“Burgered,” headlined The Economic Times, India’s leading economic daily. The publication elaborated: “From worms to lizards to fungus to finger nails, all kinds of ‘foreign’ objects have been reportedly served to consumers along with burger and fries.” It’s happened before: in Japan, where McDonald’s had to apologize for a tooth being found in French fries, and in the U.S. itself when a customer field a lawsuit after biting down on a foreign object in her breakfast burrito.
But the issue in India is about more than lacertilian legacies. It’s about a full-blown war between the U.S. fast-food chain and one of its local franchisees — Connaught Plaza Restaurants Ltd (CPRL) and its head, Vikram Bakshi. The current state of affairs: Some 169 outlets in the northern and eastern region are closed. (The west and south come under a different franchisee – Amit Jatia’s Hardcastle Restaurants.) McDonald’s has told its suppliers not to serve CPRL. And that has probably compounded the problem of quality with both sides saying the other is to blame.
The problems between McDonald’s and Bakshi are long standing. CPRL was set up as a 50:50 joint venture between the two; there were differences from the beginning over financial issues. Both sides made offers to buy each other out. They were rejected. Bakshi was ousted as managing director of CPRL by McDonald’s India in August 2013. He moved the National Company Law Tribunal (NCLT) in Delhi, which ruled in his favor. McDonald’s went to the London Court of International Arbitration. The U.K. court has asked Bakshi to sell his stake in the joint venture to McDonald’s at a fair valuation in accordance with their agreement. In the meantime, the Delhi tribunal will take another look at the issues at the end of October. The U.S. company is believed to be negotiating with Hardcastle, Jubilant FoodWorks (which operates the Domino’s Pizza and Dunkin’ Donuts franchises in India) and Moon Beverages (Coca-Cola’s Indian authorized bottler) to take over from CPRL.
Delhi Switches to Subway
But while the courts act with judicial speed (McDonald’s has gone back to the Delhi tribunal), what is happening on the ground? Consumers in New Delhi and elsewhere are heading to the nearest Burger King, Burger Singh or Jumbo King — just three of the rival fast-food chains that are stepping on the gas. According to market research firm Kantar IMRB, since McDonald’s stopped operations in Delhi, fast-food rival Subway has gained 5% traffic and KFC 2%. Overall share for McDonald’s declined from 9% in June to just 3% in July.
“Until recently, the [quick service restaurant] space in India was shaped by the international players…. But now and going forward, Indian QSRs have come of age.” –Ankur Bisen
Even outstation rivals are stepping up. “Jumbo King is now on a high-growth trajectory,” says Dheeraj Gupta, managing director of Jumbo King Foods, an Indian-style (vada paav) burger chain. “We will close the current financial [year] at 100 stores in Mumbai and Pune, the cities of focus currently. This is a market of 500 stores for us. The plan is to get to at least 200 stores here and then look at national expansion.”
Burger King has just opened its 100th store in north India. “The Home of the Whopper,” as it describes itself, has doubled its footprint since last year; it opened shop in 2014. “India is a unique market, and we have consistently experimented with our menu to create offerings that are distinct from the global menu,” says Burger King India CEO Rajeev Varman. U.S.-based Burger King is the second largest fast-food hamburger chain in the world.
Burger Singh has recently announced expansion plans for 30 outlets. Says cofounder Nitin Rana: “These are the next steps in building Burger Singh into a great and enduring worldwide brand.” Burger Singh was founded in 2014 when two Indian students in the U.K. decided to give a spicy touch to common or garden burgers. The company has raised $1 million in funding.
King Takes on Singh
Others are clambering on to the bandwagon. According to The Economic Times: “Burger King has filed a case against a Mysore-based restaurant named King Burger and battled against the owner of a pushcart in Punjab called Mr Singh Burger King.”
But does the quick-service restaurant (QSR) sector merit such a scramble? KFC opened shop in Bangalore in June 1995 to be met with a host of leftist (anti-imperialism) and rightist (anti-meat consumption) protests. It later put more emphasis on its vegetarian fare — Paneer Zinger and Veg Rockin’ Burger. McDonald’s launched in India in 1996. One of its early offerings was the McAloo Tikki, a potato-based burger which is being adapted for other global market. “One of the key reasons for the success of McDonald’s in India has been its ability very early on to recognize the implications of unique Indian customer trends and preferences,” says Ankur Bisen, senior vice president at management consulting firm Technopak Advisors. “From day one, beef was never on the menu. (India’s majority Hindu population does not consume beef.) It even opened the only vegetarian McDonald’s anywhere in the world in a religious tourist spot.”
Bisen describes the structure of the Indian market. “The total size of the QSR segment is around Rs.18,500 crore ($2.82 billion at $1 = Rs.65.50),” he says. “Nearly half of it is dominated by the chain market (enterprises with two or more outlets) and the other half comprises stand-alone units. Four international QSR chains — Domino’s, McDonald’s, Subway and KFC — make up 60% of the chain market of QSRs and there are a few other foreign chains, like Burger King, on a growth spree. Until recently, the QSR space in India was shaped by the international players. They created the QSR space in the first place and defined the rules of the game on supply chain, outlet design, business model, etc.
