who now runs a US-based consulting firm called Franchise Equity Corp., says the mere fact that McDonald's owns 53 percent of its restaurants in Brazil (compared to only 15 percent in the United States) "gives them a huge incentive to saturate the market and cannibalize" franchisees' sales.
"Their root problem globally is that McDonald's is not a growth company anymore. It's a mature company, and they are trying to convince Wall Street that they're a growth company, so they continue to grow in countries where they're already saturated," Adams said in a phone interview from San Diego. "This has been a huge problem in the US over the last 10 years. As they move around the world, they're doing the same thing in other countries, and that certainly appears to be the case in Brazil."
Fleischmann calls the cannibalization charge groundless. "One fact is enough to refute such claims," he says. "Between 1998 and 2000, the average annual turnover of each franchise restaurant increased by 13.25 percent, despite the opening of 79 franchise-owned and 78 corporate-owned restaurants in the same period. McDonald's carries out comprehensive market research prior to opening a restaurant. A new location is only developed where justified by demand. When opening a new store, the company is therefore anticipating the competition."
Fleischmann defends his company's reputation just as aggressively as he populates Brazil with new Golden Arches, noting that for the last four years, Carta Capital magazine has rated McDonald's as one of the country's 10 most admired brands. Last year, another magazine, Exame, said McDonald's was the best place to work in Brazil. It also named the chain as one of 11 "good corporate citizens" of the year for its social programs. Trade organization Alshop (Associação Brasileira de Lojistas de Shopping) recently chose McDonald's as the best service chain in Brazil.
"We rank close to 90 percent in customer satisfaction," says Fleischmann, who got his MBA from São Paulo's Fundação Getulio Vargas and started his career at Jack in the Box, a US fast-food chain that has since left Brazil. "People love McDonald's because it's a favorite with families. We are into the community. We put people in schools, we invest in training, and we are a socially responsible company. We contribute more to kids with cancer than any other institution in Brazil."
In 2000, McDonald's Brazil invested a total of R$201 million -- R$111 million in expansions and renovations, R$70 million in marketing and R$20 million in training. In 2001, overall investment reached R$205 million.
A visit to any McDonald's in Brazil invariably turns up items not available at outlets elsewhere, such as McMilla (a chicken-and-cheese burger), McMax (a mega-burger); torta de banana(banana pie) and suco de maracujá(passion-fruit juice). And there's McInternet, too. This joint venture between McDonald's and Hewlett-Packard aims to bring up to six computers into 52 selected outlets across Brazil; restaurant customers get to surf the web, and send or receive e-mail, for 30 minutes free with any purchase.
Innovations like these, says Fleischmann, have helped McDonald's Brazil stay far ahead of the competition.
"Subway came and left, and KFC and Pizza Hut came, closed down and restarted again, but they're very small-scale right now. So why has McDonald's been successful here?" he asks. "First of all, to do business in Brazil you have to be local. So even though McDonald's is a global company, we have local employees, local supply chains and local franchisees. We have a very local perspective, and our brand is dedicated to one purpose -- outstanding customer experience at a price people can afford."
Fleischmann prides himself on the fact that McDonald's Brazil sources all its ingredients domestically, except for French fries, which come from Argentina. "Brazil does not have good soil to produce good potatoes," he says. "We've tried many times. McDonald's fries require a certain percentage of solids, and you can only get that in regions that are hot during the day, and cold during the night."
Other than that, McDonald's has 201 official Brazilian suppliers. The company also exports meat to Japan and Israel, and mustard and ketchup to neighboring Uruguay and Paraguay.
Peter van Voorst Vader, president and CEO of Bob's, a Rio-based hamburger chain with 274 restaurants and kiosks throughout Brazil, concedes that no one even comes close to McDonald's in terms of sales, coverage or name recognition.
"Obviously, they have a very strong company, with unlimited resources," he says. "They're very good operators, their stores here are run better than in the United States, and they have a lot of marketing dollars. Those are the ingredients of their success."
Mauro Abdalla, franchise manager for Habib's, which claims 180 outlets in São Paulo and other leading Brazilian cities, agrees. "McDonald's has been here for a long time. When they arrived, the only chain here was Bob's. What attracted people was the fact that they were quick, and rapid service was a novelty. They were able to rent or buy prime locations, and everything is about location."
But, he adds, "the growth of McDonald's today is not as fast as before, and a lot of franchisees are unhappy with McDonald's because their return on investment is not as good as it could be." Abdalla claims the typical Habib's franchisee recoups his investment after only 24 months, while it takes five years for the average McDonald's franchisee to break even.
Fleischmann counters that things couldn't be too bad for franchisees, since the number of outlets per franchisee has risen from 1.58 in 1998 to 1.82 in 2000, and that the percentage of franchisees operating more than one McDonald's jumped from 35 percent to 47 percent over the same period.
In addition to company headquarters in Alphaville, McDonald's has regional offices in São Paulo, Riberão Prêto, Recife, Rio de Janeiro and Pôrto Alegre. Fleischmann himself spends 60 percent of his time in the field, popping in on restaurants.
"Most of the time, my visits are unannounced, but there is no sense of 'gotcha,'" says the CEO, who begins each day at 7 a.m. with gymnastics, and plays soccer on Tuesdays and Thursdays. "It really is teamwork. All executives at McDonald's know how to run a restaurant."
What they can't do is run the Brazilian economy, though Fleischmann sometimes wishes he could. "I'm frustrated that even though McDonald's creates 2,000 to 3,000 new jobs every year, Brazil's unemployment rate is higher than ever. We are investing R$200 million a year, but critical investments are not being made in tax and fiscal reforms."
Fleischmann says Brazil's 1999 devaluation "was and remains our biggest challenge. We have been through hyperinflation, recession and price freezes. In the past, we had devaluations but also big inflation, which offset each other."
On the other hand, he notes that since the devaluation, "we've learned how to cut our dollar exposure, by restructuring financing and hedging one supplier against another. So over the last three years, we've gotten our master's degree in economics."
Devaluation does have its benefits. At only R$3.95 (US$1.69), Brazilians pay less for a Big Mac than their counterparts in most other countries. How many Big Macs they'll gobble up this year is anyone's guess -- though Fleischmann aims to make it easier to find one. Over the next half decade, he says, the company will spend R$1 billion (US$429 million) to boost the number of outlets throughout Brazil -- if such a thing is desirable or even possible.
"You have to have long-term vision," insists the burger executive. "We've fought back the Russian crisis, the Asian crisis and now the Argentine crisis. The level of confidence in Brazil is growing. But in the end, we don't have much time to think about that, because we have to find our own solutions." Anyone for a McMax?