Licensing Agreements and McDonalds Operations in France Running head: GLOBAL BUSINESS ENTRY: STRATEGIES AND ALLIANCES

Global Business Entry: Strategies and Alliances Licensing Agreements and McDonalds Operations in France Presented by: Christopher J. Ferrell of Team McWorld University of Maryland University College AMBA606 Resubmitted November 12, 2005

Licensing Agreements and McDonalds Operations in France Executive Summary

Licensing is a mode of market entry and form of strategic alliance that involves the sale of a right to use certain proprietary knowledge or intellectual property in a defined way. The intellectual property may be registered publicly or it may be retained within the firm as know-how based on operational experience. As with all modes of market entry there are advantages and disadvantages of strategic alliances formed through the utilization of licensing. Advantages include: the licensors ability to recoup R&D expenses; the ability to gain income from information or technology with limited useful life; no long term obligations; and the opportunity for the licensor and licensee to gain technology and knowledge from each other. Disadvantages of licensing include possible damage to the licensors reputation by the licensee, the prevention of direct entry into the market if circumstances later dictate that approach, and the potential for antitrust problems in developed country markets (Goodwin, 2003). Recent licensing agreements in France have proven to be profitable. These include that of Cambridge Laboratories of the UK and OPi of France, and an agreement between Universal Studios of the US and IN-FUSIO of France giving IN-FUSIO worldwide rights to develop, publish, and distribute interactive games for mobile devises based on the Battlestar Galactica and Munsters television programs. With statistics citing a new McDonalds restaurant opening every six days in France licensing agreements as an entry strategy are not needed (Kiras, 2005). McDonalds now has over 1,040 restaurants in 750 French cities making France the most profitable European market for the company. While it is certain that McDonalds will remain committed to franchising as its predominant way of growing its business in France, licensing will afford the company an excellent opportunity to gain further market share against its French competitors and is therefore a highly recommended strategy.

Licensing Agreements and McDonalds Operations in France Introduction

Firms contemplating foreign expansion must address the issues of the best mode of entry into the markets chosen, and the role of strategic alliances. With more than 200 nation-states in the world with varying profit potentials for firms contemplating entry, businesses must carefully balance the costs, benefits, and risks associated with doing business in any given country. There are six different modes a firm can use to enter a foreign marketexporting, turnkey projects, licensing, franchising, joint ventures with host country firms, and setting up new wholly owned subsidiaries. Each entry mode has its own advantages and disadvantages, and none is the best in all situations (Hill, 2005). Companies must also consider issues related to strategic alliances as these arrangements are often between actual or potential competitors and include forms ranging from the contractual such as: licensing, franchising, and management contracts; to equity forms like: joint ventures, multinational corporations, and equity share purchases (www.answers.com). Strategic alliances also have advantages and disadvantages that a firm must weigh carefully when making a decision whether or not to ally itself with another company. This paper will discuss the impact of international licensing agreements on McDonalds business operations with specific emphasis on the companys business dealings in France. It will begin with an overview of global licensing agreementstheir advantages, disadvantages, and how to reduce risk in their use. The discussion then turns to licensing in France, and concludes with an overview of McDonalds worldwide licensing activities with an emphasis on those in the French market. The Dynamics of Global Licensing Licensing is a form of strategic alliance that involves the sale of a right to use certain proprietary knowledge or intellectual property in a defined way. The intellectual property may be registered publicly or it may be retained within the firm as know-how based on operational experience. Know-how may include commercial and administrative knowledge as well as technical knowledge. A licensing agreement is the legal agreement that sets out what is to be transferred from the licensor to the licensee, under what conditions, and the royalty fee to be paid by the licensee to the licensor. According to UNCTAD, flows of royalties and license fee receipts amounted to $72 billion in

