McDonald’s India Woes: Is The Franchisee Model Breaking In The Region?

Recently, McDonald’s (NYSE:MCD) temporarily suspended operations in 41 of its 55 restaurants in India’s capital city Delhi, as they failed to renew their eating house licenses. This step was taken after a long standing legal dispute with its Indian franchisee firm which runs the restaurants in the city. McDonald’s is working aggressively to adopt a nearly 100% franchised model, however this incident reveals that issues with franchises can significantly impact the reputation of the company. While the number of restaurants impacted are miniscule compared to the 33,000+ stores run by the company, they are a significant number in a region where the company has a strong growth potential.  McDonald’s entered the Indian market much before other U.S. chains such as Burger King and Wendy’s, however the company could not capture the growth in the Indian quick service restaurant market. Domino’s Pizza commands a nearly 16% share in the Indian food service industry and McDonald’s  has been able to manage to capture only 7.5% of the market.  While this is partly due to customers preferring pizzas over burgers, it can also be attributed to McDonald’s slow pace of growth in the region. There are around 350 McDonald’s restaurants in India, while Domino’s has more than 1,000 outlets serving India, making it the only country outside the U.S. with 1,000 outlets. Despite entering the Indian market two decades ago and being synonymous with the term “burger” in India, McDonald’s has not been able to expand quickly in the region.

One of the key advantages of a franchise based model is quicker expansion without high investment.  However, legal troubles with franchisees in India have impacted McDonald’s significantly, impacting its rapid growth in the region. The India quick service restaurant market is likely to grow to $4.1 billion by 2020 and while McDonald’s expects to double its restaurants in the region by this year, the growth is still slow and likely to be impacted by the reputation loss faced due to the current impasse.  Restaurant Brands International is facing a similar problem with its Tim Hortons franchisees who are initiating suits against the company for several reasons.

It is evident that McDonald’s has not been able to get its franchisee model right in India – a region which is a high growth market for the company. The suspension of operations of a significant number of stores in the capital of the country will impact the company’s reputation and can affect future growth prospects in the region. However, revenues from India are insignificant for the company’s overall growth and profitability, and this event should not impact the company in the short term.

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