10 Oct 2019 17:26 IST

Strong contracts, differentiated strategy will push long-term growth

Focus on product development, safety standards and better gross margins through best practices

Vamshi Bogadi

In 1996, McDonald’s entered into a 50:50 joint venture with along with Vikram Bakshi of Connaught Plaza Restaurants Ltd to target the northern and eastern Indian markets. But a little over a decade later, the troubles started, only to snowball into a crisis by the end of the next decade. Here’s a look at some of the factors that could have precipitated the stand-off.

 

1) Absence of an arbitration clause

The Indian Arbitration Act allows entities to settle disputes in the arbitration courts and companies draft strong arbitration clauses to settle any disputes only in the court of arbitration. Such a strong arbitration clause was missing in the contract, which is why Bakshi took the dispute to court.

2) Forced acquisition attempts and ousting of Bakshi:

McDonald’s attempt to buy out Bakshi’s stake ignited the dispute, and when Bakshi resisted, he was ousted from his MD position citing various reasons.

3) Sub-optimal quality

Assuming Bakshi’s counter-allegations on McDonald’s different food safety standards in India are true, then it would be a serious cause for concern from the customer’s angle, ruining McDonald’s brand image.

4) Corporate sabotage attempts

McDonald’s alleged attempts to affect Bakshi’s business by influencing the supply and distribution partners of CPRL. This led to a series of allegations by Bakshi, also affecting the McDonald’s brand image and causing high customer churn rates. Also, customers were dissatisfied with the absence of popular products.

5) Long contract period

In 1996, McDonald’s was entering the Indian market for the first time but entered into a long contract with a local partner. This was bound to affect McDonald’s prospects in case of a long-running dispute.

Also, the termination clause in the contract should be well-drafted for easy and quick settlement of the dispute.

6) Bad PR and crisis management

McDonald’s should have handled the crisis much better given its exposure to various emerging markets. An out-of-court settlement option should have been explored much earlier as the long-delayed crisis affected McDonald’s brand image and market share in a growing market.

McDonald’s and emerging markets

McDonald’s growth in the developed markets had become stagnant and it looked to the emerging markets that offer opportunities with promising growth rates.

 

Quick service restaurants (QSRs) have low entry and exit barriers. But the competition is so intense and it’s very easy to gain and lose market share. Holding market share and maintaining decent margins become crucial to sustain and raise new capital.

Characteristics of QSRs in emerging markets

· Price Sensitive

· High Growth rate

· Low Gross Margins

· Low Entry & Exit Barriers

· Low Capital Expenditure

· Highly Competitive

Market Share is directly proportional to the following factors:

· Brand Image

· Food Quality & Service

· Competitive Pricing & Promotions

· Trademark Products & Standards.

Problems and its impact on McDonald’s brand image

Brand image is a differentiating factor and directly impacts market share and customer perception.

 

The forced acquisition attempts signalled a negative image of McDonald’s to all current and prospective partners

Ousting of Vikram Bakshi as MD of CPRL generated a lot of negative PR as Bakshi challenged his ousting in the court.

Legal battles at NCLT & LCIA affected McDonald’s brand image because of negative publicity and lack of focus on brand image development activities.

Closure of 43 outlets as Bakshi refused to renew the license, citing unsafe food being served in outlets caused serious damage to McDonald’s brand.

Closure of 84 restaurants –due to supplier and distributors’ issues , termination of franchise contract and asking customers to refrain from eating at unauthorised outlets, citing violation of safety standards, caused a direct negative impact.

Alleged corporate sabotage attempts through suppliers and distributors seriously affected operations in outlets run by CPRL, leading to confusion and huge customer dissatisfaction as they could not find trademark products.

McDonald’s strategy in North and East regions

To improve brand image and revive customer interest

· Conduct food safety standard tests and promoting the results to erase doubts in the minds of customers

· Focus on high customer satisfaction through regular customer feedback on service and standards

· Make popular food products available to customers

· Promotions and advertisement campaigns to improve footfalls

· Focus on positive PR and promote the core values of McDonald’s

· Customer engagement activities and introduce Indian centric tastes to make locally relevant

Franchising strategy

· Strong contracts with arbitration clause to settle any dispute only in arbitration court

· Strong contract termination clause which clearly states the compensation and other contractual obligations

· Crisis management and risk management policies to handle crisis situations

· Given the experience, choosing local partners who can add value and bring operational synergies

· Lowering the initial contractual period to test the feasibility of the partnership

· Lowering the bargaining power of partners by bringing multiple local partners

· Explore opportunities and open new outlets to improve market share

Long-term growth strategy

Given the nature of the market, the long-term strategy should be a combination of the following factors:

 

· High safety and quality standards should be followed and promoted

· Trademark products and Indian-centric tastes

· Become locally relevant through context-specific policies and promotions

· Differentiate through innovative marketing and promotions

· Reduce operating costs through best practices

· Raise the customer satisfaction index to create loyal customer base

· Develop strong culture

· Take on board partners who can be assets by providing better inputs and help with key decisions

· Pursue regular promotions and advertisement campaigns to build a strong brand image

Differentiating through incremental product development and safety standards along with consistent improvement in gross margins through operational best practices and well-trained human resource should be McDonald’s long-term strategy.

(The First Runner-Up is in the second year MBA at IIM Kozhikode.)

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