3 lessons from McDonald's failed joint venture in India

McDonald’s joint venture in India: an initial success story

For years, McDonald’s has been a success story in India. A remarkable achievement, because who would have thought that the American fastfood chain would gain a foothold in India? Selling Big Macs in a country where eating beef is unacceptable for religious reasons and even prohibited in many states? A big challenge. But McDonald’s does it anyway.

The Americans developed a completely Indian menu with The McSpicy Paneer (Indian cheese), Aloo Tikki Burger (burger made of potatoes and peas) and Chicken Maharaja Mac. But McDonald’s these specially adapted products were not the only challenge the company had to overcome in the Indian market.

In the late nineties, eating out was a luxury for Indians, of the hundred meals that Indians eat in a month, only three were eaten outside the home. The majority of these meals were bought at food stalls, not in restaurants. In order to get Indians into McDonald’s, the Americans had to compete with these street stalls.

The only way to do this was through extremely competitive prices (read: extremely low margins). The introductory price for the Aloo Tikki Burger was ₹30 (30 euro cents) at the time, now its ₹72 (72 euro cents). This approach worked: McDonalds has more than 320 million customers per year in the 430 branches it has built since 1996.

Problems with the Indian joint venture partner

McDonald’s owed this rapid growth largely to its two joint venture partners. The Americans had India divided into two regions: there is a joint venture partner for the north and east of the immense country and a partner for the south and west. But trouble with the partner in the north started soon after the joint venture took off.

There were hygiene issues in the restaurants and complaints about the quality of the meals. According to the Americans, this was due to mismanagement and financial irregularities. McDonald’s therefore wanted to buy out their Indian partner, but the parties were unable to agree on a price.

The fastfood chain then got dragged into two lawsuits: one in Delhi and one in London. which made the conflict escalate and the Americans had to close 169 branches in India, including 43 McDonald’s restaurants in the capital New Delhi. More than 10,000 jobs were lost. The conflict did not only lead to enormous financial damage, but also caused reputational damage.

3 lessons from McDonald’s joint venture problems in India

How did things go so wrong at McDonald’s in India? And what can foreign companies that are considering a joint venture in India learn from the problems of the Americans? After all, a joint venture is the most popular market entry strategy in India. Which makes sense, a JV with a reliable Indian partner strengthens the credibility of the foreign company in the Indian market, ensures a strong network and reduces bureaucratic challenges. But a joint venture is not without risk, as the example of McDonald’s shows. So, what can we learn from their mistakes?

1. Take your time to find a partner

Indian companies are fond of joint ventures. A joint venture offers them great opportunities: working with a renowned foreign player increases their status and offers interesting growth opportunities. Companies would do well to take their time when selecting an Indian partner and to perform extensive due diligence on potential partners.

• Consider carefully which criteria a joint venture partner should ideally meet (knowledge, corporate culture, size, region, experience with other foreign parties, etc.).
• Also realize that choosing a partner in many cases means that you rule out cooperation with another partner.
• So be aware of the choices you make and collect information from different sources to gain a good insight in your new partner.
• Investigate how serious the Indian party is and who ultimately makes the decisions, especially if the partner is an Indian family business.

2. Get help from local experts for a solid contract

A joint venture agreement must specify how decisions are made, what the procedure is in the event of a future separation, and where any legal disputes will be settled. Invest in a good Indian lawyer to gain a good insight into Indian legislation surrounding joint ventures and the protection of your intellectual property.

Be aware that you can limit your risks by starting multiple JVs in different states. In that way, you benefit from the local knowledge and network in these states that these partners have. Also remember that the shares of a joint venture do not necessarily have to be divided 50/50.

3. Temporary collaboration to achieve a common goal

A joint venture is a great way to enter the Indian market, but a JV rarely works as a permanent construction. The reason for this is simple: after four or five years, the interests of the Indian and foreign partners diverge. In this respect, McDonald’s joint venture lasted a long time before things went south.

At the start of the collaboration, it is recommended to agree on decision-making powers, concrete goals and a common roadmap. Furthermore, make it clear from the start that the collaboration is temporary and map out an exit strategy for when the goals of both parties have been achieved. Most common scenario: the foreign party buys out the Indian party and continues as a 100% subsidiary in India.

Our legal team of local experts is ready to answer your questions or assist you in setting up a joint venture in India. Feel free to contact us without obligation.