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McBattle

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The burger market sizzles like never before

TWO DECADES AGO, India’s big fast food story was how the market had desified rather than deified McDonald’s, a model of efficiency that had worked just about everywhere else on the planet. In a twist of an old American saying, ‘Sell the sizzle not the steak’, the brand didn’t just keep its core global offering—beef—off its Indian menu, it went about selling the whole kitchen, so to speak: it had vegetarian and non-veg sections on display for all to see, complete with cooks in different coloured aprons to tell them apart. With its diet sensitivity credentials thus established in a famously fussy country, its McAloo Tikki potato burger was to prove a rage. McDonald’s Inc had success, marketers had a great case study of brand adaptation, consumers had a ‘burger’ defined as anything that could snuggle into a bun, and everyone knew who to thank—McDonald’s local partners. The company had entered India through a couple of 50:50 joint ventures (JVs) with Indian entrepreneurs. One of these was Connaught Plaza Restaurants, whose job was to open outlets in the north and east. The other JV was Hardcastle Restaurants, for the west and south. And they were both raring to span the horizon with those glowing arches. 

Today, as the burger market sizzles with exciting new options, McDonald’s seems to have lost its early mover’s advantage, if not its allure. It is no longer India’s top fast-food chain. The No 1 for the past three years has been Domino’s, which now has over 1,000 outlets and gets every fifth rupee spent on fast food, according to data from Euromonitor, which tracks the sector closely. McDonald’s, which was the overall leader back in 2012, is now in third place, with less than half the outlets and every seventh rupee. Even KFC, which learnt from its example and went local with a frenzy after a patchy start, has overtaken it in a sector worth more than Rs 11,770 crore in sales last year. Branded burgers alone form a market of about Rs 1,600 crore, by this estimate, and while McDonald’s still has most of it to itself, the sclerosis revealed in its recent performance figures could mean that late entrants like Burger King, Dunkin’ Donuts and even Café Coffee Day grab large chunks of it. 

Memories of McDonald’s dream debut feel disturbingly distant the moment one gets past the facade of everyone ‘lovin’ it’ to the battle behind the arches that has cast an unseemly shadow over its success. 

IT WAS ON 6 August 2013 that hostilities broke out, with McDonald’s Inc trying to oust Vikram Bakshi, a 50-per cent partner who had played prime mover in localising the brand, as Connaught Plaza’s managing director. “It was a gigantic shock,” he says, making it clear that he speaks only as a director of the JV, not its chief any longer. “It’s supposedly a board-run company now,” he says, “being run aground, though.” 

Bakshi’s wry grin turns into a long sigh, if not one of resignation then one of regret, even pity, that a story which began with such a bang could possibly be going the way of a whimper (or Wimpy). Aged 60 now, he hasn’t thrown his hands up yet, but he has had to cede control of operations by and by. His re-election as the JV’s chief was to be a routine matter at the annual Board meet, he’d thought, Item No 6 for discussion. Instead, he found himself being shown the exit. “I’m at my wit’s end trying to understand it,” he says, adding that he doesn’t want to ‘speculate’ on what went wrong. “The night before [the meeting] we were having drinks and dinner, and celebrating. There wasn’t a whisper of the impending disruption, and the next morning, this... I was like, ‘Hey, what happened?’ It was an ambush, planned and executed deviously,” he alleges, “I was caught completely unaware.” 

 

 McDonald’s Inc wanted to take over Connaught Plaza as soon as we turned profitable. It’s a case of cutting your nose to spite your face 

A financial irregularity was cited, a charge he’d been given no prior notice of, he claims, “an afterthought” over a “dead issue”—specifically, an advance of Rs 7 crore made to another firm of his for space in downtown Delhi that he claims was ratified by the Board, confirmed as being in the JV’s interest by audit firm Grant Thornton, and paid back with interest within four months. The ‘skeleton hunt’ undertaken by the MNC since then, Bakshi avers, has yielded nothing that can withstand scrutiny. To his mind, “It’s a case of cutting your nose to spite your face.” 

