10 Oct 2019 17:29 IST

Ensure partner’s interests are aligned well to own objectives

The fast-food MNC must frame protocols for decision-making and conflict resolution

McDonald’s, one of the most loved QSR brands in India, went through a tumultuous decade since 2008, despite which it clocked a net profit in December 2018, for the first time in its two decades in India. The relationship between McDonald’s and its JV partner for the North and East, Vikram Bakshi, turned bitter initially in 2008, when McDonald’s tried to buy out Bakshi’s 50 per cent stake. The feud was out in the open in 2013, when Bakshi was unceremoniously ousted as the MD of CPRL, and the estranged partner sought court interventions. After years of legal battles, however, he agreed to settle out of court.

Apoorva Bansal

 

Ritika Jha

 

Reasons leading to the situation

    McDonald’s went against its hassle-free, low-on-risk business model in India and followed the ownership model – 50:50 JV with CPRL and HRPL

      Allegations from McDonald’s, including violation of restrictive covenants, encumbrances on JV share, financial bungling, failure to deliver and maintain adequate internal control, multiple directorship in multiple ventures owned by family and exhibiting no desire to remedy, were, according to Bakshi, not communicated clearly

        Other points of contention by Bakshi were ulterior motives and arm-twisting by McDonald’s while colluding with HRPL. Such conspiracy and oppression theories have hurt the company’s brand image and outlet revenues

          The NCLT ruling of 2017 in favour of Bakshi placed statutory audit reports above due diligence; Bakshi was entitled to be re-elected as MD as long as he a) held 50 per cent shares in the company, b) devoted substantial time and effort to the company business, c) settled in NCR region and d) discharged his responsibilities as an MD in a faithful and competent manner.

            The NCLT also observed that McDonald’s India had not reported any grievance in the past 16 years against Bakshi; rather, there were instances where McDonald’s had appreciated his efforts. NCLT also stated that McDonald’s India had previously approached Bakshi to sell his share to them, but he had refused outright. NCLT, based on the above fact, held that ousting Bakshi was an act of oppression as the JV agreement stated that ousting Bakshi would give McDonald’s India the right to purchase his shares at a throwaway price.

            • Neither did Bakshi pay the royalties nor did he renew the licence in 2013, worsening the situation; there existed multiple issues with unapproved suppliers, and a robust supply chain was not in place, leading to problems with the quality of food served at the CPRL-managed outlets
            • Lack of clarity emerges as the biggest problem that led to this feud

             

            Ideal franchising strategy going forward

              Selecting and vetting a partner: McDonald’s representatives should be careful and patient in choosing a new partner and focus on due diligence. Thorough research and background checks on the company and individual stakeholders can prevent future legal battles and financial strain.

                Aligning interests: Difference in working cultures of Indian and foreign businesses may sabotage a partnership, if left unaddressed. Foreign players need to identify critical differences in organisational structures and fix responsibility for strategy formulation and decision-making, to ensure all partners’ interests are adequately aligned.

                  Decision-making and conflict resolution: Once interests are aligned, they must be formalised in a comprehensive contract. A JV contract is not merely a bureaucratic exercise but rather an anticipation of future conflicts. Agreements should include unambiguous protocols for conflict resolution, decision- making, and exit strategies. It would help if the MNC consulted a legal advisor based in India to understand the regulatory landscape better and draft contracts that protect them in cases of dispute.

                      Leadership: Ensure that the appropriate leadership is appointed. Avoid partners that have interest in diversification of their business in similar or slightly different ventures. Bakshi had family members on the board of PVR and Madame Tussauds, owned restaurants ‘Kebab Express’ and ‘Ardour’, and had a real estate venture too, while HRPL solely focused on the McDonald’s business.

                        Avoid 50:50 partnership: When both partners have equal rights, no decision can be taken without one of them backing down. Compromise has not been a much-favoured term in the entire face-off. Thus, it is better that the north and east regions be handled by McDonald’s itself or by striking up a HRPL-like partnership.

                         

                          Fast-food chain reinvention and long-term growth strategy

                          Process reinvention, procurement quality checks, food quality and customer service are major drivers in success in the QSR sector. Periodic food quality checks (semi-annually/annually) for all stores will ensure customer satisfaction. Suppliers are the building blocks who ensure standardisation in taste and food quality, and require periodic reviews.

                          To strengthen the vendor management process, annual background verification and quality audit should be conducted by the company and a centralised vendor database should be maintained to ensure transparency across outlets. Alternative vendors for key raw materials such as patties, vegetables should be identified, to mitigate the risk of delays in procurement.

                          Innovating the outlet space

                          Being a first mover, McDonald’s opened a few outlets at prime locations which can be further leveraged by creating a hybrid concept of serving fast casual options by day and full-service restaurant options by night. This will allow cross-utilisation and make the operations more efficient, from staffing to inventory. Such a model can be leveraged at outlets inside tech parks and business hubs such as Cyber-city, where people can order food any time.

                          Creating a positive ambience is crucial to keeping customers engaged and happy. This can be achieved by putting up posters of McD initiatives such as ‘Farm to Fork’, CSR activities and sustainability drives.

                           

                          (The winners are students of Second Year PGPM at IIM Shillong.)

                          Recommended for you