McDonald's in India: Troubled Times, Troubled Ties |
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In 1976, during Kroc’s visit to the Tuck Business School, he asked the students what business they thought he was involved in and there was a unanimous answer; “Hamburger business”. Kroc said “No, I am in the real estate business.”
Kroc’s surprising answer had its roots in the 1950s when Harry Sonneborn (Sonneborn), then CFO of McDonald’s, came up with a convincing idea. Sonneborn proposed that McDonald’s should venture into the real estate business and charge rentals for the franchisees. Sonneborn’s proposition had led to one more revenue stream for McDonald’s apart from royalties. Over the decades which followed, McDonald’s went on to own lands and develop properties with its real estate arm called Franchise Realty Corporation (FRC).
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| For an individual entrepreneur, franchising meant significant liberty to have control over all employment-related matters and marketing and pricing decisions, while also benefiting from the financial strength and global experience of McDonald’s. For McDonald’s, it meant a steady inflow of two predictable revenue streams – royalties and rent... |
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| Typically, McDonald’s did not own and run restaurants in its overseas forays. Its preferred model was a low-risk, low-hassle Franchise model. In India, however, McDonald’s deviated from its usual practice and adopted an ownership model. In the 80s, McDonald’s had followed a similar route in Latin America which eventually proved successful and evolved into its largest DL operation. In the mid-nineties, India was a newly liberalized economy and most foreign companies preferred to form JVs to enter India... |
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| In 2016, CPRL made around $100 million in revenue (Refer to Exhibit III for the Revenues of CPRL and HRPL). But CPRL’s profitability remained anemic, resulting in delinquencies in its paying the royalties. CPRL’s average per store sale of $0.8 million was way below McDonald’s global average of $2.5 million. . |
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| HRPL had access to public funds raised by its holding company Westlife Development (WD), which was also promoted by Jatia. .. |
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| Overall, the global sales of McDonald’s had hit a wall since 2013 (Refer to Exhibit IV). For the year ended December 31, 2016 . |
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| Foundational markets were critical for the future growth of McDonald’s as the US and International lead markets had shown sluggish growth in the past few years. India was categorized under the foundational market segment. |
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| Apart from the ownership model, there was yet another deviation in McDonald’s approach to India; it had no real estate assets in India. Having outlets at prime locations was a key to the success for any QSR outlet. Locations created a moat for newcomers. For instance, in places like airports, there was no space for a new entrant. |
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| For McDonald’s it was time to reap what it had sown in the previous 20 years. The cold chain was established and vendors had become stable and evolved to offer a high scale of economies. In fact, McDonald’s had developed the QSR market in India. |
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Exhibit I: Break-up of Revenue Streams from Franchise Business
Exhibit II: Growth of Outlets in India
Exhibit III: Revenues
Exhibit IV: McDonald’s Global Sales
Exhibit V:Indian QSR Market – New Entrants
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