McDonald’s Inc, however, took a grim view of what it saw as an overly cosy transaction. After raising a stink over it, the US-based company has chosen to stay silent since. ‘We do not propose to participate in this story at this time while our legal case is being resolved through the courts,’ says Liam Jeory, spokesperson of McDonald’s Inc, in response to a set of questions emailed by Open

In 2010, the fast-food major had off-loaded its equity in the other JV, Hardcastle, unto its promoters and turned it into a ‘development licensee’ for the east and west, drawing only royalties from it. Connaught Plaza, in contrast, it apparently wanted complete control of. Why it should want this, however, befuddles observers. Its global model, after all, operates via franchised outlets run by local entrepreneurs; why not here? 

After Bakshi appealed to the Company Law Board challenging his ouster, McDonald’s issued a notice to end the JV agreement that would effectively drag him to London for arbitration (a move later stayed by the Delhi High Court). 

 

 The recent stagnation of McDonald’s signals a ceding of market space to Burger King, Dunkin’ Donuts and even Café Coffee Day 

In the absence of a quick service window for a clean split, the war of words was to inevitably turn into an extended wrangle over which party would buy the other out for how much. By Bakshi’s claim, the first time the megacorp offered to buy his half of Connaught Plaza was back in 2008—the very year it broke even. “The audacity of their offers,” he says, took his breath away. On the table was a laughable $5 million at first. “This was the amount I had invested in the JV. So, after 13 years of hard work and more than 80 restaurants, one was worth nothing?” 

Globally, McDonald’s entry strategy for a new market involves serving burgers at ‘affordable’ prices in the early stages: losses are to be borne for about a decade-and-a-half, and at some point, once a sizeable scale is achieved, the bottomline turns from red to black, with profits rising rapidly to recover all that’s ploughed in, and then some. But the fast food major, Bakshi alleges, “wanted to take over as soon as we turned the corner”. In 2009, the JV logged its first full-year profit, netting Rs 1.7 crore on sales of Rs 282 crore. By 2012, not only was McDonald’s scoring especially well in north India on brand loyalty surveys, the region’s JV made Rs 8.2 crore on sales of Rs 540 crore that year. Given its financial trajectory, says Bakshi, industry norms would’ve valued Connaught Plaza at about six times its sales figure. 

THE MNC WOULDN’T hear of it. “To a brand as big as McDonald’s, its market success is simply a function of its own appeal,” says a brand analyst who doesn’t want to be named, “Why would it give anyone credit for localisation? They probably see it as a minor market translation job, that’s all—no big deal.” A mere hint of this makes Bakshi bristle with anger. “Their attitude is, ‘We’re stronger, how long will he fight us?’” he says, “If this can happen to a 50:50 joint venture, God help anyone who has less than 50 per cent—phir toh chhutti ho gayi!” 

McDonald’s, meanwhile, stares at stagnation. By Euromonitor data, it sold fast food worth Rs 1,458 crore across the country in 2014, just 2.2 per cent more than it did in 2013. The figure for 2015 is unlikely to cheer anyone up either. The expansion project has lost its steam; over the past two years, the north and east have seen only 12 new outlets open, far below the JV’s target of 95, taking the total under its charge to 168. And the golden arches appear to be losing their lustre in far too many locations as each unit grunts along on its own, with quality run-ins with authorities being reported from Bareilly, Allahabad, Jalandhar and other places. 

“McDonald’s built the quick service market and then took its eyes off,” says Bakshi, “and look what’s happening. We established the taste, we set up the market, and now we’ve given the space for these new guys—Burger King, Wendy’s, Carl’s Junior, Johnny Rockets and so on— to come take over. Even coffee chains are selling burgers now. Look at Dunkin’ Donuts or even Café Coffee Day, they’re all effectively selling burgers—all in the space we vacated.” What bothers Bakshi all the more is how McDonald’s Inc has reclassified India as a ‘foundational market’ instead of a ‘high growth’ one (a la China). “We’ve been dumped in the last basket with 83 other countries,” he says, his eyes aglare, “India is a basket case now! Unbelievable!” 

 

 This is the only country in which Dunkin’ offers burgers. We have found a sweet spot in India between coffee chains and the Quick Service Restaurant format 

If offered a ‘fair market value’ deal, though, Bakshi says he’d be ready to sell out. Since the JV’s shares are not traded on any stock market, this would call for an ‘arm’s length valuation’ by an audit firm (under RBI’s revised guidelines of 2014). Whatever the figure such an exercise throws up, the man who gave McDonald’s its beefless beef in India says he hopes for a quick resolution. 