Licensing Agreements and McDonalds Operations in France 2001, demonstrating the integral role that licensing agreements play in the business world (www.answers.com). As with all modes of market entry there are advantages and disadvantages of strategic alliances formed through the utilization of licensing Advantages A primary advantage of international licensing is that the licensor does not bear the development

costs and risks associated with opening in a foreign market. This makes licensing very attractive to firms lacking the capital to develop foreign operations. Licensing is also advantageous where there are barriers, constraints or risks to foreign trade because it allows a company to enter a foreign market where it otherwise might have been forbidden. Other advantages include: the licensors ability to recoup part of its R&D expenses; the ability to gain income from information or technology with limited useful life; the opportunity to form relationships with a potential joint venture partners; no long term obligations; and the opportunity for the licensor and licensee to gain technology and knowledge from each other (Goodwin, 2003). Disadvantages Licensing has three major disadvantages as a mode of entry into foreign markets. To begin, it does not give a company the control over manufacturing, marketing, and strategy that is required to realize experience curve and location economy effects because it usually involves the licensee setting up its own production operation which severely limits the realization the efficiencies that come from producing a product in a centralized location (Hill, 2005). A second disadvantage of licensing is the limitation it places on a firms ability to use profits earned in one country to support competitive attacks in another country due to the unlikelihood of a licensee allowing a multinational firm to use its profits, beyond those due from royalty payments, to support a different licensee operating in another country. The third major disadvantage of licensing is the risk it brings to a multinational company of losing technological know-how to the licensee. As Hill (2005) points out, technological know-how often constitutes the basis of many multinational firms competitive advantage. Licensing arrangements create a situation wherein a firm can quickly lose control in this area. A licensing agreement can actually aid in positioning the licensee as a future market competitor for the licensor. Other disadvantages of licensing include possible damage to the licensors reputation by the licensee, the prevention of direct entry into the

Licensing Agreements and McDonalds Operations in France market if circumstances later dictate that approach, and the potential for antitrust problems in developed country markets (Goodwin, 2003).

The disadvantages associated with licensing can be reduced if organizations carefully select their partners/allies paying close attention to their reputations and the structure of the alliances so as to avoid unintended transfers of know-how and control. One method of doing so is entering into cross-licensing agreements. In these arrangements the licensor also requests that the foreign partner license some of its valuable know-how to them in addition to royalty payments. This reduces the risks because the licensee realizes that if it violates the licensing contract by using knowledge obtained to compete directly with the licensor, the licensor can do the same to it (Hill, 2005). Licensing risks can also be managed by linking the licensing agreement with the formation of a joint venture in which the licensor and the licensee take equity stakes. Such arrangements better align the interests because both parties have a stake in ensuring the venture is successful. Other means of making licensing and strategic alliances less risky are keeping open lines of communication between the partners, and taking proactive steps to learn from licensing or alliance partners (Hill, 2005). Licensing in France (Source: ViewsWire Economist Intelligence Unit) Under the French system, industrial property is protected by patents and trademarks, while literary/artistic property is protected by copyrights. Companies are free to negotiate licenses in France and it is advisable to register the license with the National Industrial Property Institute in order for it to be defendable in the event of a dispute. Registration is compulsory if one of the parties is not French and it facilitates justification of royalty payments with French tax authorities. In the past it has been difficult to enforce intellectual property rights because the procedures were slow and the judiciary was not well equipped to deal with the subject. This situation has been cured by recent legislation that makes the court system more effective, and strengthens the likelihood of recourse against violators of licensing regulations. Recent licensing agreements in France have proven to be profitable. These include that of Cambridge Laboratories of the UK and OPi of France to market tetrabenazine (a molecule used in the treatment of neurological disorders), and an agreement between Universal Studios of the US and IN-

Licensing Agreements and McDonalds Operations in France FUSIO of France giving IN-FUSIO worldwide rights to develop, publish, and distribute interactive games for mobile devises based on the Battlestar Galactica and Munsters television programs. With 2003 statistics citing a new McDonalds restaurant opening every six days in France, as in Canada, licensing agreements as an entry strategy are not needed (Kiras, 2005). The company can, however, use licensing to gain further market share against its French competitors. Licensing and McDonalds Corporation In 2003, the company announced its plans to introduce a major multi-category licensing initiative called McKids. The retail line features action-oriented toys, casual contemporary clothing, and

