Global Rent excess at the World’s Largest Franchisor

March 2017 About EFFAT EFFAT is the European Federation of Trade Unions in the Food, Agriculture and Tourism sectors resulting from a merger concluded between two European trade union federations - the ECF-IUF and EFA - on 11 December 2000. As a European Federation representing 120 national trade unions from 35 European countries, EFFAT defends the interests of more than 22 million workers towards the European Institutions, European industrial federations and enterprise management.

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executive summary

cDonald’s is a dominant force in the global fast food industry. Worldwide, its stores have approxi- mately double the sales of its nearest competitor. In Europe, McDonald’s claims to be larger than its next nine competitors combined, and throughout its top markets, from the United States to France, to Brazil and to Japan, McDonald’s is consistently the fast food market leader. As a result, the golden arches produce profits worthy of their name: over the last five years, McDonald’s has produced operating profit averaging nearly US$8 billion per year and net income averaging US$5 billion annually.

A core foundation of McDonald’s ability to both realize dramatic growth and extract enormous profits from its global operations is that most of its profits come from its real estate operations rather than its burger business. McDonald’s is the largest real estate company in the world and controls most of the property on which its 36,000 stores in 120 countries are located. More than 80 percent of the company’s stores are operat- ed by 5,000 individual franchisees – not McDonald’s itself – and the corporation reaps over 50 percent more in gross profit from the rent it charges to its own franchisees than from selling food directly to customers.

McDonald’s franchise agreements require its franchisees, who are mostly small-business people, to rent land and buildings for their stores from the burger giant. This stands in contrast to most of its largest competitors – such as Yum Brands and Burger King – which control only a fraction, if any, of the property for their franchised stores.

McDonald’s has complete control over the location of franchised stores. It also requires that prospective franchisees undertake substantial unpaid training before revealing what store location will be made available if any, and under what lease terms, near the conclusion of the training period. Coupled with its unusual real estate strategy, these conditions allow the chain to set unreasonable rental rates and contract terms, leaving franchisees limited options other than accepting McDonald’s terms. As a result, franchisees squeeze the wages of their employees.

Such practices, implemented by market dominant corporations like McDonald’s, can potentially distort competition because prospective business partners, such as franchisees, may have little choice but to do business with them, regardless of the quality of their products or the fairness of their contract terms. Thus, business owners who want to open a fast food franchise in many countries likely have few alternatives to McDonald’s because the chain e ectively blankets the industry, capturing an overwhelming portion of the customer dollars spent on burgers and fries. In addition, McDonald’s real estate strategy may lead to market foreclosure for its competitors by compromising their access to strategic locations, and therefore the market. The result may thus be limited choices for consumers.

McDonald’s enjoys a dominant position in many countries. In Europe in 2015, McDonald’s accounted for over 30 percent of sales in 19 countries in the American-style fast food market, including approximately 88 percent in Italy, and 76 percent in both France and Germany.

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This report details how McDonald’s market power and real estate practices enable this massive corporation to extract potentially excessive rental payments from its franchisees in comparison to competitors. In particular, it describes:

That the rent McDonald’s charges to its franchisees appears to be excessive, representing more than four times its own real estate costs in the United States and more than three times those costs in Europe; That in some countries McDonald’s franchisees pay substantially more in rent than McDonald’s corporate-operated stores do; And, that McDonald’s charges its franchisees significantly higher rent as a percentage of sales than franchisees in competing chains pay to their landlords, who are usually third parties una iliated with a franchisor.

It also describes how these practices are likely to have serious, negative e ects that ripple throughout the local communities in which McDonald’s stores operate:

They directly hurt the business prospects of McDonald’s franchisees, who are mostly small-business people; They limit the investments franchisees can make in their stores and in quality ingredients for their food, ultimately hurting fast food consumers, leading to higher prices and lower customer reviews at franchised stores than those at corporate-owned stores and triggering industry-low food, customer service and brand reviews for McDonald’s as a whole; They allow McDonald’s to implement strategies through rent relief that reinforce franchisees’ economic dependency and their obligation to comply with McDonald’s policies, including potential resale price maintenance (as laid out by a study in France); They allow McDonald’s to control key real estate locations, contributing to an economy-wide prob- lem in which local, independent businesses are crowded out by chains and consumers have fewer and more homogenous choices; They restrict McDonald’s franchisees’ ability to provide fair wages, safe working conditions, and adequate sta ing for their workforce, resulting in poverty wages and the potential for abusive labor practices such as wage the; And, they are likely to hinder the fair functioning of the market by allowing a dominant company to extract excessive profits and competitive advantages from its market position.

Governments around the globe should investigate McDonald’s franchising practices, particularly its extractive real estate program, and pay particular attention to ensure that McDonald’s may not abuse its dominant market position at the expense of the people that eat in its stores.

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Introduction

McDonald’s is one of the world’s largest and most ships or corporations, unlike most of its competi- recognized corporations. Its iconic golden arches tors.8 span more than 36,000 stores in 120 countries.1 In The profound imbalance of power in McDonald’s 2015, these stores generated almost US$83 billion in franchise relationships is reflected in its franchise systemwide sales – a measure of the sales at both agreements, which contain one-sided terms and franchised and corporate stores – nearly twice the conditions, such as McDonald’s right to unilaterally sales of its nearest competitor, Yum Brands.2 McDon- change its operational policies and methods regard- ald’s is the dominant fast food chain in many of the less of the costs and obligations imposed on the countries in which it operates, including most of the franchisee.9 These mechanisms of control likely world’s largest fast food markets. In Europe, for serve to dramatically limit the ability of franchisees instance, McDonald’s enjoys a dominant position to bargain with McDonald’s for better deals and with over 30 percent of sales in 19 countries in 2015 increase the potential consequences for speaking in the American-style fast food market (including out against the chain. brands like Burger King, Quick, and KFC) and huge In particular, the core of McDonald’s business market power in major markets such as Italy (88 model is that it, unlike most global fast food franchi- percent of sales), France (76 percent of sales) and sors,10 requires its franchisees to lease real estate it Germany (76 percent of sales).3 controls for their stores and charges these franchi- McDonald’s is also the world’s largest franchi- sees rent that appears to dramatically exceed the sor.4 Approximately 5,000 franchisees operate more market rate. In every market we reviewed (including than 80 percent of the McDonald’s stores around the the U.S., France, Italy, Germany, and the U.K.), globe.5 McDonald’s franchisees are o en small-busi- McDonald’s franchisees pay more rent, as a percent- ness people with a fraction of McDonald’s resources, age of their sales, than franchisees of other fast food operating an average of only four stores.6 And chains. And worldwide, McDonald’s earns more McDonald’s maintains the imbalance of power and profit from collecting rent from franchisees than it expertise in most countries by only oering franchis- does from selling hamburgers. While the company es to individuals, and not to established partner- earned a global gross margin of US$2.5 billion from its corporate stores in 2015, it earned over US$4.2 billion on its real estate margin from franchisees in the same year.11 Franchising is a system in which franchisees McDonald’s dominant market position in many sign an agreement with a franchisor to countries means that prospective franchisees may license the right to use the franchisor’s concept, trade name, know-how, and other feel it is necessary to accept the terms it dictates in industrial or intellectual property. Franchi- order to operate a fast food franchise with access to sees typically pay up-front fees, as well as a significant portion of industry sales. For example, ongoing royalties or service fees, usually McDonald’s has complete control over the locations based on a percentage of sales. Franchisors of potential franchisees’ stores.12 Despite stating

What is Franchising? What provide ongoing commercial and technical that it prefers local franchisees with local knowl- assistance to their franchisees.7 edge, it requires prospective franchisees to be ready to move anywhere McDonald’s chooses within their

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Figure 1. McDonald’s is the top fast food chain in most of the world’s top 20 largest fast food markets

#1 #2 #3

All figures based on Euromonitor Passport sales data for fast food, excluding convenience stores, 2015 countries to be awarded a franchise.13 It o en operating income, or almost nine percent of system- requires prospective franchises to undergo lengthy wide sales.17 In contrast, its major fast food franchise unpaid training periods,14 and only reveals what competitors – Yum Brands, Burger King and Wendy’s store location will be available, if any, and under – earned five percent of total systemwide sales or what lease terms, near the conclusion of a new less in operating income in 2015.18 In short, McDon- franchisee’s training.15 Franchisees’ bargaining ald’s is able to achieve profitability on its sales that is power is therefore weakened by the fact that they close to double that of its nearest competitors by will not risk losing the year they spent in training by this measure, suggesting that its unique business negotiating terms and conditions, allowing McDon- model is an important driver of global earnings. ald’s to use its dominant position in the fast food Due to its dominant position, its control of store industry to impose excessive rent and other onerous real estate, and its financial power, McDonald’s o en terms on its franchisees. As a result, McDonald’s occupies strategic store locations to which its earned a massive global profit ratio of 71.9 percent competitors do not have access, resulting in the on the rent paid by franchisees, compared to a gross exclusion of its competitors from the market and profit ratio of 15.2 percent of sales at company-oper- limiting consumer choice. This real estate strategy ated stores.16 may lead to the exclusion from the market of McDon- One measure of the dominant market position ald’s competitors and to a limited choice for enjoyed by McDonald’s, and the excessive profit that consumers. As an example, Burger King was able to position enables it to take from its franchisees in the access the Belgian and French markets mainly by form of high rents, is its operating income as a acquiring the Quick restaurant chain and its percentage of systemwide sales. Operating income locations in those countries.19 is the amount of profit a company realizes before As discussed in detail in this report, McDonald’s accounting for interest and taxes, and is an import- market dominance, control of real estate, and ant indicator of a company’s overall profitability. one-sided relationship with franchisees, including Unlike its competitors, McDonald’s operating potential resale price maintenance, provide a income includes the rental income it charges combination of factors that likely allows it to perpet- franchisees less its real estate costs – its real estate uate and strengthen its market dominance to the margin. For 2015, McDonald’s reported $7.1 billion in detriment of its competitors and consumers.

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$ ROYALTIES Typical Franchisor McDonald’s $ RENT SUPPORT Figure 2. franchisor franchisor third-party rental agreement How McDonald’s franchise contract contract lease $ $ $$ system di ers from other franchisors. $ franchisee franchisee

McDonald’s is o en cited as the world’s largest real no other global chain systematically requires estate company.20 It owns the buildings for over franchised stores to be located on property it 25,000 restaurants and leases many more.21 Property controls.25 and equipment makes up the overwhelming majori- For example, Burger King and Yum Brands, ty of its assets worldwide.22 A decade ago, the McDonald’s two largest competitors, do not require company’s sprawling real estate empire was that franchisees lease store property from them.26 estimated to be worth US$46 billion, and its value Major burger chain Wendy’s also does not generally has undoubtedly increased substantially since require its franchisees to lease property it controls. then.23 Globally, Burger King and Wendy’s own or lease the McDonald’s requires its individual franchisees to property for less than 20 percent of their franchised rent stores it owns or controls via a lease.24 This real stores.27 Yum controls the property for 21 percent of estate strategy is highly unusual. Although all fast its total global stores, almost precisely the portion food chains require access to property in order to that it operates as corporate-owned locations, operate stores, and many such chains also franchise suggesting that it owns the real estate for only a a significant portion of their stores around the world, small number of franchised stores.28

Rental income – the rent McDonald’s charges to franchisees, Percentage rent – the second component of rent, McDonald’s which typically has two components: base rent and percentage charges its franchisees a percentage of every dollar of sales rent. above a monthly sales target, set by McDonald’s lease agreements with franchisees, as percentage rent. Base rent – the first component of rent; McDonald’s minimum monthly rent amount, payable regardless of franchisees’ sales Triple net lease – a commercial lease arrangement under which performance, set by McDonald’s lease agreements with its the tenant is responsible for many operating costs, such as franchisees. maintenance, insurance, and property taxes; McDonald’s often requires its franchisees to sign triple net leases for their store properties.

