MUMBAI – McDonald's Indian arm has severed ties with its second-largest franchisee in the South Asian nation in a move that could lead to the closure of more than 150 outlets and force the fast food behemoth to start over from scratch in parts of this important market.
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After years of court disputes over management of the company that controls the McDonald's restaurants in northern and eastern India, McDonald's said Monday it terminated franchise agreements with Connaught Plaza Restaurants Pvt. Ltd. which ran 169 restaurants, bringing to an end a 22-year-old arrangement.
The only other franchisee in India, Hardcastle Restaurants Pvt. Ltd, runs 242 restaurants in west and south India which won't be affected.
"We have been compelled to take this step because CPRL has materially breached the terms of the respective franchise agreements," Barry Sum, a McDonald's spokesman in Hong Kong said.
In June, 43 restaurants run by CPRL -- in which McDonald's India Pvt Ltd. has a 50% stake -- were shuttered because they didn't have the necessary regulatory permissions. Previously, McDonald's tried to oust the company's managing director, Vikram Bakshi, but he fought the decision in court and was reinstated in July.
Mr. Bakshi said the burger chain's latest decision was an "oppressive act" and he is considering his legal options.
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"This desperate action taken by the McDonald's Corporation is a direct affront on the Indian legal system," Mr. Bakshi said in a statement Monday.
The McDonald's spokesman said CPR -- which opened the first McDonald's restaurant in India -- hadn't been paying royalties and had violated other "essential obligations," and had failed to remedy them over the past two years.
McDonald's said that CPRL was required to stop using the "McDonald's System," its name, branding and trademarks within 15 days of the termination license.
"We understand that this action brings uncertainty for many," McDonald's said. It is working to mitigate the impact on employees, suppliers and landlords and is taking steps to find a new partner for the regions left empty by the fallout.
The break up means that McDonald's may have to start again in some of its most important markets at a time when it has been struggling with increasingly intense competition.
It is a painful pause for the Oakbrook, Ill.-based company that has been looking to emerging markets like India to offset slowdowns at home and in other more developed markets like China.
One of the first big global chains to bet on the India opportunity back in the 1990s, it was initially a huge success, with people lining up from Mumbai to Bangalore for its menu, which had been modified to be beef free.
It was one of the first brands that embraced India's emerging middle class and was rewarded with regular customers. It was seen as an anchor tenant at new malls and a symbol of affluent neighborhoods.
In recent years, however, McDonald's and other first movers such as Pizza Hut and KFC have seen their growth slow as a slew of international and local competitors gave consumers new options and food delivery apps offered deep discounts.
India's first generation of fast-food fans are increasingly switching to newcomers.
India's cities have been flooded with new outlets from global brands like Burger King and local options like tea chain Chaayos. Meanwhile, even Dunkin' Donuts has taken a bite out of the business by offering its own burgers.
Battling a slump in sales, the company has been trying to upgrade its menu and did the unthinkable last year, changed the recipe of the Indian version of the Big Mac -- the Maharaja Mac.
It could end up being a very expensive and time-consuming process for McDonald's to untangle itself from its current locations and rebuild a new network and meanwhile -- at least in the regions covered by the troubled franchise agreement -- it could plummet from the trailblazer to an underdog in the fast food business.
Abneesh Roy, analyst at Edelweiss Securities Ltd. said consumers would choose to eat at Domino's or Burger King if the McDonald's restaurants closed and may not return.
"The two partners were fighting over a long period," he said. "This is the risk McDonald's has to face.."
--Debiprasad Nayak and Eric Bellman contributed to this article.
Write to Corinne Abrams at email@example.com
(END) Dow Jones Newswires
August 21, 2017 09:55 ET (13:55 GMT)