Time is running thin. And Bakshi sounds every bit as exasperated as he is: “It’s 20 years of my life!” 

FAR FROM THE battle zone, glow-lit menu boards in McDonald’s familiar format are drawing queues to the sales counters of rival brands. The country’s burger lovers are almost spoilt for choice. At the market’s upper end are Johnny Rockets, Carl’s Jr and Wendy’s. Though these are casual dining rather than quick service ventures, their stand-out burgers have begun winning loyalty. Wendy’s, brought in by Sierra Nevada Restaurants, a JV between firms owned by London-based Jasper Reid and Delhi-based Sanjay Chhabra, has just launched a low-priced menu of desi fare in a quest for larger volumes. In terms of brand heft, the biggest entrant of late has been Burger King, which plays archrival to McDonald’s in America and was brought to India by private equity firm Everstone in late 2014. With more than three dozen outlets up and running, and its Whopper selling on size as a proposition, this chain is keen to expand swiftly in India with a menu that looks nicely adapted to local palates. 

Any brand’s reach makes a big difference in a market such as this. One that has an early advantage here is Coffee Day, which got going in late 2014 with its Big Crunch burgers. “We have 1,586 outlets across 219 cities in India,” says Bidisha Nagaraj, group president, marketing, Coffee Day, “We sell burgers in 1,000 of our cafés.” What motivated the launch? “In addition to coffee, our consumers, particularly the youth—our primary target audience—are always on the lookout for a large snack with fresh ingredients and flavours that pack a punch,” replies Nagaraj, “We felt that a burger is a perfect offering to fill that hunger need.” With ‘modest’ prices and ‘authentic flavours’, it has struck a rapport of its own with customers. 

Arguably, the most innovative entrant is Dunkin’ Donuts, an American chain that has made its domestic debut in alliance with Jubilant FoodWorks, which runs Domino’s. Worldwide, the brand is known for doughnuts and coffee, but in India, uniquely, it has taken a strategic swerve in favour of burgers. “This is the only country in which Dunkin’ offers burgers,” says Dev Amritesh, president and COO of Dunkin’ Donuts India, “and also the only country where the brand is called Dunkin’ Donuts & More.” While a doughnut-n-coffee culture may take many years to evolve in India, burgers appear to have offered DD a quick way to keep things ticking. In the COO’s words, “We have found a sweet spot between the QSR format and coffee chains.” With ‘Get Your Mojo Back’ as its ad slogan, Dunkin’s campaign to woo lovers of hot throbs in buns has been just as spicy as its range of Too Much Burgers that its network of outlets—69 across 24 cities—began selling late last year. DD’s Naughty Lucy and Heaven Can Wait burgers have tongue-in-cheek appeal in their own niches. Again, the thrust of its effort is to tantalise Indian taste buds in a way no foreign brand has ever tried. And DD’s going all out to outdo the original innovator. 

To be fair, McDonald’s has not exactly been idle in the face of fresh competition. On the health front, it has the likes of Subway to guard against. For this, it has been working to knock some fat, salt and sugar off its menu, even as it places fresh emphasis on vegetarian fare and broadens its range of flavours. For the first time, it has an all-veg Maharaja Mac now with a double patty of corn-and-cheese (as an option to its grilled chicken version). This ‘social burger’, as advertised, is priced at Rs 150 apiece. With the classic Big Mac no closer to being served than 20 years ago, this is the burger that plays substitute on the Big Mac Index of The Economist. And what its price says of the rupee’s value should interest anyone in the fast food business. Since the Big Mac sells for an average $5 in the US, it suggests that the rupee’s rate—in terms of what it can buy locally—is more like 30 to the dollar. Seen this way, India’s annual per capita income is now the equivalent of almost $5,000, a figure often flagged by analysts as a take-off point for a fast food boom. 

Who’ll make the most of it? Brands that keep their costs low, retain high hygiene standards, reach out as rapidly as possible, and adapt their offerings to an Indian market that’s so devilishly diverse that it can deify, desify and defy all kinds of models at the same time. 

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