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Now we will have a club over [the franchisees], and by God, there will be no more pampering or fiddling with them. We will do the ordering instead of going around and begging them to cooperate. “

The Origins of McDonald’s Real Estate buildings that house McDonald’s stores around the Empire globe, while leasing land and/or buildings on the remaining share.31 McDonald’s developed its real estate operation in In the 1950s, McDonald’s charged franchisees a the mid-1950s as a way to both increase income – fixed monthly rent of 20 percent above its lease adding a revenue stream to royalties – and to costs, but the company soon doubled its markup for strengthen its control over franchisees.29 franchisees to 40 percent, foreshadowing rent From the start, the real estate program proved increases to come.32 This was franchisees’ minimum extremely profitable: McDonald’s found landowners rent, which McDonald’s now calls base rent and is willing to build McDonald’s restaurants on their land; required regardless of store sales. leased the land and the new building from the McDonald’s also charged a second component landowners; and subleased the package to franchi- of rent – percentage rent – equal to a set percentage sees. In the mid-1960s, McDonald’s started buying of store sales that exceeded a pre-determined sales store real estate. This meant that a er making ten target. Initially, percentage rent was set at five years of installment payments to landlords and percent of sales, although it has increased signifi- paying o bank mortgages on its buildings, McDon- cantly in subsequent years as discussed below.33 ald’s owned its stores outright, erasing lease costs Initially this real estate arrangement had bene- from its expense structure.30 Today, McDonald’s fits for both McDonald’s and its franchisees.34 The owns 45 percent of the land and 70 percent of the franchisees were small operators who lacked the

Occupancy costs – defined by McDonald’s as the rent it pays Real estate profit ratio – McDonald’s real estate margin to third party landlords for leased property plus depreciation on expressed as a percentage of its total rental income; for property it owns.35 example, if McDonald’s has a real estate margin of €20 million based on rental income of €30 million and occupancy costs of Real estate margin – McDonald’s rental income minus its €10 million, its profit ratio would be: (€30 million - €10 occupancy costs. million) / €30 million = 67 percent.

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Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.36 “

funds to buy land and build stores on their own, and terms and covenants of the Franchise Agreement McDonald’s took care of this part of the business by will also constitute a breach of this Lease. Termina- negotiating lease-and-build deals with landowners. tion, expiration, default or revocation of the For McDonald’s, the advantages were obvious: the Franchise Agreement for any reason, either in whole base rent assured that McDonald’s made money on or in part, will also terminate this Lease, without all restaurants as long as the stores stayed in further notice being required.”40 business, while the percentage rent ensured that McDonald’s revenues grew with sales growth at franchisees’ stores. And the vast bulk of franchisee How Rent Works at McDonald’s Today rent revenue was profit, as franchisees were respon- sible for paying both for store improvements and for While there are some variations, the basics of ongoing costs such as taxes and insurance.37 McDonald’s real estate scheme are fairly consistent In addition to a growing revenue stream, across the countries in which it operates. In most controlling real estate gave McDonald’s power over cases, it owns or leases the land and/or buildings on its franchisees’ operations in ways that franchise which its restaurants stand; it leases or subleases agreements did not. United States franchising law the restaurant property to franchisees; and it was not well-developed in the 1950s, and McDon- charges them a minimum base rent regardless of ald’s doubted the enforceability of its franchise sales plus a percentage rent on gross sales exceed- agreements.38 In contrast, leases were well-estab- ing a particular sales target. For example, a franchi- lished legal documents, so McDonald’s used lease see contract could specify that base rent equals language to enforce compliance with its rules. “I US$200,000 a year with a sales target of US$2 million have finally found the way that will put every single and 10 percent in percentage rent for sales above McDonald’s we open under our complete control,” this sales target. That means that if store sales were McDonald’s founder Ray Kroc wrote in 1957, noting equal to or less than the target sales, the franchisee that under the lease if a franchisee “does not would be required to pay the US$200,000 base rent. conform in every way to the McDonald’s standards of If store sales were to total $2.5 million, for instance, quality and service, this lease will be canceled on the franchisee would owe $200,000 in base rent plus thirty-day notice. Now we will have a club over them, an additional $50,000 in percentage rent or [(US$2.5 and by God, there will be no more pampering or million-US$2 million)x10 percent]. fiddling with them. We will do the ordering instead of McDonald’s leases with its franchisees, like going around and begging them to cooperate.”39 many commercial leases, are also o en triple net McDonald’s today still uses lease language to leases, under which franchisees are responsible for “have a club” over its franchisees and control their paying many of the costs associated with the proper- businesses. For example, its United States franchi- ty, namely maintenance, insurance, and property see lease states that “[t]enant’s breach of any of the taxes.41

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The only way that we can positively know that these units are doing what they are supposed to… is to make it so that they can have no alternative whatsoever. You can’t give them an inch.42 “

However, as the company’s global sales have world, and also is likely to a ect or even exclude dropped, McDonald’s has increased rent dramatical- competitors. Further, it helps McDonald’s exert ly—up from approximately 5 percent to as much as control over its franchisees to ensure compliance 16 percent of sales in the United States and even with the company’s policies, including those regard- higher rates in Europe (as presented below). While ing pricing. the company was growing, McDonald’s could take a Mark Kalinowski, an analyst who has covered bigger and bigger share without starving franchi- McDonald’s for several investment firms, reported sees. But the system has become too imbalanced, on a “typical” income statement for McDonald’s and McDonald’s now appears to unilaterally control traditional store franchisees in 2012 in the United its franchisees’ profitability and to use high rents as States. Aer food costs and labor, the rent and royal- a means to keep control over franchisees and main- ties paid to McDonald’s made up the largest portion tain its dominant position.43 of a U.S. franchisee’s expenses, at 14.5 percent of McDonald’s real estate approach is particularly sales.44 By comparison, most of McDonald’s direct problematic because it is now a dominant company competitors, like Burger King and Wendy’s, do not with massive market share in the fast food industry, collect rent from the large majority of their putting it in a position to potentially abuse its franchised stores, so the fees they collect are primar- market position at the expense of franchisees, ily in the form of royalties.45 This means that instead consumers, workers, and competitors. In particular, of the 13.5 percent McDonald’s collects on franchi- McDonald’s enormous market power, coupled with see sales globally, the other brands take far less – its strategy of controlling franchisee real estate, usually 4.5 percent at Burger King’s U.S. stores, and allows it to charge franchisees more in rent than they 4.0 percent at Wendy’s.46 And in the minority of cases would likely pay on the open market, or if they where Burger King and Wendy’s charge rents to operated stores under other brands. Its triple net franchisees, percentages of sales in rent are substan- leases with its franchisees, which require those tially lower than the rates charged by McDonald’s.47 franchisees to cover many of the costs associated This comparison may not fully reflect rising rent with the properties on which their stores are located, costs at McDonald’s stores, though. In Europe, a allow it to turn an enormous profit on the rent it typical franchisee has paid more than 17.5 percent of charges. This siphons profits out of the local commu- its sales to McDonald’s in the form of rent and royal- nities that support McDonald’s stores around the ties over the past few years.48

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Figure 3. McDonald’s franchisees paying more in rent/royalties while customer visits decline, 2009-2015

Revenue from Franchised Restaurants Changes in Global Same-Store Sales and Customer Traffic

$7 billion Rent: $5.9B 6 % 6 4 5 Royalties: 2 Same Store Sales: 1.5% 4 $3.0B 3 0 2 -2 traffic: -2.3% 1 0 -4 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ’15 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ’15

In France, some franchisees pay from 11.7 percent to drive-thrus, which will require additional construc- 18.4 percent of sales as rent in addition to the five tion.54 These investments are on top of earlier spend- percent service fee and the four percent advertising ing on the “McCafé” beverage platform, including fee.49 In Italy, some franchisees pay from 12.5 to 21.0 equipment purchases and store renovations.55 In percent of sales in rent, in addition to the service and France, McDonald’s launched a renovation program advertising fees.50 Rents for franchisees in the United in 2009 requiring all its restaurants to be renovated States have risen as high as 16.0 percent of sales in before the end of 2013.56 In Germany, a remodeling addition to the service and advertising fees.51 program was launched in 2016 and requires franchi- Additionally, McDonald’s o en requires its sees to be remodeled by the end of 2019.57 franchisees to fund expensive renovations to store The sections that follow describe McDonald’s locations that the chain itself controls. McDonald’s real estate practices in dierent regions around the franchisees have complained that McDonald’s world. In every one of them, the rent McDonald’s frequently imposes remodeling costs on franchisees franchisees must pay to McDonald’s is multiple that may improve marginal sales, driving up McDon- times the costs that McDonald’s itself bears to ald’s rental and royalty income, but do not actually control the property on which franchised stores are pay o in increased profitability for franchisees.52 In located. And in each of these regions, a sample of the United States, its current remodeling program financial information for franchisees of McDonald’s costs its franchisees an estimated US$600,000 per and other fast food chains indicates that McDonald’s store for an interior makeover.53 The company is also franchisees pay more in rent than those at Burger pushing franchisees to build double-lane King or other global competitors.

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united states

McDonald’s took in over US$3 billion in rent from U.S. franchisees in 2015, which generated a real estate profit ratio of 75 percent.

McDonald’s is by far the largest fast food chain in the From the early days of its real estate operation, United States with over US$35 billion in sales in McDonald’s instituted a percentage rent structure 2015, approximately double those of its nearest through which its rental income would increase competitor, Yum Brands.58 Despite the proliferation along with sales, regardless of the underlying real of competing fast food brands in the U.S., McDon- estate costs. ald’s brings in almost a quarter of all chain fast food Over the years, the company has steadily dollars in the country. increased the percentage rents it demands from U.S. The company operates only 1,360 of its more franchisees: than 14,000 stores in the U.S. directly,59 choosing to franchise over 90 percent of its stores to more than Percentage rent was five percent of sales in the 3,000 individual operators.60 McDonald’s franchisees mid-1950s, as discussed above. in the U.S. are mostly small-business people, with the average U.S. franchisee operating only four In 1970, McDonald’s increased percentage rent stores.61 to 8.5 percent of sales.63 It appears that it was McDonald’s informs potential U.S. franchisees still 8.5 percent in 1982.64 that the rents it charges them are based on the company’s costs to buy or lease property and to By 2000, McDonald’s presented percentage build restaurants.62 However, the relationship rent as a range from 8.5 percent to 11 percent,65 between the company’s real estate costs and its and the maximum rate has been rising ever rental income has been tenuous from the beginning. since.

By the numbers McDonald’s rental income and property expenses in the United States, 2015 All figures in millions of U.S. dollars

Franchisee sales: $31,639 Real estate margin: $2,305

Rent paid by franchisees: $3,060 Real estate profit ratio: 75 percent

Occupancy costs, franchised stores: $755

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Today McDonald’s states that percentage rent low occupancy costs borne by McDonald’s has a real ranges from 8.5 percent to 15 percent or even impact on the company’s franchisees, who appear to higher,66 and a leading provider of accounting pay more in rent as a share of sales than franchisees services to McDonald’s franchisees told the of other chains. While McDonald’s discloses a rent Wall Street Journal that rents for some McDon- range of 8.5 percent to 15 percent of sales and even ald’s franchisees have risen as high as 16 higher, restaurant research firm Technomic percent of sales.67 estimates that fast food companies in the U.S. charge their franchisees rent ranging from 6 percent Rent charged to franchisees is enormously profitable to 10 percent of sales.71 for McDonald’s. McDonald’s USA, LLC, discloses both This comports with data from Burger King’s occupancy costs and rental income for its franchised largest franchisee, Carrols Restaurant Group, which stores. McDonald’s took in over US$3 billion in rent paid approximately 7.5 percent of sales in rent on from U.S. franchisees in 2015,68 which generated a stores leased from Burger King in 2015.72 Similarly, real estate profit ratio of 75 percent. That means only Wendy’s charged franchisees an estimated 6.0 one out of every four dollars it received in rent from percent of sales for rent at franchised stores where franchisees went towards occupancy costs for Wendy’s owned or leased real estate in 2015.73 franchised stores.69 McDonald’s control of real estate, and its ability to In contrast, McDonald’s reported that it earned set franchisee rent without competing on price with only US$632 million as a gross profit margin on other real estate holders, appears to lead to inflated US$4.2 billion in sales at U.S. corporate stores in rent rates. 2015, less than a third as much as it earned from McDonald’s control of franchised real estate also rent. Compared to the U.S. real estate profit ratio of means that it has wide latitude to increase the 75 percent, the company’s gross profit ratio on amount that franchisees must pay in rent over time. corporate store sales was just 15 percent.70 Rising rents and other costs have led to tension and The substantial discrepancy between the high conflict between the company and its franchisees in rents charged to franchisees and the comparatively the U.S., as discussed below.74

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europe

Across Europe, as in the United States, rent is the largest single source of profit for McDonald’s.

