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McDonald’s India Limited: The Fissure in the Franchise.

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 McDonald’s India Limited: The Fissure in the Franchise

Arun Sahay and Tushar Shankar Banerjee

It was the mid of January, 2018. The New Delhi weather had turned cool, mercury touching 140C.
Vikram Bakshi, the reinstated Managing Director of Connaught Plaza Restaurants Private Limited
(CPRL), sitting in his Jorbagh office, was wondering about future of McDonald’s franchise that
he was operating in north and east India. CPRL, a 50:50 joint venture between McDonald’s India
and him established McDonald’s as the leading consumer brand and industry leader in the Food &
Beverage sector. The partnership agreement signed had a validity for 25 years. CPRL had oriented
a multinational giant to be sensitive to Indian cultural nuances, when the concept of 'Glocal'
(Global Company with Local Focus) was in its infancy in the country. McDonald’s India had
achieved major milestones in the business, and had set benchmarks in menu innovation,
operational excellence and marketing leadership for others to vie with. It had been a roller coaster
ride along the lines of the famous golden arches (the signature yellow “M” of McDonald’s) of the
group for over a decade now. Today, tired of legal battles with McDonald’s, he was baffled as to
what to do next. He had to take a decision whether to continue his fight with the McDonald’s, the
franchiser, or quit honorably maximizing the value of his share in the joint venture.

McDonald’s in India

The Organization Structure

"McDonald's" had been the leading food & beverage retailer with almost thirty-two thousand
eateries serving more than fifty-eight million individuals in and around a hundred thirty nations.
The majority of these eateries worldwide were owned and operated by independent, local business
persons. McDonald's Corp had begun their voyage in India, the then 95th nation in their kitty, on
Oct. 13, through its Indian subsidiary McDonald’s India Limited in1996. The first eatery was
established in Basant Lok in New Delhi. 1 McDonald's India created two joint ventures for
operating across Indian sub continent. The northern and eastern India eateries were run by
Connaught Plaza Restaurants Pvt Ltd (CPRL), a joint venture led by Bakshi. The eateries of South

1 McDonald's™ India. (n.d.). Retrieved January 22, 2018, from http://www.mcdonaldsindia.net/key-milestones.aspx

and West India were taken care of by Hardcastle Restaurants Pvt Ltd, owned by Amit Jatia. Both
paid a franchise fee and royalty to McDonald's for utilizing its brand name.2

McDonald's, all around, disliked to own its ventures or operate them. Its favoured model was
generally safe, low-hassle one: permit out its great name for a payment to a local player; and on
top of that, charge a royalty linked to sales. In this way, the more the outlets are on offer, the more
cash McDonald's makes. Of its 34,000 outlets in 118 nations, 80% are through this establishment
course. Be that as it may, when it entered developing nations, McDonald’s frequently did as such
by means of the ownership model. A case in point was India, where it entered in 1995, with two
50:50 joint ventures, one with Bakshi and the other with Jatia. With both, McDonald’s signed a
25-year joint venture agreement, which would keep running till 2020. Apart from sourcing from
same suppliers and coordinating for marketing spends, the two JVs did not interact much.
Structurally, there was no difference between the Bakshi and Jatia ventures in the initial fifteen
years.

The Offerings
In India, the majority population of the Hindus consider cows as holy and avoid beef, while
Muslims view pigs as unclean and avoid pork. To address this sentimental, yet crucial social issue,
McDonald’s stopped serving beef and pork items in India, which in itself had been an unique
decision by McDonald’s. More than seventy percent of the menu in India had been privately
created with complete isolation of vegetarian and non-vegetarian products right from the food
processing plants to the eateries.3 It was a major step in addressing the varied preferences of the
huge Indian consumer base. A normal McDonald's eatery utilized around sixty to eighty
individuals who got world class training inputs and developed specialized skills. Likewise, the
focal point of McDonald's was to give Indianized versions of food items in their restaurants which
had a “Desi” touch. McDonald's general delightful menu included extensive assorted products
crafted to address the unique consumer base of India. Maharaja Mac, McAloo Tikki, Chicken
McGrill, McVeggie, Veg Pizza, McPuff,, Chicken Mcnuggets, Fries, Wraps, Sundaes, McFlurry,
the McSwirl, Soft Serve4 and refreshing beverages such as Ice Tea & Cold Coffee with outstanding

