Here’s Why McDonald’s Is Closing Nearly Half Of Its Restaurants In India

Recently, McDonald’s (NYSE:MCD) announced that it was shutting down 169 of its 430 outlets in India, following the termination of its franchise agreement with CRPL (Connaught Plaza Restaurant) due to alleged breach of franchise terms.  This decision comes after a long drawn out battle between McDonald’s and the Managing Director of its franchise partner Mr. Vikram Bakshi, who was ousted from his position in 2013, only to be reinstated by the National Company Law Tribunal in July 2017. McDonald’s had alleged Mr. Bakshi of financial irregularities and mistrust due to leasing out his real estate to a rival company. Further, McDonald’s also highlighted mismanagement by the franchise partner, inadequacies with respect to the internal control systems, and Mr. Bakshi’s focus on his other business interests. Following this dispute, in June this year, McDonald’s temporarily shut 40 restaurants in northern India due to non-renewal of licenses. With termination of the current franchise agreement, the company will no longer operate in northern and eastern India, until a new partner is found. This bold decision by McDonald’s could also be a negotiating tactic with the existing franchisee since the company has terminated the contract without a new franchise partner in place. It also indicates that the company is not willing to put up with franchisee irregularities at any cost.

While this appears to be the outcome of a specific dispute between McDonald’s and one of its franchise partners, it impacts the company’s brand value in the region where it is already lagging behind competitors. Although the number of restaurants McDonald’s operates in India is not very significant compared to its 36,000+ restaurants globally, this questions the broader franchise based expansion model especially in developing nations where strict adherence to terms might not be likely.

Expansion In India Can Be Impacted

McDonald’s entered the Indian market much before other U.S. chains such as Burger King and Wendy’s, however the company could not capture the growth in the Indian quick service restaurant market. Domino’s Pizza commands a nearly 16% share in the Indian food service industry and McDonald’s has been able to manage to capture only 7.5% of the market. Before the announced closure there were around 450 McDonald’s restaurants in India while Domino’s has more than 1,000 restaurants in the country. While this is partly due to customers seeming to prefer pizza over burgers, McDonald’s slow growth in the region can be attributed to franchise troubles. The India quick service restaurant market is likely to grow to $4.1 billion by 2020 and faster expansion in the region can help McDonald’s capture this growth. While the country does not contribute significantly to McDonald’s revenues currently, faster growth in India can boost its longer term growth prospects. Franchise troubles can impact this expansion adversely.

Re-Look At The Franchise Model Of Expansion?

While companies such as Starbucks are adopting a mixed model of expansion (company owned and franchise) McDonald’s is moving towards a nearly 100% franchised model. This model is more profitable but comes at the cost of franchisee issues which can impact the brand reputation and expansion. McDonald’s reputation in India had taken a beating due to the ongoing issues and impacted its long term growth prospects. However, we believe the franchisee model is likely to work in other nations.

India does not contribute significantly to McDonald’s revenues currently, however the company needs to re-look at its strategy in the region for strong long term growth prospects.

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