McDonald’s flirts with disaster in India

McDonald’s has closed 169 outlets in India, a market where it has been steadily losing ground to competitors following a series of disputes with local management. While it raises clear questions as to the company’s future in Asia’s second biggest economy, it also brings into the spotlight the risks of the franchise model and the shifting battle lines between multinational franchises and their local partners.

McDonald’s troubles in India raises questions as to how large franchises operate and who is responsible for operations. This has larger ramifications when considering the need to maintain brand image and food quality globally.

With McDonald’s selling off its operations in China and Hong Kong to form a joint venture (JV) earlier in the year, the firm is trying to distance itself from operations to focus more effectively on the bottom line. While this may streamline their business, it also puts distance between the company and the product, which creates risk for McDonald’s down the line.

The problem in India has its roots in a disagreement between Vikram Bakshi, the local partner of McDonald’s India and one half of Connaught Plaza Restaurant. The company was set up as a JV between the two companies to run operations in the north and east of the country. It was set up in 1995 and for many years flourished, outperforming its rivals.

In 2013, Bakshi was removed as managing director (MD), with both parties attempting to buy out the other for their half of the JV. A couple of trips to court and McDonald’s finds itself looking to close nearly a third of its outlets in one of the fastest growing and largest economies on the planet.

Parallels with Chatime case in Malaysia

It is reminiscent of a recent dispute between Chatime and its master franchisor in Malaysia, Bryan Loo of Loob Holdings. Chatime had lost effectively all of its outlets in the process of cancelling his franchise rights, contributing to a trend of franchisors losing a grip on powerful local franchisees. However, in that case, Malaysia was responsible for a significant proportion of the chain’s overall revenue.

McDonald’s, for its part, blames Bakshi. The company asserts that he is guilty of failing to properly manage the firm. However, Bakshi was removed as MD in 2013 and has since been fighting in the courts to be reinstated. In this way, it appears that McDonald’s is pushing sole responsibility for the 50:50 JV onto Bakshi.

The disagreement revolves around a contractual agreement that Bakshi must co-sign licenses for the McDonald’s outlets. Following his removal as MD, Bakshi began pushing back, insisting that without control over operations he should not be held accountable for issues with the supply chain or hygiene, which have been frequent. This finally came to a head in July when Bakshi refused to co-sign licenses, leading to the closing of 41 outlets in Delhi. Following Bakshi’s reinstatement as MD by the National Company Law Tribunal in July, it appears that Bakshi has local backing, as was seen in during the dispute between Bryan Loo and Chatime.

Notwithstanding arbitration proceedings at the London Court of International Arbitration, McDonald’s may want to consider some lessons from Chatime’s mistake. While arbitration is ongoing in the Chatime dispute, by acting rashly it is now Tealive, not Chatime, which is the largest bubble tea operator in Malaysia.