2
Patel, D. (2017, June 30). Bakshi vs McDonald's: A battle that perpetuated over 21 years. Retrieved January 22, 2018, from
http://indianexpress.com/article/cities/delhi/delhi-bakshi-vs-mcdonalds-a-battle-that-perpetuated-over-21-years-4728604/
3 McDonald's. (n.d.). McDonald's India Products. Retrieved January 22, 2017, from https://www.mcdonaldsindia.com/products.html
4 ibid
service in an energetic and exuberant mood of the eateries, for which McDonald’s is known
worldwide were being set up everywhere. Keeping in mind newer customers, the organization had
been instrumental in making remarkable differentiation like Happy Price Menu, McDelivery,
Drive thru, Breakfast Menu, Highways and Extended hours.

Gradually the quantity of eateries in India rose to about three hundred. It advanced into a value
driven brand, that perceived the affordability of its products in an alluring proposition for its clients
alongside taste. McDonald’s revolutionized fast food in India, opening the doors for other
multinationals as well as setting a strong example for local eatery chains and making the Burger a
product for the mass rather than one for the elite.

Vikram Bakshi: The Entrepreneur

Vikram Bakshi, a graduate from the University of Delhi, got the idea of opening an establishment
of McDonald's in India from a neighbor. Before that, he had been maintaining a real estate business
in the national capital, where he developed commercial and residential projects for multinational
corporations. He, later, wandered into the venture of hotels and service apartments and bit by bit
grew up in owning big time firms in the real estate and retail hospitality segment. With such an
illustrious bouquet of the real estate, Bakshi was almost ready to retire, when he faced an inherent
desire to be a mass marketer rather than operating in the niche. Persuasion of this desire resulted
into the creation of CPRL in which he got totally plunged. His better half Madhurima additionally
sat on the board of CPRL,5 notwithstanding three other firms. Two of Bakshi’s three daughters
maintained a different business, and as of late launched a jewelry chain called Pandora. Close by,
Bakshi had set up the first museum of the UK-based Merlin Entertainments Group (owner of
Madame Tussauds) in India. He also was a board member of multiplex chain PVR Ltd.

The Fissure Appears

It was 2008, when McDonald's India Private Limited (MIPL), the Indian unit of the US-based
eatery network first conveyed an offer to purchase Vikram Bakshi's stake in the joint venture. The
organization had offered Bakshi an underlying whole of $5 million, the initial amount Bakshi had

