The 'What' & 'Why' of McDonald's India rift
McDonald's entered the Indian Territory in 1996 as a Joint Venture between Oak Brook III and two local Indian partners. Connaught Plaza Restaurant manages North and East India franchise, and HardCastle Restaurant manages South and West Indian outlets. They were both known to be splendid success stories as building a burger business without a beef offering - it was never done anywhere else in the world by McDonald’s. Also, bringing in innovation through items like ‘aloo tikki’ and developing affordable price offerings as low as a soft serve cone at Rs. 14 pushed McDonald’s to be a very successful venture in India with two JV partners.
In a not so fortunate twist in this story, the recent tiff between McDonalds and Connaught Plaza Restaurant (CPRL) owner Vikram Bakshi, McDonald's is seen losing its shine and brand image to a larger extent. And of course, it has a direct impact on revenues; they are losing revenues in the Northern region due to the non-renewal of mandatory licenses to operate. On August 21, 2017, McDonald’s India terminated its franchise agreement with Connaught Plaza Restaurants Pvt. Ltd (CPRL) for all 169 of McDonald’s outlets in northern and eastern India, citing non-payment of royalties as the main reason. This fight has put an axe on the 169 outlets managed by CPRL in the country.
Who are the real victims?
The closure of the restaurants would affect around 6,500 McDonald’s employees in northern and eastern India besides 3,500 workers as suppliers and business associates. Vikram Bakshi claims that till date salaries of all employees including for the restaurants that are shut down are being paid by CPRL and the landlords are being paid their rentals. However, there seems no direct and immediate resolution in sight. The branding too has taken a hit and the franchisees of competing brands are working on plans to poach the fast food major’s employees. At this juncture, the employees and related associates are in a fix on how to take the right plunge to safeguard them from this unwarranted turmoil.
- Should they join other rivals - who are seen rushing to expand by opening various outlets and grab the market share?
- Will individual brand loyalty give better benefits to the loyal employees in the longer run?
- Is it a worthy wait to see what the verdict comes out to be?
Impact of JVs in India
This unwanted saga of recent upheaval in such a huge brand clearly points out to the inherent challenges of joint ventures in India. Businesses need to clearly define every bit of leadership structures to succeed in a set up of 50:50 joint ventures. McDonald’s JV was one of the few remaining success stories which have taken such an unpleasant turn now. There is an interesting piece of analysis done by IndSight Growth Partners Advisors’ on India entry strategy. Out of 38 foreign consumer goods companies over the last 25 years, data shows that of the 21 JVs started, only six have survived. And of the 15 that were terminated, a third of them ended in a public conflict. There are many business reasons for these failures. Cross cultural differences, control expectations, Strategy, culture, team dynamics, resources and different ownership context are some factors which play a pivotal role. However, most JVs fail because they do not acknowledge and manage the inherent challenges within the structure of a JV in India.
The interesting journey of McDonald’s
Structurally, there was no distinction between the Bakshi and Jatia ventures (owner of HardCastle Restaurant) in the first 15 years of its inception. However, the changes began in May 2010, when the parent company bought back its shares in the Joint Venture (JV) with Jatia venture. And then in 2013, McDonald’s voted against the re-election of Bakshi as managing director of CPRL.
Bakshi is widely known as the corporate face of McDonald's in India. A player in real estate in the National Capital Region, and beyond; he challenged his removal at the National Company Law Appellate Tribunal (NCLAT). NCLAT reinstated Bakshi as the managing director on 13th July. As per Vikram Bakshi, McDonald’s have earned royalty till September 2015. He has paid 5% of sales stake as royalty even for the period of dispute from 2013-2015.
On the other hand, as per the termination notice issued by McDonald’s India, Bakshi was supposed to cease using McDonald’s name, trademarks, designs, branding, operational and marketing practices, policies, food recipes and specifications from 6th September, 2017.
NCLAT will now hear the matter on 21st September, with the main appeal brought by McDonald’s India against the NCLAT’s order of July reinstating Bakshi as managing director of CPRL. A separate appeal was also filed by Bakshi requesting a fair valuation of the fast-food chain’s outlets in northern and eastern India.