20 Oct 2017 13:49 IST

What’s the problem at McDonald’s India?

The stand-off between the fast-food major and its franchisee seems set for tedious legal proceedings

Following the termination of McDonald’s India’s franchise agreement with CPRL (Connaught Plaza Restaurants Ltd) due to alleged breach of franchise terms, 169 of the US-based fast-food major’s 430 outlets in India were shut down early last month. All these outlets were located in north and east India.

Some of them have, however, been recently reopened, and McDonald’s has strongly objected to this (you’ll see below why). The issue has taken a legal course and arbitration proceedings are now pending across courts in India and the UK.

So, what’s the structure of McDonald’s operations in India? The American fast-food chain globally runs its operations through a combination of joint-venture and franchise structures — including in India.

The inside operations

The American company is represented in India through the private limited company, McDonald’s India Pvt. Ltd (MIPL). MIPL has structured a joint venture operation with Vikram Bakshi, through the company Connaught Plaza Restaurants Pvt. Ltd (CPRL), in which both partners, McDonald’s India and Vikram Bakshi, own equity. Bakshi had been appointed the managing director of CPRL.

CPRL holds the master franchise, under which it can set up McDonald’s outlets in the country’s northern and eastern regions. CPRL pays royalties based on the sale of food items in such outlets. With Vikram Bakshi at the helm, it runs 169 McDonald’s restaurants in the regions it is responsible for.

McDonald’s has alleged that the joint venture company has defaulted in payment of royalties, which is why the global fast-food chain sought termination of the franchise agreement and closed down the entire operations controlled by CPRL. As a result of such termination and closure of operations, CPRL has also to immediately cease using McDonald’s brand name.

McDonald’s has confirmed that it will look for a new franchisee to reopen its operations in the country’s North and East.

The fast-food company has a second franchisee in India, Hardcastle Restaurants Pvt. Ltd (a subsidiary of Westlife Development Ltd), which manages its outlets in the southern and western parts of in the country. Its operations have not been impacted.

Brewing problems

There have been problems between Bakshi and McDonald’s over the last five years. The fast-food chain alleges that Bakshi siphoned off funds from the joint venture company for his other businesses, while also focusing more on his own businesses rather than dedicating time and resources to the JV, CPRL.

Five years back, McDonald’s invoked arbitration in the London Courts of International Arbitration to oust Bakshi as the managing director of CPRL and take control of the company. But the Indian regulator, the National Company Law Tribunal (NCLT), reinstated Bakshi.

Joint venture vs. franchise agreement

International companies have two primary objectives when they enter countries like India. First, to develop their business in the new territory and, second, to exercise reasonable control over their operations.

The joint venture agreement serves both objectives. It brings in a local partner who develops the international company’s business, while giving the main company control over the operations. The profits in the joint venture company are shared between the two partners in proportion to their shareholdings in the joint venture.

The operational specifics in the territory are governed by the franchise agreement, where the franchisee is given all the recipes, the know-how, the store layout and instructions for running the operations. The franchisee, in turn, uses the brand name and logos, and pays royalties to the franchisor for such usage.

If the franchise agreement is terminated at any point in time, the franchisee cannot use the brand name and logos of the franchisor any more. That way, a franchise agreement safeguards the international company (in this instance, McDonald’s) in ensuring that their brand is protected, and not imitated or copied.

Unfortunately, the way this JV is structured, there seem to be a number of contentious issues that can be open to interpretation. Once the partners have a dispute, a maze of disagreements could arise, which is exactly what happened in this case.

The future

In spite of McDonald’s cancelling the franchise agreement, Vikram Bakshi, by virtue of having control over CPRL, recently reopened 18 outlets; this is being viewed seriously by McDonald’s.

Both parties are considering appropriate legal action. McDonald’s has escalated the issue for arbitration in the London Court of International Arbitration, which has ordered Vikram Bakshi to sell his stake in the JV firm CPRL to McDonald’s.

Over the last few years, the two partners have been debating the valuation of the company; this has been a major hurdle for McDonald’s in acquiring Bakshi’s shares and take complete control of the franchise operations in India.

It could be a very long-drawn-out dispute resolution process and, for sure, the McDonald’s brand will be impacted in a key growth market like India. In the meantime, competitors like KFC, Domino’s and Burger King will establish their brands more strongly.

In summary, the issue boils down to the valuation of Bakshi’s share in CPRL. Is it as high as he claims it to be? Or is it lower, at the levels estimated by McDonald’s? It will finally come down to the nitty-gritty of whether the McDonald’s brand name has been the driver for its success in India or if it has been Bakshi’s expertise and support that have popularised the burger business across the northern and eastern regions.

This is an extremely subjective question and would entail a very lengthy legal debate!