McDonald’s is by far the largest fast food company in countries and controls the real estate for franchised Europe, with almost 8,200 stores and €20.5 billion in stores, requiring its individual franchisees to lease systemwide sales on the continent in 2014.75 McDon- their stores from the company.80 ald’s claims to sell more fast food in Europe than its And third, McDonald’s market power, coupled next nine competitors combined.76 with its strategy of tying its franchise agreements to In the fast food sector McDonald’s enjoyed a the leasing of property, allows the company to dominant position in most E.U. countries in 2015. In extract substantial profits on the rent it charges to particular, in the American fast food market (includ- franchisees. Prospective franchisees in many coun- ing brands such as Burger King, Quick, and KFC), tries likely choose McDonald’s as a franchisor in McDonald’s accounted for over 30 percent of sales in order to access an overwhelming portion of the fast 19 countries in 2015 and over 75 percent in major food market, due to McDonald’s disproportionate markets like France (76 percent), Germany (76 share of fast food sales among franchised chains, percent) and Italy (88 percent).77 regardless of how the terms imposed by McDonald’s McDonald’s operating model varies throughout compare to those of other brands. Their alternative Europe, adjusting for national laws and incorporat- is, in many cases, to seek a franchise with a much ing menu items suited to local tastes. However, a few smaller and less successful chain. Furthermore, constants persist. First, McDonald’s franchises a prospective McDonald’s franchisees must undergo a significant portion of its stores in most European lengthy and unpaid training period before being markets. Franchisees operate 79 percent of McDon- granted a franchise.81 McDonald’s only reveals where ald’s European stores,78 and the average franchisee new franchisees can operate stores and what rental in Europe had fewer than four stores in 2010.79 rate they will be charged near the conclusion of this Second, it o ers similar franchise agreements in all training period, likely limiting the impact of competi-

By the numbers McDonald’s rental income and property expenses in europe, 2014 All figures in millions of euros

Franchisee sales: €14,407 Real estate margin: €1,276

Rent paid by franchisees: €1,843 Real estate profit ratio: 69 percent

Occupancy costs, franchised stores: €568

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Figure 4. McDonald's market share in American-style fast food, 2015

100%

90%

80%

70% United finland Kingdom 60% 33% 40% denmark 68% 50% sweden 39% Netherlands Czech 40% ireland 71% 43% Republic 67% 30% belgium 45%

20% poland germany 71% 76% slovakia 92% france 76% hungary portugal austria 70% 69% 90% Bulgaria spain 56% romania 58% 63% italy 87% greece 17%

competition in the real estate market on the rent corporate stores, where the company reported a McDonald’s charges franchisees.82 Franchisees’ margin of €1.1 billion on approximately €6.1 billion bargaining power is indeed weakened as they will in corporate store sales in 2014.84 not risk losing the year they spent in training by negotiating terms and conditions. Country by Country Analysis85 Across Europe, as in the United States, rent is the largest single source of profit for the company. McDonald’s franchisees pay more rent, as a percent- McDonald’s posted an average gross profit ratio on age of their sales, than franchisees of other fast food rental income of 69 percent in Europe in 2014, mean- chains. Additionally, in every market reviewed, ing that less than one-third of the rent monies McDonald’s rents are much higher than market charged to its franchisees went towards its own rents. This strategy not only allows McDonald’s to occupancy costs for franchised stores.83 That extract more revenue from its franchisees, but it is compares to McDonald’s gross profit ratio of only 18 also likely used as a means to keep control over percent on selling hamburgers in its European franchisees through their level of profitability.

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The German press refers to rental payments that are up to 20 percent of franchisees’ sales, exceeding market rates by five to ten times.

France Italy France is one of McDonald’s largest markets and the As of December 2016, McDonald’s has 554 stores in second most profitable market in the world. As of Italy, 84 percent of which are operated by franchi- December 2016, McDonald’s has 1,410 French stores, sees. In total, McDonald’s Italian stores had sales of 84 percent of which are operated by franchisees. In €1.1 billion in 2015, representing 88 percent of sales total, McDonald’s stores in France brought in almost in the American style fast food market. Franchisees €4.7 billion in sales in 2015.86 McDonald’s enjoys a in Italy paid McDonald’s €94.4 million in rent in 2014, dominant position in France; it accounts for over 76 the equivalent of 12.0 percent of sales.91 Further- percent of sales in the American-style fast food more, a sample of McDonald’s franchise agreements market (including brands like Burger King, Quick, in Italy suggests that franchisees there pay up to as and KFC).87 much as 21.0 percent of sales in rent, suggesting an A sample of McDonald’s franchisee financial even higher rate of rental charges.92 McDonald’s statements in France suggests that franchisees there occupancy costs for its franchised stores in Italy, pay an average of 13.6 percent of sales in rent, however, were estimated at just €35.0 million, or 4.2 ranging from 11.7 percent to 18.4 percent.88 McDon- percent of franchised sales.93 For a typical franchisee ald’s underlying costs for real estate in France were paying 12.0 percent of sales in rent to McDonald’s for an estimated 4.4 percent of sales for 2014. The a store on which McDonald’s bore 5.0 percent of disparity between franchisee rental rates and sales in occupancy costs, McDonald’s would earn a McDonald’s 4.4 percent real estate costs suggests profit of 63 percent on franchisee rent. that for a typical store, franchisees pay more than three times as much in rent as McDonald’s incurs in Germany costs.89 Even the lowest rate of rent found for a As of December 2016, McDonald’s has 1,470 stores in McDonald’s franchisee in France was more than 2.5 Germany, 90 percent of which are franchised. times McDonald’s average underlying real estate McDonald’s accounts for 76 percent of sales in the costs, and the highest rate found, of 18.4 percent of American-style fast food market. The main franchi- sales, was more than four times these costs. sor in Germany is McDonald’s Deutschland, LLC. This McDonald’s franchisees appear to pay more in company is the German branch of a Delaware, U.S. rent than franchisees of competing fast food chains registered company, and as such is not required to in France. Quick Burger, which also controls real make available financial statements and accounts, estate for its conventional franchised stores, charges thereby preventing the public from accessing the its franchisees an estimated average of 7.4 to 7.9 amount of rent received by the company compared percent of sales in rent despite underlying real estate to rental costs. Regardless, McDonald’s franchisees costs of 6.2 to 6.6 percent of sales, substantially in Germany appear to pay rent that significantly higher than those borne by McDonald’s.90 Overall, as exceeds a fair market rate. The German press refers a percent of sales, McDonald’s franchisees pay to rental payments that are up to 20 percent of approximately 72 to 84 percent more in rent than franchisees’ sales, exceeding market rates by five to franchisees of Quick. ten times.94

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McDonald’s likely earned an estimated real estate profit ratio of 75 percent on the rent charged to its U.K. franchisees in 2015.

United Kingdom including Birmingham, Bristol, Liverpool, and In the United Kingdom, McDonald’s has 1,274 stores Manchester, not a single store listed as a McDonald’s as of December 2016, 73 percent of which are operat- location by the Valuation O ice Agency had a ed by franchisees. In total, McDonald’s stores earned rateable value anywhere near this amount. In fact, £2.4 billion in sales in 2015, 40 percent of sales only one McDonald’s store in these four markets had among all franchised fast food chains. a rateable value of more than half the estimated Franchisees in the U.K. paid an estimated £282.4 average rent McDonald’s charged its franchisees, million to McDonald’s in rent in 2015. This amount is and the overwhelming majority of stores were rated 20.0 percent of franchisee sales as reported by at less than a third of the average.101 Euromonitor.95 McDonald’s various subsidiaries in Nationally, McDonald’s rateable property values the U.K. recorded total estimated occupancy costs of are broadly in line with those of other main fast food £120.0 million in 2015, representing 5.0 percent of chains and average approximately £85,000 per systemwide sales based on Euromonitor data.96 For annum, less than a third of what its franchisees a franchisee paying a typical rental rate for a store on actually pay in rent.102 As an example, Lambtrad Ltd., which McDonald’s covered occupancy costs in line a small McDonald’s franchisee, paid an average of with its national average, McDonald’s likely earned £289,731 in rent per store in 2014 to McDonald’s.103 an estimated real estate profit ratio of 75 percent on But the average rateable value for the stores operat- the rent charged to its U.K. franchisees in 2015.97 ed by Lambtrad Ltd. that are listed by the Valuation McDonald’s has disclosed that the rent it O ice Agency is only £81,000.104 So the rent Lamb- charges to its own corporate stores when they trad Ltd. paid to McDonald’s can be estimated at 3.6 operate on leased property “equates to the third times the market rate for its stores. party rental cost with no further mark-up.”98 There- In the course of determining a property’s valua- fore, the average U.K. franchisee likely pays four tion, the same agency sets an expected price per times as much in rent as an average McDonald’s square meter, considering a property’s type and corporate store.99 unique characteristics.105 Based on that market McDonald’s franchisees also appear to pay rent price, McDonald’s properties do not appear to be that significantly exceeds a fair market rate. The more valuable than those of its top competitors. In U.K.’s Valuation O ice Agency calculates “rateable the four major cities listed above, McDonald’s value” for business properties in England and Wales, locations have a mean market price per square which represents the annual rental value of a prop- meter that is lower than other international chains erty if o ered on the open market.100 The average such as Burger King, KFC, and Pizza Hut.106 There- franchised store paid more than £300,000 to McDon- fore, the high rents charged to McDonald’s franchi- ald’s in rent in 2015 – calculated by dividing estimat- sees do not seem to reflect characteristics of its ed rental payments of £282 million by the number of locations, but rather the unique dynamics of McDon- franchised stores – but in major urban centers ald’s franchising relationships.

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McDonald’s strategies towards franchisees

The operators sit on a cliff right now. With sales going in the wrong direction, all must be conservative in our decisions. It will take only one bad decision to put any operator down and out. “

In the U.S., the high and rising costs outlined in this Recently, franchisees and their advocates have report have stoked rising tensions between franchi- asked for regulatory action to combat McDonald’s sees and the corporation.107 In July 2015, U.S. abusive practices. Several McDonald’s franchisees in franchisees’ assessment of their relationship with Puerto Rico, who sued the company in 2007 for McDonald’s reached an all-time low, according to allegedly engaging in abusive conduct and failing to analyst Mark Kalinowski’s recurring survey of disclose material information,117 have since advocat- McDonald’s franchisees.108 “At least half of the opera- ed for legislation to address McDonald’s practices,118 tors in my region are on the verge of collapse,” one and filed a request for enforcement with the U.S. franchisee commented. Another added, “The opera- Federal Trade Commission.119 In May of 2015, the tors sit on a cli right now. With sales going in the Service Employees International Union petitioned wrong direction, all must be conservative in our the U.S. Federal Trade Commission to investigate decisions. It will take only one bad decision to put abusive and predatory practices by franchisors, any operator down and out.”109 Franchisees remain including McDonald’s.120 dissatisfied, rating the relationship at 1.73, where 1 In Brazil, sales for McDonald’s stores deteriorat- is poor and 5 is excellent, according to the October ed in the late 1990s. Franchisees blamed the decline 2016 edition of the survey.110 on cannibalization from the rapid opening of corpo- Since 2007, McDonald’s and other franchisors rate stores, as well as on exorbitant rents on McDon- have been required to disclose certain types of litiga- ald’s property.121 They launched a series of regulato- tion, including all suits between the chain and its ry investigations into McDonald’s alleged exploit- franchisees, in their annual Franchise Disclosure ative and anti-competitive business practices and Documents (FDDs) filed in the United States.111 pursued over 100 separate legal actions, some rising Between 2008 and 2015, McDonald’s was a party to to the Brazilian Supreme Court.122 some 61 lawsuits and complaints considered materi- These cases are likely only the tip of the iceberg, al to its FDD filings. Of those, fully 45 cases (74 since no disclosure of out-of-court settlements is percent) included franchisees as either plainti or mandatory, and franchisees likely think twice before defendant.112 The allegations made against McDon- filing a complaint that puts their business further at ald’s in these cases included “fixing prices,”113 risk.123 “tortious interference,”114 and “non-fulfillment of Additionally, in response to risks of litigation contract.”115 Some sought injunctive relief or mone- about rent, McDonald’s has developed a “rent relief” tary damages, as well as reductions in rent.116 practice,124 thereby allowing franchisees to benefit

