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McDonald's suspends royalty hike for India units this year

The operators of McDonald's restaurants chain in India, which are battling muted consumer spending, have got some relief as they will have to pay lesser royalties to the US parent this year.

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The operators of McDonald's restaurants chain in India, which are battling muted consumer spending, have got some relief as they will have to pay lesser royalties to the US parent this year.

Westlife Development Ltd (WDL), which operates (under franchise arrangement) the McDonald's restaurants in western and southern India under its subsidiary Hardcastle Restaurants P Ltd (HRPL), will receive relief in royalty payments for the four quarters in calendar year 2015.

The relief has been granted by the parent company after taking into account the prevailing muted consumer sentiments in India, top company official said.

Amit Jatia, vice chairman, WDL and HRPL, said, "McDonald's Corporation has reaffirmed its commitment in WDL by providing a one-time relief of 1% in its royalty for the calendar year 2015.

Accordingly, WDL will pay a royalty (to the US parent) of 3% instead of 4% (of net sales) for the January to March quarter of 2015."

"Thereafter, the royalty to be paid for the next three quarters i.e. April to June, July to September and October to December 2015 will be 4% instead of 5%.The decision to extend the 1% relief will depend on the market conditions and consumer sentiments then," Jatia said in an earnings call on Friday.

The annual increase of 1% in royalty payments was instituted by the two parties in January 2014, whereby WDL was to (gradually) pay royalty of 8% of net sales by 2020. The royalty rate is said to be one of the highest paid by any Indian company to the US parent.

On consumer sentiments, Jatia said the demand continues to be weak, and it will take another three to six months for things to start looking good. "While results have been better quarter on quarter in this fiscal, consumer sentiments haven't seen a drastic change. We are definitely towards the end of the cycle as far as muted demand scenario is concerned and are hopeful that the situation is only going to improve from here," he said.

Jatia said the Indian eating out market is still in the nascent stages of development and thus presenting huge growth opportunities for WDL in the medium to long term. "We are focusing on intelligently navigating the current challenges in the Indian economy without getting distracted by the same. In the past, as eating out frequency grew in west and south India, our basket of comparable restaurants almost doubled their same-store sales (SSS) over this period reflecting the brand connect with consumers," he said.

As the economy revives, according to WDL management, a key task is to continue to open restaurants in the vast under-penetrated geography. "While we need to have an aggressive approach to growth, it is imperative to have a sustainable plan so that new restaurants are able to build strong long-term competitive advantage in our site locations through favourable commercial and legal terms, differentiated design and a well-diversified portfolio," said Jatia.

Among strategies adopted by WDL to enhance consumer connect and revenue generating opportunities include re-imaging of older restaurants, adding McCafe's and providing menu offerings. This apart, addition of online ordering option to the delivery business has helped delivery business grow with strong double digit same-store sales on a month-on-month basis for the entire nine months of the current fiscal.

WDL currently operates 202 McDonald's and 30 McCafe outlets. A total of 11 new restaurants and 15 cafes were added in the third quarter of fiscal 2015. On a year-on-year basis, the December quarter saw gross addition of 25 outlets. The company is on track with meeting its for fiscal 2015 new store openings and maintains that 175 to 250 new outlets will be added over the next three to five years.

"We plan to have 50-75 McCafe's by end of 2015 and will double the number in the following year. In fact, majority of new restaurants now open with McCafe's in it so we are confident of meeting or for that exceeding the number of McCafe's in the coming years," said Jatia, adding that the company will spend between Rs 130 to Rs 150 crore annually towards expansion in the next three years.

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