5 Singh, R. (2017, July 02). Why McDonald's had to shutter outlets in Delhi. Retrieved January 22, 2018, from
https://economictimes.indiatimes.com/industry/cons-products/food/why-mcdonalds-had-to-shutter-outlets-in-delhi/printarticle/59402309.cms
invested. Later, however, they revised the offer to $7 million. Keeping in mind the viability of the
offer, CPRL decided to have a fair market valuation done for which they invited Grant Thornton,
an autonomous consulting firm. Grant Thornton determined CPRL’s value in 2009 to be $331
million, out of which $100 Million was claimed by Bakshi as his own. MIPL halted for the moment
on assessing the claim. In 2009, CPRL equalled the initial investment, and by 2010 the company
had declared its first profit of $1.35 billion. Bakshi claimed that MIPL prohibited CPRL to take
up credits notwithstanding that period which continued up until 2012, when both parties had to
bring in more equity and alter the joint venture agreement. CPRL had opened 27 restaurants in the
same year, the highest number of restaurants opened in a year since 1996. At that crucial point
came the board meeting of 6 August 2013. One of the many items on the agenda was the re-election
of Bakshi as Managing Director of CPRL. The nominee directors of MIPL on the CPRL board
voted against Bakshi’s reelection, blaming him for different wrongdoings. The allegations
included mismanagement of funds (allegedly Rs 7 crore was moved to one of Bakshi’s own firms);
absence of regard for CPRL because of involvement in other businesses, and conflict of interest
(Bakshi owned other restaurants and also rented out his properties to other food chains). Bakshi
took up the matter of his expulsion from the board of CPRL to the Company Law Board (now
National Company Law Tribunal), accusing McDonald’s of wrongdoing. Later that year,
McDonald’s revoked the joint venture agreement and conjured arbitration to settle the dispute in
London Court of International Arbitration (LCIA), based on an arbitral provision specified in the
joint venture agreement. In 2013, CPRL had a total of 154 eateries and was wanting to open 35
more, only some of which could eventually launched in the subsequent years due to lingering
dispute between two JV partners.

In an order passed on 13 July, NCLT reinstated Bakshi as MD of CPRL and limited McDonald's
India Limited from meddling in the smooth working of CPRL and its 169 eateries. Calling
Bakshi’s non-election illegal, unjustifiable and malignant, NCLT additionally appointed former
Supreme Court judge G.S. Singhvi as administrator to the board, overseeing the functioning of
CPRL. McDonald’s challenged the verdict of NCLT which was, at present, pending in National
Company Law Appellate Tribunal (NCLAT). In the meantime, LCIA, in an award passed on 12
September, asked Bakshi to sell his stake in CPRL to its JV partner. LCIA additionally required
the appointment of independent experts to determine a fair value for CPRL so that McDonald’s
could buy out Bakshi’s 50% stake. 6

Twist in the Tale

In May 2010, when McDonald’s decided to sell off its shares in the Jatia venture in favour of its
Indian partner. This happened in the fifteenth year of its 25-year agreement. McDonald’s had
entered into a new arrangement with Jatia. It sold its 50% stake back to Jatia; JV moved to the
American organization's favored method of franchise fee and royalty—a transition McDonald’s
has been making the world over. However, the Bakshi venture CPRL in India and Chinese ventures
were the exception. Filings with the Ministry of Company Affairs show that McDonald’s received
next to nothing for their stake sale in Jatia venture, Hardcastle Restaurants. It had contributed Rs
1.08 billion (Rs 155 million as value and Rs 925 million as inclination shares) in the Jatia venture,
but it realized just Rs 1.08 million and booked a loss of Rs 1.079 billion. 7

The Battle Getting Fierce

On 21 August, Vikram Bakshi, the Managing Director of CPRL, received a notice of termination
from McDonald’s. He was shocked to think that the mass-market brand which he had crafted so
efficiently in north and east India, may not exist anymore.8 The LCIA judgement was out and
MIPL ended its establishment agreement with CPRL for the 169 outlets it kept running in north
and east India. As a result of this termination, Bakshi was supposed to cease using McDonald’s
intellectual property. MIPL cited non-payment of royalties as the primary reason for termination
of the agreement. In this regard, Ron Christianson, global head of corporate relations, foundational
markets at McDonald’s Corp stated, “The termination is a result of a breach, a violation of certain
essential obligations that were a part of the agreement typically the default of payment of royalties
to MIPL for two years. CPRL was notified of the breaches and was provided opportunity to remedy