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Figure 5. McDonald’s Anti-Competitive Practices May Lead to Higher Prices at Franchised Stores*

Marseille paris lyon

72% 64% 25% higher higher higher

*Price differentials for small fries are shown above. from a reduction of their rental payments provided sees who comply with the McDonald’s System have a they comply with conditions set forth by McDonald’s, chance to expand and at some point to be partners such as price policies. Despite this practice, McDon- with McDonald’s through joint ventures operating ald’s rental income remains exorbitant as described numerous restaurants (operators running joint above in this report. This rent relief practice has a ventures have an average of 12 restaurants in double advantage for McDonald’s: first, it allows France).127 McDonald’s also favors the expansion of McDonald’s to extract higher revenues by unilateral- franchised restaurants within families, by allowing ly fixing franchisees’ profitability. Second, it may be franchisee family members to open a McDonald’s used as a means to control franchisees through their franchised restaurant or to take over the business level of profitability and induce them to comply with operated by one parent who likely proved his or her McDonald’s policies. In other words, fixing loyalty.128 above-the-market rents allows McDonald’s to then McDonald’s predatory real estate practices do o er rent relief to its franchisees in consideration for not only impact its franchisees. As discussed below, strict compliance with the McDonald’s System. In they are also likely to hurt McDonald’s workers, its this respect, McDonald’s tighter control over its customers, and, due to the chain’s massive size, the franchisees in consideration for rent relief may overall competitive environment in fast food. include compliance with potential resale price main- tenance policies that may harm consumers: McDon- Not Lovin’ It: McDonald’s Extractive ald’s Franchise Disclosure Document refers indeed Practices Likely Lead to a Worse Deal for to two price-fixing cases, and the press reported a Customers price-fixing issue in France.125 It also appears that McDonald’s has implement- Consumers may also feel the impact of McDonald’s ed strategies to reinforce loyalty and commitment to extraction of enormous real estate profits from its the brand from its operators, thereby limiting risks of stores. Understa ing, low wages, and unsafe condi- litigation. One strategy consists of replacing fully-in- tions translate into a challenging environment for dependent franchisees by long-term McDonald’s workers to provide quality meals and customer executives and employees, who have obviously service. Similarly, tight margins can force franchisees proved their loyalty and commitment to the brand. to skimp on investing in their stores or in the prod- For instance in France, priority for existing or new ucts they serve and can also force franchisees to franchised restaurants is given to former o icers and raise prices, directly impacting customers. executives at McDonald’s headquarters or long-term Fast food customers have already noticed the employees in restaurants.126 Additionally, franchi- impact that McDonald’s extraction has on the quality

McLandlord: Global Rent Excess at the World’s Largest Franchisor | 17 McLandlord

Figure 6. Price data for McDonald’s stores by city, November and December 2015

99% 84% 85% 89%

98% 90% 93% 80% Bologna Lyon Marseille Paris

Percent of items priced di erently between corporate and franchised stores. Proportion of said items that were more expensive in franchised stores than corporate. of the customer experience. The American Customer items at corporate stores, a di erence of 8 percent. Satisfaction Index ranked McDonald’s the worst fast In France, data gathered by the Que Choisir Maga- chain in the United States in 2015, and its scores zine confirms an average di erence of 4.4 percent, have been deteriorating in recent years.129 with at least 10 products being 10 percent to 27 In the United Kingdom, McDonald’s is a perenni- percent more expensive in franchised stores than in al contender for the title of most hated brand, and in corporate-owned stores.134 2015 it was ranked as the most hated service sector Higher prices charged by McDonald’s franchi- company in the U.K.130 In France, McDonald’s was sees may result from McDonald’s extractive practices ranked second to last among branded fast food combined with possible price-fixing policies imple- companies in 2016 by the Que Choisir Magazine.131 mented by McDonald’s, a practice which is prohibit- McDonald’s extractive practices likely also a ect the ed by European and national laws. Indeed, accord- quality of McDonald’s food, which is in part a ing to a 2016 economic study conducted in France, function of how much pressure franchisees apply on prices for more than 80 percent of McDonald’s prod- their employees to produce the products quickly, to ucts are identical or similar from franchised store to the possible detriment of their quality. In a 2014 franchised store. This suggests a possible concerted Consumer Reports survey on the quality and taste of practice resulting from the imposition of retail food at United States fast food chains, consumers prices.135 Cases filed in Greece and Norway also rated McDonald’s burgers worst in the country.132 include price-fixing allegations.136 This kind of Customers at franchised McDonald’s stores may practice is detrimental to consumers as they are pay higher prices as a result of the high rent McDon- deprived of possible lower prices at franchised ald’s charges its franchisees. Data collected in stores. The financial and operating pressures faced November and December of 2015 indicates that in by McDonald’s franchisees as a result of the chain’s several major cities in Europe, McDonald’s high fees and restrictive terms may also limit franchised stores charge higher prices than corpo- franchised stores’ ability to provide even the same rate-owned stores in the same geographic areas.133 level of value, customer service, and quality food as For example, in Bologna, 99 percent of the items is provided at McDonald’s corporate stores. In major examined had di erent average prices between cities in the Czech Republic, France, Germany and corporate and franchised stores, and of those, 98 Italy, franchised McDonald’s stores consistently percent had higher prices at franchised stores. received lower average ratings than their corporate The di erential between prices at corporate and counterparts on Yelp, a leading online portal for franchised stores can be substantial. In Bologna, for customer reviews.137 Of the 12 major geographies example, menu items priced higher at franchised examined, all had higher ratings for corporate stores stores were €0.34 more on average than the same than franchised stores.

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Figure 7. Yelp Rating Comparison for McDonald's Corporate and Franchise Stores, February 2017

Average Yelp Ratings Average Yelp Ratings All stores weighted equally All reviews weighted equally

City Corporate Franchised Dif ference Corporate Franchised Dif ference Paris 2.9 2.6 11.6% 3.0 2.6 11.7% Prague 3.6 2.9 19.0% 3.4 2.8 18.1% Berlin 3.2 2.5 19.8% 3.3 2.6 23.0% Cologne 3.0 2.4 19.6% 2.9 2.4 19.8% Dusseldorf 3.0 2.6 12.5% 3.0 2.6 15.6% Frankfurt 2.8 2.6 9.1% 2.8 2.4 14.4% Nuremberg 2.9 2.6 8.1% 3.7 2.6 27.8% Stuttgart 2.8 2.6 6.8% 2.9 2.3 21.0% Bologna 4.0 3.8 4.2% 4.0 3.2 21.4% Milan 3.5 3.2 9.1% 3.5 3.2 8.1% Rome 3.0 2.9 3.9% 2.9 2.7 5.1% Other Italian Areas 3.4 3.3 3.4% 3.4 3.2 4.6%

McJobs and McWages stores around the world.142 For instance, in April 2016, workers from more than 300 cities and 40 McDonald’s workers at franchised stores see direct countries around the world protested for better consequences from the chain’s extractive practices. wages.143 In the United States, workers in three High rents and fees and low store-level profit states filed lawsuits against McDonald’s and its margins lead franchisees and store managers to franchisees for wage the .144 More recently, workers keep labor costs low, resulting in low wages and, in at U.S. McDonald’s stores filed 15 separate some cases, violations of employment law.138 Store complaints of sexual harassment against the managers engage in aggressive scheduling arrange- company and its franchisees.145 In the European ments, such as on-call systems and zero-hour Union, the European Parliament's Petition Commis- contracts,139 which aim to ensure that each store is sion launched an investigation concerning working leanly staed. Cost pressures, in turn, can lead to conditions at McDonald’s restaurants in November unsafe conditions, where workers are required to 2016 in response to three petitions, which gathered work quickly with dangerous equipment. In 2015, 31,000 signatures, denouncing McDonald’s use of McDonald’s workers at 23 stores in the United States zero-hour contracts in the U.K., McDonald’s reliance filed complaints with the Occupational Safety and on flexi-jobs in Belgium and McDonald’s strategies to Health Administration (OSHA), alleging that under- hinder union representation.146 staing, lack of protective equipment, pressure to In the United Kingdom, a recent poll of fast food work quickly, and greasy floors put workers at risk of workers found that McDonald’s is the worst fast food burns and other injuries.140 In France, employees employer in the country.147 In France, McDonald’s regularly denounce understaing, low wages and franchisees appear to invest less in their workforce alleged violations of labor law.141 than the franchisees of any other major fast food It is no surprise, then, that workers have chain. According to a review of available financial highlighted poor labor conditions at McDonald’s statements for a sample of French franchisees from

McLandlord: Global Rent Excess at the World’s Largest Franchisor | 19 McLandlord

Figure 8. Wages and salaries as a percent of sales by chain

fast food franchisees, france Fast Food Chain Salaries as a Percent of Sales Range Salaries as a Percent of Sales Chain Average McDonald’s 18-23 19% KFC (YUM) 18-29 22% Quick 23-26 24% Subway 20-31 25% La Brioche Dorée 22-33 28% Pomme de Pain 22-36 28% Paul Boulangerie 21-33 29% Pizza Hut (YUM) 22-31 29% La Mie Caline 25-36 29% Sushi Shop 28-38 34% di erent fast food chains, the average McDonald’s In addition, McDonald’s control of high-value retail franchisee spent less on labor as a percent of sales locations, maintained in some cases even if a specific than the franchisees of any other chain.148 Among a McDonald’s franchisee in that location fails, is likely sample of franchisee statements, the average to exclude competitors and also limits consumer McDonald’s franchisee in France spent 19 percent of choice. For example, in Latin America, McDonald’s sales on labor costs, while the average franchisee of master franchisee Arcos Dorados attempts to use its other chains spent 25 percent. This suggests that market power to sustain a dominant position. The McDonald’s franchisees may be paying workers less, company disclosed to the U.S. Securities and providing less valuable fringe benefits, hiring fewer Exchange Commission in 2012 that “some restau- sta , or perhaps combining all of these cost-saving rants are located based on a strategic view, such as strategies to slash labor costs more aggressively to a ect competitors” as opposed to being located in than their competitors. order to maximize sales or profit.149 Additionally, the master franchise agreements between McDonald’s No Such Thing as a Free Market Lunch and Arcos Dorados limit the circumstances under which Arcos Dorados and its sub-franchisees can Finally, McDonald’s outsized market power means close stores, specifically allowing McDonald’s to that its real estate approach may disrupt the fair prevent store closures that may lead to the sale or functioning of the American-style fast food market. transfer of real estate to a list of competitors150 or in Excessive rents may reflect a market distortion certain iconic locations.151 Strategic use of store because, in many countries, McDonald’s huge share locations to constrain competing chains – such as of fast food sales among franchised chains gives it a holding on to real estate for unsuccessful stores in dominant role in the supply of fast food franchises. order to reduce the supply of potential store Prospective franchisees likely have few options locations for competitors – can mean using the other than McDonald’s and therefore may be more chain’s market dominance and real estate control to willing to accept unfairly high rents. reduce competition.

