McDonald’s India-Franchise new direction in North

and East India

McDonald’s Business Overview
McDonald’s is the world’s leading food service retailer with more than 31000 restaurants in 119
countries serving more than 50 million customer each day. Globally McDonald’s adopted a
franchise business model to easily penetrate new markets and enlarge its target market.
Franchise business model works basically in 2 steps:

1. McDonald’s license out its brand name on a fee to local player.

2. Charge a royalty linked to sales, so that more the outlet sales more money McDonald’s make.

This model help McDonald’s push up its gross margin and operating income. It also helps
McDonald’s to earn a stable revenue stream with lower operating cost and risks.

McDonald’s India
McDonald’s was the 1st Quick Service Restaurant (QSR) chain to enter India. McDonald’s enter
India in 1996 with same franchise model which it is using across the globe but with a different
approach. In India, McDonald’s enter market with two 50:50 joint ventures dividing country
operations into two regions. The two franchises are:

1. Vikram Bakshi owned Connaught Plaza Restaurants (CPRL) for North and East India.

2. Amit Jatia owned Hardcastle Restaurants (HRPL) for South and West India.
The transition was very smooth, and company started to increase its foothold in India
effectively. Soon, McDonald’s become the market leader in QSR segment with market share of
10.9%.

The Downturn
McDonald’s was market leader in India in QSR sector. But after 2013 chain’s growth started
declining. By 2016, Domino’s ousted McDonald’s as market leader with 16% market share, on
the other hand McDonald’s market share dropped to 7.4%. Reason that leads to the downturn
of McDonald’s are:

1. Conflict with CPRL: In 2013, McDonald’s ousted Bakshi

citing financial discrepancies. There were also allegations

of not devoting time to CPRL and conflicts of interest.

While Bakshi termed this move as oppressive and moved to

NCLT. NCLT gives decision in favor of Bakshi and he was

reappointed as CRPL managing director. Hence McDonald’s

ends agreement with CPRL and most of its outlet in north

India shut down. These events lead to a negative image and inefficient functioning hence leads
to decline in growth.

2. Growing Coemptions: By this time McDonalds start facing stiff competition from rivals such
as KFC, Domino’s, Pizza Hut etc. These rivals enter Indian market with aggressive marketing and
offering lower priced options on their menu. This help them to gain the market share quickly.

3. Food Quality Issue: With conflict flaming up between CPRL and McDonald’s, operations were
affected and complains of insects in food and unhygienic condition were reported from various
outlets. Also, 43 out of 169 McDonald’s restaurants health license got expired in 2017 which
refrained customers from McDonald’s.

4. Closure of McDonald’s Outlets: As the market is already highly competitive with so many
competitors competing to gain market share, McDonald’s outlet closed down. This help rivals to
attract customers who were earlier using McDonald’s service.

5. Uncertainty over McDonald’s franchise in India: With internal conflict increasing and
business declining, there was a mistrust among suppliers on future relation and payment with
company. This affect the entire operational process and leads to shortage of products at
various outlets.

Impact on Business
McDonald’s was facing all the mentioned issue parallelly in a competitive market. With a large
market like India which is predicted to be a $250 Billion QSR market by 2020, there is a lot of
stake for McDonald’s in India. Loosing the market share and at such juncture could impact
McDonald’s growth in India adversely. These problems and challenges impacted the brand’s
overall image to a great extent thus leads to:

1.Negative sales growth: Most of the Same-Store sales growth of McDonald’s remains negative
for 8 consecutive quarters between mid-2013 to September 2015.

2.Loss of Revenue: With many outlets shut, McDonald’s India posted a loss of Rs 3.05 Billion.
This also hits the much-required expansion plan of McDonald’s as company was able to add just
1 outlet in north and east India.

3. Loosing Market share: The uncertainty over McDonald’s helps rivals to gain market share.
With closure of outlets and inefficient operations rivals like KFC and Subway gains 2% and 5%
market share respectively. At the same time, market share of McDonald’s market share
dropped from 9% to 3% in July 2017.

4. Mistrust among logistics partner: CPRL has to shut 84 outlets as its logistics partner Radha
Krishna foodland discontinued supply chain services alleging uncertainty of future of company
and nonpayment of dues.