6
Ahluwalia, H. (2017, December 25). Inside the McDonald's-Vikram Bakshi controversy. Retrieved January 22, 2018, from
https://www.livemint.com/Companies/Jxj8A0RLE0CkpWOoboaJ6J/Inside-the-McDonalds-Vikram-Bakshi-controversy.html
7
Raja D, J. S., & Chakravarty, C. (2013, September 24). Vikram Bakshi & Amit Jatia: A tale of McDonald's two franchise partners in India.
Retrieved January 22, 2018, from https://economictimes.indiatimes.com/industry/services/retail/vikram-bakshi-amit-jatia-a-tale-of-mcdonalds-
two-franchise-partners-in-india/articleshow/22956923.cms
8 ZeeBiz WebTeam. (2017, August 23). Nearly half of McDonald's fast-food stores in India may shut down in 15 days. Retrieved January 22,
2018, from http://www.zeebiz.com/companies/news-nearly-half-of-macdonalds-fast-food-stores-in-india-may-shut-down-in-15-days-22114
those; it had failed to do so.” McDonald’s maintained that non-payment of royalties over a period
of two years was the essential reason for the termination of the agreement.9

Following this, Bakshi went back to NCLT, and alleged that the termination of franchise pact was
in contempt of the NCLT order of 13 July. Both MIPL and Bakshi had also moved to the Delhi
high court; the former had filed a petition to enforce the LCIA award, while the latter had
challenged it. McDonald’s have also filed a plea in the Delhi high court against the Central
Government, challenging NCLT’s right to issue a contempt notice.

The matter was now pending in four forums. The termination jeopardized the careers of 6,500
employees across the 169 restaurants, whereas the market for fast-food in India was expected to
expand 5.8 percent to $21.2 billion (Rs 1441.6 billion) this year itself. 10 On one hand, 84
McDonald’s in North and East India were shut down after its supply chain partner Radhakrishna
Foodland discontinued supplies due to the alleged non-payment of dues, on the other, Bakshi was
hell bent to continue with his 169 eateries. However, in these outlets in Delhi/ NCR itself, the
McFlurry, the McSwirl and Soft Serve, Wraps and Burgers dropped in and out of availability. The
brand icon, the famous golden arches were no longer to be found on any of the packaging.11
McDonald’s India had issued a health advisory on the ‘quality’ of food being served at stores
operated by CPRL in the north and east.

Time was ticking while these legal battles were ongoing. All stakeholders, especially the customers
and vendors, were confused. Embattled Bakshi, on behalf of CRPL, is carrying MIPL’s franchisee
business but with many constraints and hinderances. He has to decide whether to plug the fissures
in the franchise or extract highest value from the joint venture.

9
Ahluwalia, H. (2017, August 21). McDonald's terminates franchise pact for 169 restaurants in north, east India. Retrieved January 22, 2018,
from https://www.livemint.com/Companies/iV9DSFl76RU1YlPwe5IcrI/McDonalds-terminates-franchise-agreement-with-CPRL-for-169.html
10
Sanjai, P. R. (n.d.). McDonald's Slumps In India's Exploding Fast Food Market. Retrieved January 22, 2018, from
http://www.gonews24x7.com/home/content/Business/McDonald’s-Slumps-In-Indias-Exploding-Fast-Food-Market-052daf37
11
Ahluwalia, H. (2017, August 21). McDonald's terminates franchise pact for 169 restaurants in north, east India. Retrieved January 22, 2018,
from https://www.livemint.com/Companies/iV9DSFl76RU1YlPwe5IcrI/McDonalds-terminates-franchise-agreement-with-CPRL-for-169.html
 Appendix

Aug 2008 - Aug 2013 - Jul 2017 - NCLT

McDonald's Bakshi removed Nov 2014 - reinstates
Offers to but from the MD of Bakshi demands Bakshi as MD of
Bakshi's Stake CPRL $1800 Crore CPRL

March 2009 - Oct 2013 - Jul 2016 - Delhi Decmber 2017 -

Bakshi seeks McDonald's Highcourt 84 eateries shut
$100M drags Bakshi to allows down for
LCIA McDonald'sfor conflict with
arbitration by supplier
LCIA

Figure 1 Timeline of Events

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