McDonald's Cuts Ties With Indian Partner
August 21 2017 - 10:10AM
Dow Jones News
By Corinne Abrams
MUMBAI -- McDonald's Indian arm has severed ties with its
second-largest franchisee in the South Asian nation in a move that
could lead to the closure of more than 150 outlets and force the
fast food behemoth to start over from scratch in parts of this
important market.
After years of court disputes over management of the company
that controls the McDonald's restaurants in northern and eastern
India, McDonald's said Monday it terminated franchise agreements
with Connaught Plaza Restaurants Pvt. Ltd. which ran 169
restaurants, bringing to an end a 22-year-old arrangement.
The only other franchisee in India, Hardcastle Restaurants Pvt.
Ltd, runs 242 restaurants in west and south India which won't be
affected.
"We have been compelled to take this step because CPRL has
materially breached the terms of the respective franchise
agreements," Barry Sum, a McDonald's spokesman in Hong Kong
said.
In June, 43 restaurants run by CPRL -- in which McDonald's India
Pvt Ltd. has a 50% stake -- were shuttered because they didn't have
the necessary regulatory permissions. Previously, McDonald's tried
to oust the company's managing director, Vikram Bakshi, but he
fought the decision in court and was reinstated in July.
Mr. Bakshi said the burger chain's latest decision was an
"oppressive act" and he is considering his legal options.
"This desperate action taken by the McDonald's Corporation is a
direct affront on the Indian legal system," Mr. Bakshi said in a
statement Monday.
The McDonald's spokesman said CPR -- which opened the first
McDonald's restaurant in India -- hadn't been paying royalties and
had violated other "essential obligations," and had failed to
remedy them over the past two years.
McDonald's said that CPRL was required to stop using the
"McDonald's System," its name, branding and trademarks within 15
days of the termination license.
"We understand that this action brings uncertainty for many,"
McDonald's said. It is working to mitigate the impact on employees,
suppliers and landlords and is taking steps to find a new partner
for the regions left empty by the fallout.
The break up means that McDonald's may have to start again in
some of its most important markets at a time when it has been
struggling with increasingly intense competition.
It is a painful pause for the Oakbrook, Ill.-based company that
has been looking to emerging markets like India to offset slowdowns
at home and in other more developed markets like China.
One of the first big global chains to bet on the India
opportunity back in the 1990s, it was initially a huge success,
with people lining up from Mumbai to Bangalore for its menu, which
had been modified to be beef free.
It was one of the first brands that embraced India's emerging
middle class and was rewarded with regular customers. It was seen
as an anchor tenant at new malls and a symbol of affluent
neighborhoods.
In recent years, however, McDonald's and other first movers such
as Pizza Hut and KFC have seen their growth slow as a slew of
international and local competitors gave consumers new options and
food delivery apps offered deep discounts.
India's first generation of fast-food fans are increasingly
switching to newcomers.
India's cities have been flooded with new outlets from global
brands like Burger King and local options like tea chain Chaayos.
Meanwhile, even Dunkin' Donuts has taken a bite out of the business
by offering its own burgers.
Battling a slump in sales, the company has been trying to
upgrade its menu and did the unthinkable last year, changed the
recipe of the Indian version of the Big Mac -- the Maharaja
Mac.
It could end up being a very expensive and time-consuming
process for McDonald's to untangle itself from its current
locations and rebuild a new network and meanwhile -- at least in
the regions covered by the troubled franchise agreement -- it could
plummet from the trailblazer to an underdog in the fast food
business.
Abneesh Roy, analyst at Edelweiss Securities Ltd. said consumers
would choose to eat at Domino's or Burger King if the McDonald's
restaurants closed and may not return.
"The two partners were fighting over a long period," he said.
"This is the risk McDonald's has to face.."
--Debiprasad Nayak and Eric Bellman contributed to this
article.
Write to Corinne Abrams at corinne.abrams@wsj.com
(END) Dow Jones Newswires
August 21, 2017 09:55 ET (13:55 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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