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McDonald's local arm asked to pay royalty

Partha Ghosh

With sales of its hamburgers tumbling elsewhere in the world, fast food chain McDonald's is turning to the growing Indian market for beefy business.

The profitable Indian subsidiary, McDonald's India Ltd, has now been asked to remit royalty on monthly gross sales and the franchise restaurants -- old and new -- have to pay an initial franchisee fee of $45,000 each. During the past eight years, the local venture was not charged the fees to provide it cushion against uncertain demand.

The US firm is saying its eight-year-old Indian operations is becoming "self sustaining" and "showing signs of growth". And hence, it is time the business, which has been subsidised to sustain the initial pangs, pays up all its dues.

McDonald's local business has grown at a rate of over 60 per cent per annum. On the other hand, in recent times, the world's largest fast food chain's worldwide sales has taken a beating following a sharp slump in demand for humburgers, which the company attributes to the two cattle diseases -- mad cow and foot and mouth.

The growing non-beef eating domestic market is, therefore, increasingly becoming important in the company's global strategy. Said an executive: "Beginning this year, the local subsidiary has been directed to pay an initial franchisee fee of $45,000 prior to opening any new restaurant in the country. All the restaurants which are franchised will also have to pay up a similar amount since they have not done any such payment so far."

Besides, the arm would pay a royalty at the rate of five per cent of the gross sales from the operations of all its Indian restaurants to the parent on a monthly basis, he added.

The world's largest fast food chain was so far not claiming any initial franchise fee to which it was entitled under a "Master License Agreement" from its local subsidiary since it was not certain about the company's business prospects.

"Due to an uncertain demand for our products in India and in order not to unduly burden the local subsidiary in the initial years of its operations, McDonald's did not claim the initial franchisee fees to which it was entitled under the existing agreement. Our operations are doing well now, and we now intend to claim the amounts due towards initial franchise fees," the executive said.

The company currently operates 27 restaurants through two zonal joint ventures and is expected to take that number to 42 by the end of this year. According to the original plan, some of the restaurants would be operated through franchisee agreements and some by the company itself. An Indian partner recently said McDonald's is now taking the franchise route more seriously.

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