5.Inconsistency in menu and food quality: After termination of agreement between CPRL and
McDonald’s, some vendors stopped supplying ingredients and packaging materials to CPRL
which leads to inconsistency in menu with popular products being unavailable across
restaurants.

6.Negative impact on mind of customer: Inconsistency and unavailability in menu and food
creates a negative impression on consumers mind and provide unpleasant experience which
tends them to move to rival brands.

Strategy to revive franchise

After out of court settlement that ended 6-year long dispute, CPRL is now completely owned by
McDonald’s India hence the issue of conflict of interest is over for the company. Also, with all
these problems, McDonald’s shows a net profit of 6.52 million during FY 17-18 as compared to
a loss of 3.05 billion in FY 16-17. This shows that company still has a good market presence and
customer loyalty with its brand. So, in order to revive its brand awareness and gain the market
share again, McDonald’s can change its strategy by redesigning its marketing mix of 4 P’s. The
strategy for all the marketing mix is as follows:

1. Product: One of the biggest factors behind the decline of McDonald’s was due to
inconsistency in menu with several popular products such as McFlurry and soft serve ice creams
were not available. Hence McDonald’s should bring in more variety and options in menu to
meet the consumer choice. Also, it should focus more on products that is USP of business-like
Pizza for Domino’s. Fries and Burgers are the most in demand items for outlets. Hence it should
focus and target on such products to create a USP on those food items. Also, products can
classify on demographics such as

(a) Happy meal for children.

(b) Vegetarian products as most Indian customers are primary vegetarian.

2. Price: The main consumer of McDonald’s belongs to middle income group. Even though the
per capita income is low, people like to spend on eating out. With growing economy, the
middle-income group segment is increasing day by day providing McDonald’s potential
customers. Other competitor like Domino’s, subway is gaining market by providing products at
affordable prices like Pizza Mani by Domino’s. Hence McDonald’s should come up with more
variety of products which are affordable for target segment like McAloo Tikki and McSave
Breakfast and Meals.

3. Place: The major part of consumers lives in urban India as rural areas are still not that much
open and enthusiastic for QSR. The urban population is growing at a rapid rate in India and
most likely to reach 50% of population from current 34% by 2030. Hence McDonald’s should
more target on urban and metropolitan areas and try to expand in such areas to beat the
competition. Students or working professional are primary customers and they like to visit
restaurants nearby frequently. Hence having outlets in close proximity of such area can be
beneficial.

4.Promotions: This is the most important part to be looked upon. McDonald’s due to so much
controversy and bad experiences leads to negative image for the brand. Hence the first priority
must be aware people with products and services and try to build the trust again. For this,
McDonald’s must start a fresh aggressive marketing campaign targeting potential and existing
customers with new ideas and values. This will help customer to get away with previous
experiences and negative image of brand and creates a new enthusiasm for the brand. This can
be done through TV, Social Media or Movie Halls etc. as from these places it can directly
connect with target customer. Also having a social media page at different platforms with
customer experiences and introduction of new products keeps customer aware about the
products.

5. Process: As due to conflict and uncertainty supplier had mistrust. Hence assuring supplier
and enhancing trust will help the process to smoothen.

6.Physial Evidence: With previous bad experiences of having insects in food and unhygienic
conditions people might not like to visit the place again. This is a very strong influencer hence
any such incident can impact entire business. So, McDonald’s must focus on clean and hygienic
interior of its outlets.

Long Term Growth

McDonald’s even with such adverse condition manages to make profit. This is a great indicator
that how big and diverse Indian market is. With proper marketing strategy and Product mix
McDonald’s can surely regain its market share. But it needs to be consistent and innovative.
With so many competitors bargaining power of customer is very high. Even with a small wrong
move can disrupt the entire process. Hence McDonald’s should continuously keep checking the
market and consumer to understand the requirement and be prepared to bring in the changes
on time before anyone else grab the opportunity. Also, it can adopt with new technologies and
tie up with different food delivering companies to reach out to more customer and expand the
business.

Name: Akshay Ranjan Jha

College: T A Pai Management Institute

Course: Post Graduate Diploma in Management