“But now and going forward, Indian QSRs have come of age,” adds Bisen. “There are QSRs, like Haldiram’s, that offer Indian cuisines and experience. There are QSRs, like Goli Vada Pav, that are plays on niche tastes and are taking the narrative national.” (But the real trouble is the multiplicity of Indian cuisines; one person’s fuchka is another’s panipuri).
“QSRs have learned [from] and appreciated the international players on supply chain, customer experience and business model, and have imbibed these practices in their growth plans,” continues Bisen. “In doing so, they have kept the product offering uniquely Indian or fusion.”
“For the next decade at least, Indian consumers will continue taking a big bite of McDonald’s, and McDonald’s will continue to take a big bite of the Indian QSR market.” –Jagdeep Kapoor
He feels that the franchise battle facing McDonald’s is unlikely to have a lingering effect on the company or the industry. “The controversy around McDonald’s is not reflective of the Indian QSR segment in any way,” he says. “It is for reasons that are internal to the company, and such a controversy can happen in any company in any sector. If a car joint venture between a foreign player and an Indian company is called off, that does not cast doubts on the Indian automobile segment. My guess is that the appointment of the new franchise operator will happen soon and the business will be back to usual.”
“Overall, McDonald’s has a fairly strong brand equity in the rest of the country and is seen as a young, aspirational brand,” says Jagdeep Kapoor, brand consultant and CEO of Samsika Marketing Consultants. “The local chains, like Jumbo King and Burger Singh, will not get much benefit because the equity of McDonald’s is far stronger than any local brand. The brand which could benefit is Burger King.”
Gupta disagrees. The franchise battle “is damaging the brand value,” he says. “It is a war of egos between two partners. We as members of the same industry do hope that they are able to resolve their differences soon.”
“The QSR sector is growing very fast in India,” adds Kapoor. “This is because what I call ‘the aspiration’ market is growing and the ‘perspiration’ market is declining. Eating out, eating western food, eating in-between meals and eating on the go are all accelerating QSR market growth.”
Kapoor continues: “The ethnic food QSR market is growing…. [But] I see McDonald’s doubling their stores and growing even faster. Brands are built in the minds and hearts of consumers, and McDonald’s has a premium, aspirational image. For the next decade at least, Indian consumers will continue taking a big bite of McDonald’s, and McDonald’s will continue to take a big bite of the Indian QSR market.”
“The 169 stores controlled by Vikram Bakshi’s company is less than 0.5% of the 37,000 McDonald’s outlets worldwide,” Gupta notes. “However, the Indian market will eventually become a very large market for them and for any multinational. It is better that they sort out their differences now.”
There is another issue lurking in the wings. McDonald’s has been losing brand value globally. After a decade among the top 10 global brands, Interbrand demoted it to No. 12 in 2016. “For 15 straight years, McDonald’s has always ranked within the top 10, peaking at No. 6 back in 2011,” wrote The Motley Fool. “This year is the first year that the Big Mac maker did not crack the elite ranking.”
“A burger can be replaced by not only a burger. The options are humongous. Burger’s loss can be pizza’s gain, or for that matter, vada paav’s.” –Harish Bijoor
“McDonald’s is certainly under threat the world over,” says Harish Bijoor, brand strategy specialist and founder of Harish Bijoor Consults. “The key problem is its perception of yore as typical American fast food. That perception worked when everything American was the way to be. Today, perceptual shifts have occurred that are tectonic. American burger and soda companies are considered unhealthy statements. Fast food is considered a sure way to a fast-deteriorating life.
“This shift has affected McDonald’s and other companies in the space of burgers and sugared sodas,” he continues. “The American himself is looking for better ways. The Walmartisation of the U.S. in the supermarket space has led to rebel supermarket movements such as Whole Foods that have elicited a big response in recent times. Therefore, the American way itself has changed. That’s quite like pulling the rug off from under the feet of burger and soda companies. The operating environment has turned different, and even hostile.”
In the background is the fact that a Western brand is no longer a recipe for success in India. Coke has been [in India] for two decades, but the brand the multinational purchased from Parle – Thums Up – still rules the cola roost. It is the market leader in the segment despite attempts by the company to kill it off and ease the path for the “Real Thing.” Today, small beverage companies – with cheaper products – are taking the big boys to the cleaners.
In India, local competition — at lower prices — is another danger. “The [franchise] controversy does provide entry/leverage points to competitors at the cost of McDonald’s,” says Bisen. “Competition will try to capitalize.”
“There are enough local options that could fill in the blanks that McDonald’s closures will leave,” adds Bijoor. “Getting those consumers back is another game. The risk also lies in the fact that a burger can be replaced by not only a burger. The options are humongous. Burger’s loss can be pizza’s gain, or for that matter, vada paav’s.”
Article by Knowledge@Wharton