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This, in turn, limits the diversity of food options for McDonald’s at the top position, continuously devel- consumers in the marketplace. Given the amount of oped to the detriment of their independent counter- control that McDonald’s exercises over Arcos Dora- parts.157 McDonald’s aggressive expansion and dos, these practices may mirror McDonald’s own cut-rate pricing squeezed both independent cafes practices in other regions. and the German co ee chain Tchibo, which lost Chain businesses’ increasing prevalence in key market share to McCafé in 2008 and 2009.158 In Spain, real estate locations is also generally likely to hurt independent restaurants are struggling to compete, local and independent businesses. For instance, fast and in 2015 Euromonitor reported that the “rise of food chains are leading consumer foodservice indus- chained consumer foodservice continues to erode try growth in the United Kingdom, with McDonald’s the shares of independents.”159 Similarly, in Italy, at the top.152 In February 2015, the Telegraph report- chains are fueling foodservice industry growth and ed that, “Start-up eateries are unable to expand due taking market share from independent restaurants, to a chronic shortage of a ordable sites in the a high number of which closed in 2014.160 The prior capital. London’s restaurant squeeze is hurting small year, McDonald’s had committed €350 million to add brands as chains gobble up popular high street more than 100 new locations.161 spots.”153 In 2012, branded chains increased by 670 In France, a study on McDonald’s and Quick outlets in the U.K. while independent restaurants restaurant openings in Paris between 1984 and 2004 decreased by about 370 outlets.154 In 2013, 40 underlines McDonald’s predatory practices over percent of independent restaurants reported having strategic locations and strategies to a ect competi- a branded chain within a mile of their business, tors.162 which had increased by 26 percent in five years, with While none of these industry trends are solely chain growth limiting the diversity of food choices caused by McDonald’s, they demonstrate that the available to consumers.155 real estate strategies it pursues – keeping tight McDonald’s growth in Germany also negatively control of real estate for franchised stores and thus impacted traditional German restaurants, which had limiting competitors’ access – likely have negative diminished to only about 30 percent of the market consequences for consumer choice and on the prices by 1996.156 In recent years, chain restaurants, with charged by franchisees to consumers.

McLandlord: Global Rent Excess at the World’s Largest Franchisor | 21 McLandlord

conclusion

It is McDonald’s responsibility to offer fair terms to its franchisees that allow for McDonald’s stores to support healthy and prosperous communities.

McDonald’s is best known for its iconic golden individual franchisees in making a profit and avoid arches, Big Macs and Happy Meal toys. It is also franchisees’ economic dependency and that allow known for its tax avoidance strategies adopted for McDonald’s stores to support healthy and around the world and in Europe especially as prosperous communities and to provide decent outlined by the investigations launched by the jobs. It is also McDonald’s responsibility not to use its European Commission and by national tax authori- franchising network in order to reinforce its domi- ties, as well as at McDonald’s hearing at the TAXE nant position to the detriment of its competitors. It is committee of the European Parliament.163 But its finally McDonald’s responsibility to ensure that real estate empire is arguably the single most franchisees o er the best price and quality of service important part of its extractive business model. The to their customers by avoiding involvement in any company’s franchise contracts and their onerous kind of price-fixing through resale price mainte- rental requirements ensure a lucrative revenue nance strategies. stream, tight corporate control over the thousands However, government regulators can play a of franchisees who operate the bulk of McDonald’s critical role in ensuring the appropriate competitive stores, low wages for McDonald’s workers, higher functioning of markets and protecting against the prices for customers at franchised stores and less consolidation of corporate power. For example, the choice for customers in the market. European Commission is responsible for regulating McDonald’s real estate strategies benefit its anti-competitive practices in Europe, including bottom line at the expense of everyone else. McDon- agreements between firms that restrict competition ald’s massive footprint, as well as the small size of and any firm’s abuse of a dominant market position. most of its franchisees, means that it has a dispro- In particular, Europe’s competition laws regulate portionate ability relative to other franchisors to potential abuse of dominance, exploitative prices, enforce terms that may be deemed otherwise out of such as the potentially excessive rents McDonald’s line with a competitive real estate market. The charges franchisees,164 and resale price maintenance extraction of these rents and McDonald’s control policies imposed in the vertical relationship by a over franchisees’ profitability translate into increas- franchisor to its franchisees. ingly limited investments in quality products, Similarly, Brazil’s competition laws disallow family-supporting jobs, decent wages and tax practices that limit, restrain, or harm competition, or revenues for the communities in which McDonald’s that allow a company to control a particular operates. market.165 Brazil also has a law specifically designed Ultimately, it is McDonald’s responsibility to to target excessive rents, which prohibits excessive o er fair terms to its franchisees, terms that support markups on subleased property.166

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The following steps can be taken in nearly every 4. Finally, in all cases where governments and country where McDonald’s operates to address the courts find McDonald’s practices to be in viola- troubling practices identified in this report: tion of the law, they should pursue penalties su icient to the scale of profits McDonald’s Recommendations enjoys, as well as remedies to ensure McDon- ald’s cannot continue engaging in practices 1. Competition authorities and other regulatory that would be found to produce unfair market bodies in countries where McDonald’s franchis- outcomes. es stores should investigate McDonald’s real estate practices to determine whether they Taking these steps would ensure that McDonald’s constitute abuse of market dominance or franchisees, customers, workers and competitors otherwise violate competition and consumer benefit from fair practices around the globe. protection laws. Countries in which McDonald’s realizes a large share of franchised fast food sales should particularly focus on high rents charged to franchisees and other exploitative practices that could distort the market, includ- ing any resale price maintenance policies.

2. Laws specifically designed to limit potentially excessive rents or fees also should be vigorous- ly applied to McDonald’s franchising system where permitted. Any legal framework intend- ed to protect market participants from exploitation by more powerful entities is likely to be directly relevant to McDonald’s practices with regards to its market power.

3. Courts reviewing the frequent conflicts between McDonald’s and its franchisees should consider the broad context of these franchising relationships in determining whether McDon- ald’s practices are abusive.

