Joint Ventures in India: Learning from McDonald’s Experience
By Dezan Shira & Associates
Posted: 19th October 2017 08:47A 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 planning.
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 attitudes.
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 India
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 jobs.
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 diligencewhen 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 India’s market.
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 structures.
Decision making and conflict resolution
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 exit strategies.
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.
This article was first published on India Briefing.
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