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McDonald’s India grew over threefold in last 5-yrs to cross $200M sales; a peek at its two franchisees 

One of the two master franchisees of the burger chain in India has sped faster overtaking the other in size over the last couple of years.

McDonald’s, the world’s largest fast food retail chain by revenues and the second largest by the number of stores behind Subway, has had a heady growth in India even as the Indian economy slowed down over the last few years.

So much so that the burger chain has seen the revenues from the country grow at a compounded annual growth rate of around 28.5 per cent over the past six years. In the last five years alone (FY08-FY13) its revenues have shot up over threefold to around Rs 1,300 crore for the year ended March 31, 2013, based on revenue clocked by its franchisees in the country.

The chain operates through two master franchisees in India which handle particular geographies - Connaught Plaza Restaurants Pvt Ltd for the north and east region (McDonald’s N & E) and Hardcastle Restaurants Pvt Ltd (HRPL) (now under parent company Westlife Development) for the south and west region (McDonald’s W & S).

While the former is run as a joint venture between McDonald’s and domestic partner Vikram Bakshi, who also leads the operations of the business in north and east regions of the country, the other has now become a full franchisee after the local partner Jatias bought out McDonald’s stake in the venture. VCCircle dug into financial numbers of the two firms down the years, which is not available under the public domain, to see how they stack up.

First things first, the chain which entered India with its maiden store in 1996 in Delhi saw its store count grown from around 100 in 2006 to over 300 at the end of FY13. McDonald’s W & S which had a little less than half of the stores in FY07 overtook McDonald’s N & E in the number of outlets in FY12 when it added around 23 outlets, the highest in a single year till then and almost double of what McDonald’s N & E did in that year, according to sources.

This also catapulted its revenues, which shot up 45 per cent to Rs 544 crore for FY12 overtaking McDonald’s N & E for the first time. McDonald’s N & E grew its sales 27 per cent to Rs 490 crore in the same period. McDonald’s W & S revenue rose 25 per cent last fiscal to Rs 681 crore. Although FY13 sales of McDonald’s N & E is not available yet, given that it added around the same number of new outlets as its other peer, it is estimated to have remained a smaller firm by revenues.

Interestingly, the outperformance of McDonald’s W & S coincided with change in operational ownership. FY12 was also the first year after a change in business structure where the Jatias acquired the stake held by McDonald’s in their joint venture HRPL while retaining their role as a master franchisee for two regions of the country. Jatias recently consolidated HRPL under a small public listed firm Westlife Development.

To be fair, McDonald’s N & E reached break-even faster than its other Indian peer. Connaught Plaza Restaurants clocked positive EBITDA way back in FY08, one year ahead of Hardcastle Restaurants. It also clocked net profit one year before Hardcastle, in FY10. While faster rollout of new stores in FY11 and FY12 allowed Jatias to gain speed, McDonald’s N & E matched the new addition to stores last year with around 30 new outlets the same as McDonald’s W & S. Few weeks ago it also set up the single largest McDonald’s outlet in the country in Noida.

Vikram Bakshi, the chief of McDonald’s N & E, declined to comment on specific financial numbers and number of outlets run by Connaught Plaza Restaurants.

Amit Jatia, vice-chairman of Westlife Development, did not comment specifically about the financial revenues but shared that McDonald’s W & S added 60 restaurants over the past two years, taking the count up from 107 restaurants in FY11 to the current 166 restaurants (as of June 30, 2013) as the company moved into an acceleration phase and the business has grown significantly.

“The aggressive rolling out of the acceleration phase is backed by a strong foundation, a solid balance sheet, a constant control on processes and quality and a deeper understanding of markets and consumer demands,” said Jatia in an email response.

“We created products and habits which did not exist in the country before; we set up the partnerships, attracted the customers, reached out to investors,” he added.

A consultant with one of the Big Four firm, on condition of anonymity said, “We believe that going forward, Hardcastle (McDonald’s W & S) will do a better job and there will be rapid expansion by them due to the funds that the company has recently raised.”

Westlife recently raised Rs 180 crore from Arisaig Partners, an asset management firm which chases investments in public-listed consumer-facing companies.

The consultant further added that real estate cost has gone up for quick service restaurants (QSRs) and one needs to be well funded to expand and thus Jatias are in a better position to scale up.

In February this year, Amit Jatia, told VCCircle that the firm is planning to increase the number of outlets in McDonald’s W & S to 250 by 2014. “Typically, we invest Rs 3 crore per restaurant plus there is the cost of real estate. Hence, we plan to spend around Rs 400-500 crore in the next two years,” said Jatia.

A stock analyst who tracks consumer sector said, “The last two years have definitely been a game changer of McDonald’s in India with the brand (franchisees) started making profits despite heavy competition in the QSR space. In such a scenario, having an organisational structure like Hardcastle has definitely helped. The franchisee now has solely Indian top management which has led to faster decision making and scaling up. The restructuring to bring it under a listed firm, which is as good as a reverse listing, too has helped the company to raise funds.”

According to consultancy firm Technopak Advisors, the organised food & beverages services market in India stood at $2 billion in 2012, of which the QSR market size was pegged at $850 million, casual dining was around $430 million and the fine dining segment was $190 million. The rest is café market besides pub/club/bar/lounge outlets. This means McDonald’s accounts for roughly a quarter of organised QSR business in the country.

Besides the change in ownership structure and funding channels for growth, which could be behind the divergence in performance of the two franchisees of McDonald’s in India, another aspect could possibly be the geography.

While growth opportunities, given the purchasing power and discretionary spends on eating out, in north, west and south regions would match each other, the eastern region could be a laggard in terms of expansion which could be affecting performance of McDonald’s N & E.

The roll out of fresh outlets of both the franchisees could decide the future growth trajectory of the burger chain which is now facing fresh competition from addition of burgers under the Dunkin’ Donuts brand by public listed Jubilant Foodworks, a franchisee of Domino’s pizza chain in the country.