I'm just not lovin' it - McDonald's fracas is sad, could have been averted

Joint-ventures have a finite shelf life. It is best to look at them as an entry-strategy, no more. But this is a difficult perspective for Indian partners to understand.

The year was 1996. My office those days used to be at Basant Lok, just next to Priya Cinema, in New Delhi. The corner outlet of the market, as you entered from the Vasant Vihar side, was a Nirula’s QSR. Quite popular. Reasonably crowded throughout the day. One day, quite inexplicably, the Nirula’s downed its shutters. And in its place opened India’s first ever McDonald’s. There were hundreds in the queue on the first day, even first week. Even the first month. Braving the queue, I was lucky to partake the Maharajah Mac, the fries and the legendary vanilla milkshake as one of McDonald’s first customers in India. Which is why I was more than a trifle saddened by the news that 43 of McDonald’s 55 outlets in Delhi shut down a few days back.
 

Connaught Plaza Restaurants Pvt Ltd (CPRL), which runs the McDonald's franchise for North and East India, has been forced to close down 80% of its outlets in the NCR region as it failed to secure regulatory health clearances to keep the business running. Much has already been written in media about how Vikram Bakshi, the Indian partner, and the American company have been at loggerheads in the 50:50 JV. If memory serves me right, the bickering in the JV first surfaced in 2008 when McDonald's offered to buy Bakshi's 50% stake for $5 million, and later for $7 million. Bakshi tabled a Grant Thornton's report that pegged CPRL's enterprise value at $331 million and demanded upwards of $100 million. The success of the company between 2008 and 2012, when it grew manifold and turned profitable, was not enough to re-establish amity and peace between the partners.
 

Between 2009 and 2013, CPRL registered a cash profit of Rs 110 crores. In 2014/15, it had a cash loss of Rs 41 crores. After opening 27 outlets in 2012, it opened only 14 in 2013 as against a target of 35. The numbers were nine in 2014 and three in 2015. The time taken to start an outlet also went up from four months in 2012 to 12 months in 2014 and 16 months in 2015.

McDonald's other JV in West and South India, Hardcastle Restaurants Pvt Ltd (HRPL), meanwhile has done much better. In 2010, McDonald’s sold its 50% stake to partner Amit Jatia of Westlife Development Ltd. The contrast between the performance of the two ventures in the past few years is very visible. In 2012/13, the last financial year when Bakshi was in charge, CPRL was operating 154 outlets and reported revenue of Rs 562 crores. Under Jatia, HRPL had 161 outlets with revenues of Rs 681 crores. CPRL’s outlet count in 2015/16 was 168 and estimated revenues were Rs 675 crores. Under Jatia, HRPL had cruised ahead. In 2015/16, it had 236 outlets with revenues of Rs 833 crores. In the past three years, CPRL has added just 14 outlets and Rs 113 crores in revenues, while HRPL has added 75 outlets and Rs 152 crores in revenues.

Bakshi had dragged McDonald's to court in 2013 after the multinational company announced its Indian partner would cease to be the managing director of the equally owned joint venture. Bakshi had alleged that McDonald's move to remove him was linked to its objective of buying his stake at a cheap price. McDonald's denied these charges. The situation deteriorated swiftly thereafter. Stung at not being re-elected the managing director for the 10th time - the election took place every alternate year - Bakshi dragged McDonald's to the Company Law Board (CLB) seeking reinstatement. The CLB ordered status quo on equity, removing any possibility of change in shareholding or either partner taking full control. McDonald's terminated the JV agreement and moved the London Court of International Arbitration. A battle over valuation followed. In early 2014, Bakshi offered to buy McDonald's stake at a net asset value of Rs 150 crores. The US company made a Rs 48-50 crores offer for Bakshi's stake. The latter insisted on fair market value and offered to sell initially for Rs 2,500 crores and later for Rs 1,800 crores. McDonald's did not respond. As this went on, the Delhi High Court in July 2016 allowed McDonald’s to pursue arbitration at the London Court of International Arbitration; Bakshi approached the Supreme Court but the SC rejected Bakshi’s plea.

Clash between JV partners is not new to India, or for that matter anywhere else in the world. It just makes the situation more readily acrimonious when the joint-venture is a 50-50 one (strange though it may seem, 68% of all JVs in the US are actually 50-50 ventures!).

Four essential issues tend to cloud the JV relationship when stakes are equal:

1. There is rarely if ever a clearly defined tie-breaker process. Differences are difficult to resolve without third-party intervention, and this sours the relationship even further.

2. Mutual buy-out / shoot-out agreements are prescribed and included in most 50-50 JVs but fail when stances harden.

3. First-right-of-refusal is again mostly provided for in 50-50 JVs but once the fighting starts, it is not easy to implement.

4. Clearly defined roles and authority are most times missing, especially in situations of disagreement.

I think it is important to examine a few cases outside of the McDonald’s one to get a better understanding of some key issues involving the motivations in setting up those joint ventures, and then their subsequent success or failure.

Most foreign companies wanting to do business in India in the 1970s-80s-90s figured that it was best to bring in an Indian partner who would help navigate the complex Indian business environment of those days. Foreign companies quickly understood the benefit of having the Indian partner handle difficult issues like licenses, quotas, inspector raj, the cash economy, taxation and more such. The foreigners would bring in the money, the technology and the global brand; the Indians would take care of most of the rest, especially government related.

The Modis were the best possible example of an industrial house that prospered through joint ventures. The Modis partnered everyone from Phillip Morris, Lufthansa, Continental, ESPN, Estee Lauder, Revlon, Olivetti, Xerox to Walt Disney and more. Most of these joint ventures faded away or ended up in litigation a few years later. Much the same happened in the joint venture between the Government of India and Suzuki in Maruti. The public fracas in 1997 between the Government, led by late industry minister Murasoli Maran and O Suzuki, Chairman of Suzuki over Maruti Udyog is well-documented. It was only when the Government changed that peace prevailed with Suzuki finally buying out the Government’s stake. Suzuki went through a similar, and painful, divorce with TVS for two-wheelers. The same story got repeated between the Firodias and Honda at the Kinetic Honda scooters JV. The Hero-Honda JV lasted much longer but the end result was the same. Splitsville. The parting of ways between Bharti and Walmart, between Nusli Wadia and Danone, between Saroj Poddar and Gillette, between S Sabharwal and Di Bella Coffee, between Anup Rana and Faber Castelle, between Cooper Tyres and Apollo … The end result has always been acrimonious and mostly nasty with litigation, arbitration and a lot of mud-slinging.

Having myself had a joint venture (though not a 50-50) with a Japanese behemoth, my belief is that a McDonald’s-like situation can be averted if one not only knows the best time to enter the JV, but also knows the best time to exit the JV. I sold my stake to my Japanese partners in 2011, eight years after we had started together. It was a very difficult decision to make especially when as an entrepreneur I had spent my best professional years building the business through blood, sweat and tears. But I knew all along that I could never match the financial brute force of my Japanese partners and every time they talked new investments or new acquisitions, I would either need to cough up matching sums (which I did not have) to retain my share in the JV, or get diluted to decimal points very very soon. I think I chose discretion over valour and acrimony, and wisely so. Most Indian JV partners find it difficult to quit the JV especially when the going is good. Also they see attempts by the foreigner to unseat them as acts of hostility, aggression and unfriendliness. The foreigners, of course, having gained a smooth entry into a difficult market, beyond a point have no use for the local partner. And so the fight begins!

(Sandeep Goyal was Founder Chairman & JV partner of Dentsu India from 2003 to 2011. He currently chairs the Mogae Group).