McLandlord: Global Rent Excess at the World’s Largest Franchisor | 23 Endnotes

1 McDonald’s Corporation, SEC Form 10-Q, Nov. 3, 2016, Item 2, p. 11 2 Systemwide sales are calculated by combining sales from company owned stores and franchised sales. McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, Item 6, p. 12; Euromonitor passport data; Piper Ja ray reports that YUM! Brands worldwide system sales in 2013 were US$49,184 million, Piper Ja ray Restaurant Benchmark Analysis, “Ninth Annual Cookbook,” July 2014, p. 8. 3 All currency translations in this report use yearly average currency exchange rates published by the U.S. Internal Revenue Service at http://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates. All sales data is sourced from Euromonitor passport data unless otherwise noted. Market share is calculated as the share of McDonald’s sales in American-style fast food restaurants in each country, including chains such as Burger King, Quick, and KFC. Small operators of local specialties and European concepts, such as Italian (but not pizza)-themed fast food, or Greek fast food, or German fast food, have been excluded. 4 “Top 200 franchise systems,” Franchise Times, http://www.franchisetimes.com/pdf/2014/Top200-2014.pdf 5 "Our Business Model," McDonald's Corporation website, http://www.aboutmcdonalds.com/mcd/our_company/busi- ness-model.html 6 Based on the number of stores operated by “conventional franchisees” divided by McDonald’s reported number of 5,000 individual franchisees. McDonald’s Corporation, SEC Form 10-Q, Nov. 3, 2016, Item 2, p. 7 7 “Franchising FAQs,” http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html; see also for Spain, “Mi familia, amigos o asociados pueden aportar fondos para comprar la franquicia?” http://www.mcdonalds.es/empresa/franqui- cias; for Belgium, “Une société ou un groupe d’investisseurs peuvent-ils devenir franchises?” http://www.mcdon- alds.be/fr/entreprise/franchise/faq; for the U.K., “Franchise Approval Process,” http://www.mcdonalds.co.uk/uk- home/Aboutus/Franchising/the-process.html; for Italy, “Il Franchising,” www.mcdonalds.it/azienda/il-franchising 8 European Franchise Federation, “European Code of Ethics for Franchising,” (accessed Feb. 14, 2016) http://www.e -franchise.com/Data/Code%20of%20Ethics2.pdf 9 McDonald’s USA, LLC, Franchise Disclosure Document, 2015, p. 77 (Exhibit B, p. 3 ¶ 4). 10 Burger King Worldwide, SEC Form 10-K, Feb. 21, 2014, p. 9; Yum Brands, SEC Form 10-K, Feb. 17, 2015, pp. 3 and 13; see also Markus Voss, “10 Gründe, warum Sie besser keine Fastfood-Filiale übernehmen sollten,” Focus Money, Nov. 23, 2014, http://www.focus.de/finanzen/news/unternehmen/insid er-bericht-10-gruende-warum-sie-bess- er-keine-fastfood-filiale-uebernehmen-sollten_id_4295466.html 11 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 20 and 41. Real estate margin is calculated by subtracting franchising revenue other than rent from franchised margins. 12 “Franchising FAQs,” http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html 13 For instance, see McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias: “La disponibili- dad geográfica por parte del candidato debe ser total en el ámbito nacional. No formamos a un franquiciado para un local concreto (salvo excepciones muy escasas), ya que la ubicación de nuestros restaurantes se hace con criterios de rentabilidad del mismo. McDonald’s realiza todo el proceso de evaluación y selección de los locales. Nosotros adquirimos la titularidad del local y realizamos la inversión remodelación o construcción del edificio. Cuando los locales están próximos a ser utilizados, y dependiendo de las necesidades de la compañía ofrecemos los mismos a aquellos candidatos que están a punto de terminar su formación." See also “Comment on ouvre un McDo,” La Depeche, Sept. 2, 2013, http://www.ladepeche.fr/article/2013/09/02/1699682-comment-on-ouvre-un-mcdo.html: "Après avoir signé un contrat de 20 ans renouvelable, il ne reste plus qu’à savoir où le candidat sera muté. Car à McDo, être mobile géographiquement est essentiel. On peut vivre à Marseille et se voir proposer un restaurant à Amiens." See also McDonald's Belgium, “Rapport 2005 de Responsabilité Sociale d’Entreprise pour la région Europe,” p.7, https://www.mcdonalds.be/sites/default/files/csr_rapport_francais.pdf 14 “Existing Restaurants,” http://www.aboutmcdonalds.com/mcd/franchising/us_franchis ing/acquiring_a_franchise/ex- isting_restaurants.html; “World Class Training,” http://www.aboutmcdonalds.com/mcd/franchising/us_franchis- ing/why_mcdonalds/world_class_training.html; “Franchise Approval Process” at McDonald’s U.K., http://www.mc- donalds.co.uk/ukhome/Aboutus/Franchising/the-process.html and http://www.mcdonalds.co.uk/ukhome/People/- Franchising.html/franchising-explained.html: referring to a 9-month unpaid training in the UK; https://www.mcdon- alds.fr/entreprise/entreprise/franchise: referring to a 12-month training in France; https://www.mcdonalds.es/empre- sa/franquicias: referring to a 12-month un paid training: “Aunque McDonald’s no reembolsa los gastos ni el tiempo que el candidato a franquiciado emplea en su formación, sí paga el coste de los materiales de entrenamiento y gastos de profesores y entrenadores.” 15 “Franchising FAQs,” http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html; see “Franquicias,” https://ww- w.mcdonalds.es/empresa/franquicias: "Este programa de entrenamiento puede ser suspendido por cualquiera de las partes. McDonald’s sólo considerará válido un candidato a obtener una franquicia, cuando haya superado con éxito la totalidad del programa de formación." 16 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 20 and 41; real estate profit ratio from franchised restau- rants is calculated by dividing the real estate margin by total rental income; gross profit ratio at company-operated stores is calculated by dividing sales from company-operated restaurants by their operating costs and expenses and is reported directly by McDonald’s Corporation. 17 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016 p. 12 18 Burger King system-wide sales and operating income numbers are drawn from its parent company Restaurant Brands International (RBI), here drawn from the RBI SEC Form 10-K, February 26, 2016, pp. 30-31. YUM Brands figures from YUM SEC filing 10-K, Feb. 16, 2016, p. 21 for operating income; system-wide sales aggregated from Euromonitor global data for 2015 for KFC, Pizza Hut, and Taco Bell. The Wendy’s Company, SEC Form 10-K, March 3, 2016, p. 30; system-wide sales from Euromonitor global data for 2015. 19 ADLC, n°15-DCC-170, Dec. 10, 2015: relative à la prise de contrôle exclusif de la société Financière Quick par la société Burger King France, p. 2 §3 : “L’objectif de l’opération est de faire basculer progressivement, en quatre ans, 300 restaurants à l’enseigne Quick en France vers l’enseigne Burger King à un rythme moyen annuel de 70 à 80 établisse- ments. Un programme d’incitation sera élaboré à destination des franchisés Quick.” 20 Steven Mark Adelson, “McDonald’s and the new franchising paradigm,” Financial History Magazine, Summer 2012, http://www.moaf.org/publications-collections/financial-history-magazine/103/_res/id=File1/McDonalds.pdf 21 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 7 and 24 22 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 32 23 Pershing Square Capital Management, “A Value Menu for McDonald’s,” 2005, p. 5, http://www.valuewalk.com/wp-con- tent/uploads/2014/05/76865670-Ackman-All.pdf 24 For example, “Franquicias” at http://www.mcdonalds.es/empresa/franquicias and “Une Question?” at http://ww- w.mcdonalds.be/fr/entreprise/franchise/faq detail that McDonald's selects the premises and acquires ownership, and franchisees must be available to franchise at a location selected by McDonald's 25 In the past, Quick Burger has required franchisees to rent buildings and/or land from the chain (http://groupe.quick.- fr/fr/la-franchise/l-apport-financier), but it operated in only a handful of markets, and its global market share and power is far less than McDonald’s. Additionally, the rent it charged is lower than McDonald’s – see the European section of this Report. In 2015, Burger King’s master franchisee in France, Groupe Bertrand, purchased Quick and is planning on converting those stores to Burger King branded stores. It is unknown whether the new owner will continue to require subfranchisees to lease or sublease stores from the company, https://www.groupe-ber- trand.com/restauration/#bk 26 Burger King Worldwide, SEC Form 10-K, Feb. 21, 2014, p. 9; Yum Brands, SEC Form 10-K, Feb. 17, 2015, pp. 3 and 13; see also Markus Voss, “10 Gründe, warum Sie besser keine Fastfood-Filiale übernehmen sollten,” Focus Money, Nov. 23, 2014, http://www.focus.de/finanzen/news/unternehmen/insid er-bericht-10-gruende-warum-sie-bess- er-keine-fastfood-filiale-uebernehmen-sollten_id_4295466.html. 27 Restaurant Brands International, SEC Form 10-K, Feb 26, 2016, p. 4 and p. 9; and Wendy’s SEC Form 10-K, Mar. 3, 2016, pp. 5 and 16 28 Yum Brands, SEC Form 10-K, Feb. 16, 2016, pp. 15 and 21 29 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 155-157 30 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, pp. 168 31 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 24 32 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, pp. 153-154, 159 33 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, pp. 155 34 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 153 35 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 20 36 Robert Kiyosaki, “Free Money: Why The Rich Get Something for Nothing…And the Poor Don't,” Feb. 26, 2013, http://www.richdad.com/RESOURCES/RICH-DAD-FINANCIAL-EDUCA TION-BLOG/FEBRUARY-2013/FREE-MON- EY-WHY-THE-RICH-GET-SOMETHING-FOR-NOTHING.ASPX 37 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 154 38 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 156 39 John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 156-157 40 McDonald’s Operator’s Lease, p. 8, ¶4.07, Exhibit G to McDonald’s Franchise Disclosure Document 2015 41 McDonald’s Operator’s Lease, pp. 4-5, Exhibit G to McDonald’s Franchise Disclosure Document 2015 42 John F. Love, McDonald’s: Behind the Arches, p. 144 43 Hayley Peterson, “McDonald's franchisees are terrified for the future,” Business Insider, July 16, 2015, http://ww- w.businessinsider.com/mcdonalds-franchisees-are-terrified-for-the-future-2015-7; Tony Smith, “Economic troubles take a bite out of Brazil’s McDonald’s”, Jan. 13, 2002, https://www.washingtonpost.com/archive/poli- tics/2002/01/13/economic-troubles-take-a-bite-out-of-brazils-mcdonalds/5ea4e982-68a6-40 -b915-0504afdd8922/?u tm_term=.1fb68ade35ae; Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Mar. 26, 2015, http://www.capital.de/das- magazin/die-fettigen-jahre-sind-vorbei-4132.html 44 Mark Kalinowski, “MCD: A “Typical” U.S. Franchised Restaurant’s Annual Income Statement,” Janney Capital Markets, Feb. 8, 2012, p. 2 45 All three brands also require the payment of advertising fees, but these are normally paid to co-operatives, not directly to the franchisor. All three brands also have similar ad rates, in the vicinity of 4 percent of sales. 46 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 12; Franchise Direct, “Burger King Franchise Cost & Fees”, web profile, http://www.franchisedirect.com/foodfranchises/burger-king-franchise-07118/ufoc/, and “Wendy’s Franchise Cost & Fees,” web profile, http://www.franchisedirect.com/foodfranchises/wendys-franchise-08373/ufoc/ 47 See the United States section of this report 48 McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, calculated by dividing franchised revenues (p. 18) by franchised sales (p. 19), since globally almost all franchised revenues consist of royalties and rent (p. 40). McDonald’s reported franchised and corporate sales in Europe until the end of 2014: McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, pp. 18-19. McDonald’s no longer reports Europe system wide sales as from 2015, as it reorganized its segments into “U.S.”, “International Lead Markets”, “High Growth Markets” and “Foundational Markets & Corporate.” 49 Archangles SARL, Comptes Annuels, 2015, pp. 5, 19; Archangles SARL, Comptes Annuels, 2014, pp. 5, 18; Archangles SARL, Comptes Annuels, 2012, pp. 5, 18; Drive le Pontet, Comptes Annuels, 2014, pp. 5, 19; Drive le Pontet, Comptes Annuels, 2012, pp. 5, 18; Arches Avignon, Comptes Annuels, 2014, pp. 5, 18; Arches Avignon, Comptes Annuels, 2012, pp. 5, 18; Chatorest, Comptes Annuels 2015, PDF pp. 5, 19; Chatorest, Comptes Annuels 2014, PDF pp. 8, 23; Chatorest, Comptes Annuels 2012, PDF pp. 8, 22; Cristole, Comtes Annuels 2014, PDF pp. 20, 35; Comptes Annuels 2012, PDF pp. 16, 30; Foncorest, Comptes Annuels 2014, PDF pp. 16, 31; Foncorest, Comptes Annuels 2012, PDF pp. 16, 30; La Cerisaie, Comptes Annuels 2015, pp. 5, 18; La Cerisaie, Comptes Annuels 2014, PDF pp. 5, 27; ; La Cerisaie, Comptes Annuels 2012, PDF pp. 5, 19; L'Oseraie, Comptes Annuels 2014, PDF pp. 20, 35; L'Oseraie, Comptes Annuels 2012, PDF pp. 16, 30; Realrest, Comptes Annuels 2014, PDF pp. 21, 36; Realrest, Comptes Annuels 2012, PDF pp. 17, 31; Com 2, Comptes Annuels 2012, PDF pp. 9, 21; JBM, Comptes Annuels 2012, PDF pp. 9, 27; Nynon, Comptes Annuels 2012, PDF pp. 9, 22. 