By Bradley Dunseith, India Briefing
Joint Ventures in India: Learning from McDonald’s Experience
A troubled relationship between
McDonald’s and one of their Indian partners is spoiling the American
corporation’s once impressive position in India’s food and beverage industry.
McDonald’s is set to close nearly
170 outlets in northern and eastern India; 43 outlets have already shut down in
Delhi. Since September 2013, McDonald’s has engaged in drawn out legal battles
with their partner for north and east India: Connaught Plaza Restaurants
Private Limited (CPRL).
Infighting between the American
corporation and CPRL has tarnished McDonald’s brand reputation in the
subcontinent, and sabotaged business development and expansion. In 2015, for
example, the company opened only three new outlets in north and east India
while their southern and western operations flourished.
Foreign businesses and investors
should read McDonald’s ordeal as a precautionary account on the risks of joint
ventures (JV) in India, and the importance of patient and diligent vetting and
The rise of McDonald’s in India
That McDonald’s (a restaurant
known for beef based products) succeeded in India (where the consumption of
beef is not only stigmatized but also largely illegal) is instructive: the fast
food giant did a remarkable job of tailoring its products to local tastes and
McDonald’s opened its first
Indian restaurant in 1996 – back then, India’s middle class largely considered
eating out a frivolous activity while India’s league of street food vendors met
the population’s demand for quick and affordable meals.
Ingeniously, McDonald’s scaled
down its meat based products – selling no beef or pork – in exchange for wider
vegetarian options, which borrowed Indian flavors such as its ‘aloo tikka
burger’ – a potato and pea patty made with Indian spices.
Further still, the fast food
giant released value-priced products to attract a wider market while tailoring
their advertising towards young professionals and socialites.
McDonald’s was not only among the
first foreign fast-food outlets to enter the Indian market – it also
dramatically altered how Indian consumers perceived eating out.
Before the shutdowns, McDonald’s
boasted of 430 outlets in the subcontinent.
McDonalds’ joint venture problems
In the mid-1990’s, McDonald’s
signed two JVs in India. CPRL, headed by Vikram Bakshi, took north and east
India while Hard Castle Restaurants, headed by Amit Jatia, took over the
southern and western regions. Both Indian companies are family run, and neither
had their base in the food and beverage industry.
In August 2013, McDonald’s ousted
Bakshi, accusing him of financial irregularities. Bakshi brought the case to
India’s National Company Law Tribunal (NCLT), arguing McDonald’s was attempting
to buy his shares at an undervalued rate. The NCLT reinstated Bakshi as
managing director of CPLR.
In 2014, McDonald’s offered
Bakshi US$18.7 million for his 50 percent stake in CPRL; Bakshi valued his
stake at US$81.6 million.
In July 2017, 43 McDonald’s
outlets in Delhi closed overnight for failure to renew regulatory health
licenses. Bakshi later said he did not renew the licenses out of quality
concerns, speculating publically on the health standards of McDonald’s
franchises in north and east India – his own district.
Finally, on August 21, 2017,
McDonald’s announced they would prematurely terminate their JV with CPRL,
shutting down 169 of its outlets in their region.
The McDonald’s brand is suffering
from self-inflicted wounds, and thousands of employees are set to lose their
Planning a joint venture in
India: Lessons from McDonald’s
McDonald’s soured relationship
with CPRL has undermined their past success in India. Foreign businesses
looking to partner with an Indian company can learn from their example on how
to vet and plan a JV in India.
Selecting and vetting a partner
Domestic Indian companies are
eager to partner with foreign businesses given their access to finance and
established success. Foreign companies must practice patience and conduct due
diligence when selecting an Indian partner. Thorough background checks and
research on both the company and individual stakeholders can save a foreign
business from ensuing legal battles and financial strain.
Furthermore, India is a diverse
country with many regional languages, cultural practices, and regulations.
Foreign businesses do not have to choose a single partner for all of India.
Multiple joint partnerships can diffuse risk while providing regional insight into
Working cultures in the U.S. and
India can be very different; these differences, if left unexamined, can
sabotage a partnership. Many Indian companies are family businesses and
entrepreneurial in attitude whereas American companies tend to be headed by
professional managers and do not answer to family members.
Foreign players need to first
identify key differences in decision making, long and short term strategy, and
hierarchies. Identify key stakeholders – not a straightforward task when it
comes to family businesses – and ensure their cooperation.
Most JVs fail due to poor
planning in the initial, launch phase. Foreign businesses should identify
attitude and strategy differences between both partners at the outset while
simultaneously agreeing explicitly to specific targets and working
Decision making and conflict
Once interests are aligned, they
must be formalized in a comprehensive contract. A JV’s contract is not simply a
bureaucratic exercise but rather an anticipation of future conflicts. Contracts
should include clear protocols for decision making, conflict resolutions, and
Foreign businesses should consult
a legal advisor based in India to better understand the regulatory landscape
and focus their energy into drafting a contract, which will protect them in
cases of dispute. For example, non-compete clauses are largely unenforceable in
India while legal disputes can be addressed outside of India (thus outside of
India’s slow, backlogged courts) if stated in the contract.
The potential of a well-planned
joint venture in India
Developing a joint venture with
an Indian partner can provide foreign companies with strengthened credibility,
new networks, and help navigating India’s regulatory landscape.
Foreign businesses can mitigate
the risks of JVs with carefully vetting and selecting their partners, and
ensuring their contract includes proper provisions for conflict resolution.
McDonald’s initial success in
India was due to properly functioning JVs; their downfall is, in part, the
result of an unhealthy JV. Foreign investors can learn from McDonald’s example:
properly vet Indian partners, ensure all partners’ interests are adequately
aligned, and formalize those interests in a comprehensive contract.
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