Fast-food chain cuts off large franchisee in dispute, adding to woes in market
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 22, 2017).
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MUMBAI -- McDonald's Corp. has severed ties with its second-largest franchisee in India, a move that could lead to the loss of nearly 170 outlets and force the fast-food behemoth to start over in parts of this South Asia market.
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., 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," said Barry Sum, a McDonald's spokesman in Hong Kong.
In June, 43 of the 169 restaurants run by CPRL -- in which McDonald's India Pvt Ltd. has a 50% stake -- were shuttered because they didn't have the necessary business licenses. 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. "This desperate action taken by the McDonald's Corporation is a direct affront on the Indian legal system," he said in a written statement Monday.
The McDonald's spokesman said CPRL -- which opened the first McDonald's restaurant in India -- hadn't been paying royalties and had violated other "essential obligations" that it failed to remedy 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 of its license.
"We understand that this action brings uncertainty for many," McDonald's said. The company said it is working to mitigate the impact on employees, suppliers and landlords and is taking steps to find a new partner for the affected regions.
The breakup marks a painful pause for the Oakbrook, Ill.-based company, as it 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 global restaurant chains to bet on the India opportunity back in the 1990s, McDonald's was initially a huge success, with people in cities like Mumbai and Bangalore lining up for its fare, 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 as 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, McDonald's has been trying to upgrade its menu in India and did the unthinkable last year, changing 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 its network. Meantime, in northern and eastern India, the chain could go from the trailblazer to underdog in the fast-food business.
Abneesh Roy, an analyst at Edelweiss Securities Ltd. said consumers could migrate to Domino's or Burger King in the absence of McDonald's restaurants.
"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.
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August 22, 2017 02:47 ET (06:47 GMT)