50 Sample of Italian franchise agreements, including Dadina Srl (16 to 21% as rent), Gemar Srl (13 to 15% as rent), Eurostar Srl (13 to 16% as rent), Molko Srl (12.5 to 15% as rent). In addition to the rental fees, franchisees are required to pay a 5% service fee and a 4% advertising fee. 51 Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015, http://ww- w.wsj.com/articles/discontent-simmers-among-mcdonalds-franchisees-1433272884 52 Mark Kalinowski, Janney Capital Markets, “MCD: Franchisee Survey Leads to Street-Low June U.S. Comp Estimate”, July 16, 2014; see also Lisa Baertlein, “McDonald’s is testing a new custom burger program,” Reuters, Apr. 29, 2015, available at http://uk.businessinsider.com/r-mcdonalds-tests-custom-burg er-program-with-drive-thru-op- tion-2015-4?r=US&IR=T 53 Leslie Patton, “McDonald’s is Pushing Out the Small Fries,” Bloomberg, Sept. 1, 2016, https://www.bloomberg.com/news/articles/2016-09-01/mcdonald-s-is-pushing-out-the-small-fries; Leah Goldman, “A Tour Inside McDonald's Big $550,000-Per-Store Renovations,” Business Insider, May 13, 2011, http://www.businessin- sider.com/remodeled-mcdonalds-photos-2011-5, with McDonald’s contributing about $220,000 of the total cost 54 Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015 55 McDonald's Corporation Investor Meeting Transcript, Dec. 10, 2014 56 McDonald’s France, “UN PROGRAMME DE RÉNOVATION AMBITIEUX,” http://www.mcdonalds-donneescorporate.fr/- construction-architecture/un-programme-de-renovation-ambitieux 57 Erica Sha er, “McDonald's Germany embarks on remodel initiative,” Meat + Poultry, July 2, 2016, http://www.meat- poultry.com/articles/news_home/Busi ness/2016/07/McDonalds_Germany_embarks_on_r.aspx- ?ID=%7B5A715698-5CE7-4C78-A0C1-B0EF27419985%7D&cck=1 58 Euromonitor passport data, 2015 59 McDonald’s U.S.A. Franchise Disclosure Document 2016, Exhibit A, p. 6 60 McDonald’s U.S.A. Franchise Disclosure Document 2016, Item 1, p. 1; McDonald’s Corporation, SEC Form 8-K, July 23, 2015, Exhibit 99.2, pp. 10-11. 61 Calculated by dividing the number of franchised stores in the U.S. by the number of franchisees. McDonald’s U.S.A. Franchise Disclosure Document 2016, p. 1; McDonald’s Corporation, SEC Form 8-K, July 23, 2015, Exhibit 99.2, pp. 10-11. 62 For example, McDonald’s states in its 2015 Franchise Disclosure Document that base rent is “based upon the total amount invested by McDonald’s in the acquisition and development of the land and the building as well as monthly rent paid in the first year to a third party landlord.” Meanwhile, McDonald’s also provides a table clearly implying that percentage rent is also tied to its real estate costs. The table associates each percentage rent level, from 8.5 percent to 15 percent, with a range of McDonald’s “Acquisition and Development Costs.” McDonald’s Franchise Disclosure Document 2015, Item 6, Other Fees, p.13. 63 Steven Mark Adelson, “McDonald’s and the new franchising paradigm,” Financial History Magazine, Summer 2012, http://www.moaf.org/publications-collections/financial-history-magazine/103/_res/id=File1/McDonalds.pdf 64 Patrick J. Kaufmann & Francine LaFontaine, “Costs of Control: Economic Rents for McDonald’s Franchisees,” Working Paper #689, University of Michigan School of Business Administration, July 1992, p. 6, Table 1, http://www.- jstor.org/stable/725738. According to this table and notes to it, combined royalties and rent were 11.5 percent of gross sales, while royalties were 3 percent, implying percentage rent of 11.5 percent – 3 percent = 8.5 percent. 65 McDonald’s Uniform Franchise O ering Circular, 2000, Item 6, Other Fees, Fixed Percentage Rent table 66 McDonald’s Franchise Disclosure Document 2016, Item 6, p. 15 67 Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015 68 McDonald’s U.S., LLC, Franchise Disclosure Document, 2016, p. 79 (Exhibit A, p. 11) 69 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 18-20; and McDonald’s USA, LLC, Franchise Disclosure Document, 2016, p. 79, Exhibit A, p. 11. 70 McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 18, 20 71 Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015, https://ww- w.wsj.com/articles/discontent-simmers-among-mcdonalds-franchisees-1433272884 72 Average lease cost calculated by dividing the lease payments to Burger King by the number of stores leased by Burger King. Rent as a percent of sales is calculated by dividing average rental costs for stores leased from Burger King by average sales per store. Carrols Restaurant Group, SEC Form 10-K, Mar. 9, 2016, pp. 7 and Item 14, p. 89. 73 Average rent per store was calculated by dividing Wendy’s rental income from franchisees by the number of stores Wendy’s leases or subleases to its franchisees. Average sales per franchised store was calculated by dividing North American franchised sales by the total number of franchised stores in North America. Rent as a percent of sales was calculated by dividing the estimated average rent paid by franchisees to Wendy’s by the average sales per franchised store in North America. Wendy’s, SEC Form 10-K, Mar. 3, 2016, pp. 16, 38, and 39. 74 Leslie Patton, “McDonald’s Franchisees Rebel as Chain Raises Store Fees,” Bloomberg, Aug. 6, 2013, http://ww- w.bloomberg.com/news/articles/2013-08-06/mcdonald-s-franchisees-go-rogue-with-meetings 75 McDonald’s reported franchised and corporate sales in Europe until the end of 2014: ($7.8 billion in company-operat- ed sales and $18.4 billion in franchised sales in Europe. See McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, pp. 18-19. McDonald’s no longer reports Europe system wide sales as from 2015, as it reorganized its segments into “U.S.”, “International Lead Markets”, “High Growth Markets” and “Foundational Markets & Corporate.” Store figures from McDonald’s Europe Virtual Press O ¬ice, “A Quick Snapshot” (accessed Feb. 4, 2015), http://www.mcdpresso ice.eu- /aboutus.php 76 McDonald’s Europe President Douglas Goare, McDonald’s Corporation Europe & APMEA Investor Meeting, May 16, 2014 77 Euromonitor Passport data 78 McDonald’s in Europe, Virtual Press O ¬ice, (accessed on Feb.2, 2017) http://www.mcdpresso-ice.eu/aboutus.php, data valid as of end December 2016 79 McDonald’s in Europe, “McDonald’s economic footprint in Europe,” p. 46, http://www.mcdpresso-ice.eu/down- loads/Economic_footprint_Report.pdf 80 McDonald's U.K., Franchise FAQs, “Can I set up the franchise in my own property?”, http://www.mcdonalds.co.uk/uk- home/Aboutus/Franchising/FAQs.html; McDonald’s France, “La Franchise McDonald’s: Bien Plus Qu’un Simple Contrat”, p.6; McDonald’s Italy, “Il Franchising,” www.mcdonalds.it/azienda/il-franchising; McDonald's Belgium, “Rapport 2005 de Responsabilité Sociale d’Entreprise pour la région Europe,” p. 7, https://www.mcdon- alds.be/sites/default/files/csr_rapport_francais.pdf: “D’une manière générale, nos contrats de franchisage sont très similaires partout dans le monde.” 81 See McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias: “Este programa de entrenamiento puede ser suspendido por cualquiera de las partes. McDonald’s sólo considerará válido un candidato a obtener una franquicia, cuando haya superado con éxito la totalidad del programa de formación.” 82 McDonald’s describes its franchising process, which fits this general description in most countries, on its national websites, such as McDonald's U.K., “Franchise approval process,” http://www.mcdonalds.co.uk/ukhome/Aboutus/- Franchising/the-process.html and McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias. See also McDonald's in Europe, “McDonald’s economic footprint in Europe,” p.45, http://www.mcdpresso ice.eu- /downloads/Economic_footprint_Report.pdf. Concerning the unpaid training period, see for instance, McDonald's U.K., “Franchising Explained,” http://www.mcdonalds.co.uk/ukhome/People/Franchising.html/- franchising-explained.html, which refers to a 9-month unpaid training in the UK; see McDonald's France, “La Franchise,” https://www.mcdonalds.fr/entreprise/entreprise/franchise, which refers to a 12-month training in France; see McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias, which refers to a 12-month unpaid training: “Aunque McDonald’s no reembolsa los gastos ni el tiempo que el candidato a franquiciado emplea en su formación, sí paga el coste de los materiales de entrenamiento y gastos de profesores y entrenadores.” 83 Europe figures derived from McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, p. 19. Rental income is calculated by subtracting estimated royalties, based on advertised rates of 5 percent of sales, from franchised revenues. Occupancy costs are derived from subtracting franchised margins from franchised revenues. Gross profit ratios are the proportion of rental income that does not comprise occupancy costs. 84 McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, pp. 18, 20 85 All sales data from Euromonitor unless otherwise noted. All store count and franchising information from McDonald’s Europe Virtual Press O ice, “A Quick Snapshot” (accessed on Feb. 2, 2017), http://www.mcdpresso ice.eu/abou- tus.php, unless otherwise noted. 86 Euromonitor Passport data 87 Euromonitor Passport data, 2015; on December 10, 2015, the French Competition Authority authorized the takeover of Quick by Burger King, see République Francaise, Autorité de la concurrence, Espace Presse, “L'Autorité de la concur- rence autorise, sous réserve d'engagements, le rachat de Quick par Burger King,” Dec. 10, 2015, http://www.autorit- edelaconcurrence.fr/user/standard.php?id_rub=606&id_article=2676 88 Archangles SARL, Comptes Annuels, 2015, pp. 5, 19; Archangles SARL, Comptes Annuels, 2014, pp. 5, 18; Archangles SARL, Comptes Annuels, 2012, pp. 5, 18; Drive le Pontet, Comptes Annuels, 2014, pp. 5, 19; Drive le Pontet, Comptes Annuels, 2012, pp. 5, 18; Arches Avignon, Comptes Annuels, 2014, pp. 5, 18; Arches Avignon, Comptes Annuels, 2012, pp. 5, 18; Chatorest, Comptes Annuels 2015, PDF pp. 5, 19; Chatorest, Comptes Annuels 2014, PDF pp. 8, 23; Chatorest, Comptes Annuels 2012, PDF pp. 8, 22; Cristole, Comtes Annuels 2014, PDF pp. 20, 35; Comptes Annuels 2012, PDF pp.16, 30; Foncorest, Comptes Annuels 2014, PDF pp.16, 31; Foncorest, Comptes Annuels 2012, PDF pp. 16, 30; La Cerisaie, Comptes Annuels 2015, pp. 5, 18; La Cerisaie, Comptes Annuels 2014, PDF pp. 5, 27 ; La Cerisaie, Comptes Annuels 2012, PDF pp. 5, 19; L'Oseraie, Comptes Annuels 2014, PDF pp. 20, 35; L'Oseraie, Comptes Annuels 2012, PDF pp. 16, 30; Realrest, Comptes Annuels 2014, PDF pp. 21, 36; Realrest, Comptes Annuels 2012, PDF pp. 17, 31; Com 2, Comptes Annuels 2012, PDF pp. 9, 21; JBM, Comptes Annuels 2012, PDF pp. 9, 27; Nynon, Comptes Annuels 2012, PDF pp. 9, 22 89 McDonald’s France SAS is the largest McDonald’s subsidiary in France, and has significant real estate and property holdings. Real estate costs for France were estimated by combining the depreciation costs on buildings with the total ‘Other expenses and external charges’ costs. This latter category includes rent, and likely includes other costs as well. This figure for real estate costs was divided by systemwide sales for France. Any mortgage expense was excluded because McDonald’s does not consider financing part of its occupancy costs for property, and because McDonald’s France’s total reported interest expense for 2013 of €1,176,411 was only 0.03% of systemwide sales. McDonald’s France SAS, Annual Accounts, 2014, Compte de Resultat, pp. 6 and 15; McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, p. 19; Euromonitor sales data. 90 Occupancy costs were calculated by combining the rental expense and depreciation on land and buildings for France Quick and Quick Invest, netting out intercompany payments, and dividing by the systemwide sales reported in Financière Quick’s Annual Accounts. Rental income was calculated by combining rental income from franchisees as reported by France Quick and Quick Invest, then dividing that figure by franchised sales. Franchised sales were provided as a range of options: first, based on Euromonitor estimates; and second, calculated by applying the franchised percent of sales as reported by Euromonitor to the total systemwide sales in France as reported by Financière Quick. France Quick, Annual Accounts, 2014; Quick Invest, Annual Accounts, 2014; Financière Quick, Consolidated Annual Accounts, 2014; Euromonitor Passport data. 91 McDonald's Development Italy 2014 Accounts, p. 530; franchised sales figures from Euromonitor data: Euromonitor reports €997.6 million in total sales in Italy (franchised and corporate-owned restaurants), 79 percent of which was from franchised stores (€789.1 million). 92 Franchise agreements for Dadina Srl dated March 30, 2011 (16 to 21% as rent), Gemar Srl dated December 21, 2009 (13 to 15% as rent), Eurostar Srl dated July 15, 2007 (13 to 16% as rent), and Molko Srl dated July 30, 2014 (12.5 to 15% as rent) mandate rents in this range. 93 Occupancy costs are calculated by combining rent expense for franchised restaurants with depreciation on buildings assuming the depreciation is proportionally split between corporate and franchise stores according to sales. Any mortgage expense was excluded because McDonald’s does not consider financing part of its occupancy costs for property, and because McDonald’s total reported external interest expense for Italy in 2013 was only 0.01% of systemwide sales. McDonald's Development Italy, 2014 Accounts, pp. 519 and 530; McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, p. 19; and Euromonitor sales data. 94 See Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Capital, March 26, 2015, http://www.capital.de/dasmagaz- in/die-fettigen-jahre-sind-vorbei-4132.html, which refers to rental payments that are up to five times the market rent; Silvia Liebrich,“Zo im Hamburger-Land,” Süddeutsche Zeitung, May 17, 2010, http://www.sueddeut- sche.de/wirtscha¬/mcdonalds-aerger-mit-paechtern-zo -im-hamburger-land-1.25204-3 95 McDonald's Restaurants Limited, 2015 Accounts, Profit and loss account and Notes 2, 3, and 10; Euromonitor sales data. An alternative calculation of franchisee sales can be made by dividing franchisees’ marketing contribution in the U.K. by the rate McDonald’s requires, five percent: in 2014, this suggests that franchisees paid 15.2% of sales in rent. Franchisees contributed £82,963,840 in 2014; that amount, divided by 5%, suggests franchised sales of £1,659.3 million. Using this alternative methodology, McDonald’s U.K. occupancy costs represent 4.7% of sales. As of 2015, McDonald’s Marketing Cooperative no longer discloses these figures. McDonald’s Marketing Cooperative Ltd., Annual Accounts 2014, p. 15 96 Any mortgage expense was excluded because McDonald’s does not consider financing part of its occupancy costs for property, and because McDonald’s total reported interest expense for the U.K. in 2014 was only 0.16% of systemwide sales. McDonald's Real Estate LLP, 2015 Accounts, Profit and loss account and Notes 2, 3, and 7; McDonald's Restau- rants Limited, 2015 Accounts, Profit and loss account and Notes 3 and 10; Euromonitor sales data and McDonald’s Marketing Cooperative Ltd., Annual Accounts 2014, p. 15. 