interactive videos and books. The move was one to unify all of McDonalds retail licensed products under one brand. The toy line extended the companys toy offerings and expanded McDonalds list of licensing partners to include such prominent companies as Creative Designs, Hasbro, Mattel, Patch Products, and SpinMaster. The apparel line was designed to appeal to children and their parents, and involved licensing agreements with major clothing manufacturers. The company duplicated similar licensing arrangements for its entertainment and book branding initiative and introduced the initiative in Canada, Mexico, Japan, China, Australia, Korea and Taiwan as well, with plans for further expansion (www.mcdonalds.com). While acceptance of the brands quality has not been as widespread in the domestic market as the company anticipated, McDonalds has realized many gains from licensing their famous name in this venture. McDonalds has also had a long-time successful licensing arrangement with the Walt Disney Company. The exclusive marketing partnership has lasted for over a decade and gave McDonalds access to Disneys family audience while Disney got access to the powerful promotional platform that McDonalds 30,000 plus restaurants represent. Since 1996, the licensing agreement held McDonalds to only promoting Disney movies, television shows and theme parks. The Disney-McDonalds agreement specified how much TV advertising McDonalds would provide and how many promotions would run in its restaurants each year (Marr & Grey, 2005). Ten years ago when Disney ruled the animation business the deal made sense to McDonalds. However, as Disneys winning streak faded the relationship became strained and McDonalds found itself locked into promoting Disney flops that McDonalds franchisees blamed, in part, for declining sales of the chains Happy Meals. The agreement has limited Disneys

Licensing Agreements and McDonalds Operations in France flexibility in picking release dates for its movies and locked Disney-owned networks into selling prime advertising time to McDonalds at below market rates. As such, both companies are anxiously exploring

their options for new allies as the expiration date of the agreement draws near. This demonstrates both a disadvantage of licensing agreements as well as one of their advantages as the limited term of the agreement now affords both companies the opportunity to explore relationships that are more conducive to their current needs. The French market offers McDonalds similar benefits as those gained from the strategic alliances with toy makers, clothing retailers, movie studios, and the like, here in the United States. France is the only place in Europe that has consistently loved McDonalds sine the first outlet opened there in 1979. The restaurant dominates the French restaurant sector, dwarfing rivals such as Elior, a French fast-food group, and Quick, a Belgian chain. McDonalds is already teaming with French companies such as Danone to put its name on fruit yogurts, Carte Noire for coffee products, and the French soft drink company Orangina (ViewsWire, 2005). While it will be important for the company to utilize discretion in selecting the companies with whom it enters into licensing agreements, McDonalds French operations can derive benefit from securing additional licensing opportunities with French companies to expand its brand awareness and market share in France. Conclusion McDonalds now has some 1,040 restaurants in 750 cities in France thus making McDonalds France the most profitable European subsidiary owned by the Corporation (ViewsWire, 2005). The company believes the success in France could offer the chain the recipe for boosting foreign sales which is a key to future growth as the U.S. market has become saturated (BusinessWeek, 2003). While it is certain that McDonalds will remain committed to franchising as its predominant way of growing its business in France and elsewhere, licensing will afford the company an excellent opportunity to gain further market share against its French competitors and is therefore a highly recommended strategy. References Business Week Online (January 13, 2003). Whats this? The French love McDonalds? Retrieved September 29, 2005 from http://www.umuc.edu. Goodwin, R.C. (2003). On licensing agreements. Retrieved November 2, 2005 from AMBA606 Reserved Documents.

Licensing Agreements and McDonalds Operations in France Hill, C.W.L. (2005). International business with Global Resource CD, PowerWeb and th World Map (5 Ed.).New York: McGraw Hill

Kiras, S. (2005). Licensing agreements and their impact to McDonalds in Canada. Retrieved November 10, 2005 from http://www.nventivesolutions.com Marr, M. & Grey, S. (June 6, 2005). Disney, McDonalds may end their marketing marriage. The Wall Street Journal. Retrieved November 1, 2005, from http://www.postgazette.com/pg/pp/05157/516632.stm United States Department of Commerce: Trade Information Center. (2005). France: Trade Regulations and Prohibited Imports. Retrieved September 30, 2005, from http://web.ita.doc.gov. U.S. Commercial Service France: Trade Regulations and Standards. (2005). Retrieved September 30, 2005, from http://www.buyusa.gov/france. ViewsWire. (2005). France: Licensing and intellectual property. Retrieved November 11, 2005 from http://viewswire.com ViewsWire. (2005). France: Investment regulations. Retrieved November 11, 2005 from http://www.viewswire.com http://www.answers.com (2005). Strategic Alliance. Retrieved November 5, 2005. http://www.answers.com (2005). Licensing. Retrieved November 5, 2005. http://www.mcdonalds.com (2005) McDonalds 2005 Corporate Responsibility Report. Retrieved September 29, 2005.