97 Rental income is calculated from licensee income reported by McDonald’s Restaurants Ltd., Annual Report 2015, Note 2, by subtracting estimated royalties. Royalty payments are estimated at 5 percent of franchised sales based on McDonald’s advertised royalty rates. Occupancy costs are calculated by combining the depreciation on land and buildings and rental expenses paid by McDonald’s Restaurants Ltd. with the same expenses for McDonald’s Real Estate LLP net of payments from group companies, with figures from McDonald’s Restaurants Ltd., Annual Report 2015, Notes 2, 3, and 10, and McDonald’s Real Estate LLP, Annual Report 2015, Notes 2, 3, and 7, and dividing by systemwide sales figures from Euromonitor Passport data and by dividing the marketing cooperative contribution figures of both corporate and franchised stores by the advertised marketing contribution required, of 5 percent of sales. 98 McDonald’s Real Estate LLP, Report and Financial Statements 2012, p. 2. 99 Corporate store real estate costs were calculated by: adding depreciation and rent for land and buildings among group companies; removing intra-group payments; and dividing by systemwide sales. This resulted in an underlying real estate cost of 4.4 percent in 2013 and 4.5 percent in 2012. McDonald's Restaurants Limited, Annual Report 2013, Note 3, p. 16 and Note 10, p. 20; McDonald's Real Estate LLP, Annual Report 2013, Notes 2 and 3; and Euromonitor Passport data for systemwide sales figures. 100 Valuation O ice Agency FAQs page for Rateable Value, http://www.2010.voa.gov.uk/rli/static/HelpPages/English/faqs/- faq116-what_does_rv_mean.html 101 Data from U.K. Valuation O ice Agency, at http://www.2010.voa.gov.uk/rli/en/advanced/searchResults. Queried from the list year 2010, for those with “CR” in description, meaning Restaurants and Premises. Results were sorted based only on locations where a store brand is listed in the store address, so not all brand locations may be included. Those with blank valuations, usually due to site closure or construction, were excluded. Data was downloaded November 13-17, 2015. 102 The underlying rateable property values per square meter are broadly comparable between the main chains. For instance, in Manchester, the 16 investigated restaurants had a rateable value per square meter of approximately £290, compared with £300 for KFC and £275 for Pizza Hut. 103 Lambtrad Ltd., 2014 Abbreviated Accounts, p. 13, section 3; total lease costs of £1,158,923 divided by four stores open in 2014. 104 Data from U.K. Valuation O ice Agency, at http://www.2010.voa.gov.uk/rli/en/advanced/searchResults. Details on Lambtrad Ltd. locations from Charlotte Richardson, “Tim is the link with four McDonald’s,” Weston Mercury, April 2013, http://www.thewestonmercury.co.uk/news/business/tim_is_the_link_with_four_mcdonald_s_1_2002963. One location, which is listed with a rateable value of £0, may be closed or under construction and has been excluded to avoid artificially lowering the average rate. 105 Valuation O ice Agency FAQs page for Price per Square Meter, http://www.2010.voa.gov.uk/rli/static/HelpPages/En- glish/faqs/faq072-how_do_you_arrive_at_price_per_m2.html 106 Data from U.K. Valuation O ice Agency, at http://www.2010.voa.gov.uk/rli/en/advanced/searchResults. Queried from the list year 2010, for those with “CR” in description, meaning Restaurants and Premises. Results were sorted based only on locations where a store brand is listed in the store address, so not all brand locations may be included. Those with blank valuations, usually due to site closure or construction, were excluded. Data was downloaded November 13-17, 2015. 107 Jed Graham, “McDonald's Franchisees Are in a Funk — Like Its Stock,” Investor’s Business Daily, Oct. 17, 2016, http://www.investors.com/news/mcdonalds-franchisees-are-in-a-funk-like-its-stock/ 108 Julie Jargon, “McDonald’s Franchisees Say Recent Management Moves Yet to Bear Fruit,” Wall Street Journal, July 16, 2015, http://www.wsj.com/articles/mcdonalds-franchisees-say-recent-management-moves-yet-to-bear-fruit- 1437068737, Annie Gasparro, “McDonald’s Franchisees Express Frustration at Revamp Plans,” Wall Street Journal, April 15, 2015, http://www.wsj.com/articles/mcdonalds-franchisees-express-frustration-at-revamp-plans-1429124389 109 Hayley Peterson, “McDonald's franchisees are terrified for the future,” Business Insider, July 16, 2015, http://www.businessinsider.com/mcdonalds-franchisees-are-terrified-for-the-future-2015-7 110 Jed Graham, “McDonald's Franchisees Are in a Funk — Like Its Stock,” Investor’s Business Daily, Oct. 17, 2016, http://www.investors.com/news/mcdonalds-franchisees-are-in-a-funk-like-its-stock/ 111 Federal Trade Commission, “Franchise Rule 16 C.F.R. Part 436 Compliance Guide,” May 2008, p. 35; Federal Trade Commission, “Amended Franchise Rule FAQ's”, Dec. 2013, from https://www.c.gov/tips-advice/business-center/guid- ance/amended-franchise-rule-faqs, question 5; FTC’s guidance states that “All suits pertaining to the franchise relationship—even a small number of suits—are presumed to be material,” Federal Trade Commission, “Franchise Rule 16 C.F.R. Part 436 Compliance Guide,” May 2008, p. 36 112 Based on analysis of cases listed in Item 3 of Franchise Disclosure Documents filed in 2009, 2010, 2011, 2012, 2013, 2014, 2015, and 2016, specifically: McDonald’s USA LLC, 2009 filing to the FTC, “Franchise Disclosure Document,” Mar. 27, 2009, Item 3, pp. 4-18; McDonald’s USA LLC, 2010 filing to the FTC, “ Franchise Disclosure Document,” May 1, 2010, Item 3, pp. 4-17; McDonald’s USA LLC, 2011 filing to the FTC, “Franchise Disclosure Document,” Mar. 29, 2011, Item 3, pp. 4-17; McDonald’s USA LLC, 2012 filing to the FTC, “Franchise Disclosure Document,” Mar. 23, 2012, pp. 4-16; McDonald’s USA LLC, 2013 filing to the FTC, “Franchise Disclosure Document,” Mar. 21, 2013, pp. 4-15; McDonald’s USA LLC, 2014 filing to the FTC, “Franchise Disclosure Document,” Mar. 20, 2014, pp. 4-13; and McDonald’s USA LLC, 2015 filing to the FTC, “Franchise Disclosure Document,” Mar. 16, 2015, pp. 4-13; McDonald’s USA LLC, 2016 filing to the FTC, “Franchise Disclosure Document,” Mar. 30, 2016, pp. 4-11. 113 George Vazakas and Stamar Monoprosopi E.P.E. vs McDonald’s Hellas M.E.PE. (case #5283), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016,” Mar. 25, 2016, p. 4; Carpe Diem Invest AS, et al, v McDonald’s Norge (case #14-143059 TV1-OTIR/07), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016,” Jan. 4, 2017, p. 7. 114 H. Keith Melton, et al v Charles Robeson and McDonalds USA, LLC (case # 2008 CA040438), detail from McDonald’s USA, LLC filing to FTC, “Franchise Disclosure Document,” Mar. 27, 2009, p. 6 115 Jose Quijano and JCQ Foods, Inc v McDonald’s USA, LLC et al, (case #CAC-40202014-3456), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Mar. 25, 2016, p. 7 116 For instance, see Dadina Srl v McDonald’s Development Italy, Inc (case# 9487/03), filed and settled in 2003; the settlement forgave €269,000 of receivables and expenses, and also relieved franchisee Dadina Srl of rent for 2003; detail from McDonald’s USA LLC, 2007 filing to the FTC, “Franchise Disclosure Document,” Feb. 6, 2007, p. 11. See also Gemar 2000 Srl v McDonald’s Development Italy, Inc (case# 9486/03), filed and settled in 2003. The settlement forgave €215,000 due, and also restructured rents until 2006. Detail from McDonald’s USA LLC, 2007 filing to the FTC, “Franchise Disclosure Document,” Feb. 6, 2007, p. 12 117 Lawsuit #KAC2007-0725, Court of First Instance of San Juan, Puerto Rico, filed Jan. 26, 2007. 118 Jose Chico Vega, “Informe Final sobre la R. de la C. 1071,” Camara de Representantes de Puerto Rico, Nov. 16, 2010 119 Luis Moyett et. al., “Complaint by 78% of Puerto Rico Franchisees against McDonald’s Corporation and Others in Concert Therewith Pursuant to FTC Act Section 5 and the Franchise Rule,” p. 1 120 “Petition for Investigation of the Franchise Industry,” submitted by the Service Employees International Union, http://nrn.com/site-files/nrn.com/files/up- loads/2015/04/FTC-Req-for-Investigation_final,%20May%2019%202015%5B1%5D.pdf 121 Eduardo Ferraz, “Sinal amarelo,” Exame.com, Feb. 9, 2000, http://exame.abril.com.br/revista-exame/edicoes/0722/no- ticias/sinal-amarelo-m0053326 122 Miriam Jordan and Shirley Leung, “McDonald’s Faces Revolt in Brazil,” The Wall Street Journal, Oct. 21, 2003, http://online.wsj.com/news/articles/SB106669192039977200 123 Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Capital, March 26, 2015, http://www.capital.de/dasmagazin/die-fet- tigen-jahre-sind-vorbei-4132.html 124 See Tony Smith, “Economic troubles take a bite out of Brazil’s McDonald’s”, The Washington Post, Jan. 13, 2002, https://www.washingtonpost.com/archive/poli tics/2002/01/13/economic-troubles-take-a-bite-out-of-bra- zils-mcdonalds/5ea4e982-68a6-40¬-b915-0504afdd8922/?utm_term=.1fb68ade35ae, which discusses rent relief programs in Brazil; see Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Capital, March 26, 2015, http://www.capi- tal.de/dasmagazin/die-fettigen-jahre-sind-vorbei-4132.html, which discusses rent relief programs in Germany. 125 George Vazakas and Stamar Monoprosopi E.P.E. vs McDonald’s Hellas M.E.PE. (case #5283), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, p. 4; Carpe Diem Invest AS, et al, v McDonald’s Norge (case #14-143059 TV1-OTIR/07), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, p. 7; Matthew Newman, “McDonald’s faces fresh antitrust charges on Big Mac pricing in France,” MLex, July 12, 2016, http://consumersversusmc.com/wp-content/uploads/2016/10/MLEX.pdf 126 Manon Soucasse, “Comment on ouvre un McDo”, La Dépêche, Sept.2, 2013, http://www.ladepeche.fr/arti- cle/2013/09/02/1699682-comment-on-ouvre-un-mcdo.html: “La plupart des candidats ont gravi les di¬érents échelons de l’entreprise, ils passent en priorité”. See also Cecile Mulato, “Journee des Metiers Chez McDonald's,” Drome Ecobiz, Apr. 10, 2015, http://www.drome-ecobiz.biz/jcms/prod_281956/fr/journ- ee-des-metiers-chez-mcdonald-s: More than 10 percent of McDonald’s franchisees in France have been identified as former executives or o ¬icers at McDonald’s France headquarters or long-term employees in restaurants; the former professional position of a majority of franchisees could not be identified; the actual percentage of former long-term McDonald’s employees or o icers may therefore be much higher. 127 In France, 225 restaurants out of 1,385 restaurants (16.25 percent of total restaurants) have been identified as joint-ventures and are operated by 19 individuals, i.e. an average of 11.8 restaurants per operator. 128 Research carried out in France reveals that a number of current McDonald’s operators have the same family name and are generally parent and child or brothers. In addition, some former operators have the same name as current operators, thereby meaning that the restaurant operation was transferred to a family member. In this respect, 45 current operators have the same name as a current or former McDonald’s restaurant operator. 129 American Customer Satisfaction Index, “Benchmarks by Industry: Limited-Service Restaurants,” http://theacsi.org/in- dex.php?option=com_content&view=article&id=147&catid=&Itemid=212&i=Limited-Service+Restaurants 130 Lucy Crossley, “Sometimes you just hate it: Marmite in top ten most hated brands in Britain along with Ukip and Starbucks but Heinz and Cadbury's are among our favourites,” Daily Mail, Feb. 15, 2015, http://www.dailymail.- co.uk/news/article-2954511/Some- times-just-hate-Marmite-ten-hated-brands-Britain-Ukip-Starbucks-Heinz-Cadbury-s-favourites.html 131 Que Choisir, “Comparatif Satisfaction fast-foods,” n°52, Nov. 2016, p. 17, https://www.quechoisir.org/comparatif-satis- faction-fast-foods-n22871/ 132 Paul Ausick, “McDonald’s Burgers Rate Last in Survey,” 24/7 Wall Street, July 2, 2014, http://247wallst.com/ser- vices/2014/07/02/mcdonalds-burgers-rate-last-in-survey/ 133 A 2015 study of McDonald's store menus in Paris, Lyon and Marseille in France, and Bologna and Rome in Italy, found that when the average price was di erent at franchised and corporate stores, the average prices at franchised locations were higher than those at corporate locations at least 68 percent of the time. This study, conducted by surveyors in Italy and France and compiled by SEIU sta , included taking photos of computer kiosk menus and menu boards at McDonald's stores in the cities mentioned above and compiling price points for more than 300 items on McDonald's menus in Italy and France. Menu photos were taken at 28 stores in Lyon (13 corporate and 15 franchised stores); 16 stores in Marseille (5 corporate and 11 franchised); 27 stores in Paris (12 corporate and 15 franchised stores); 12 stores in Bologna (6 each of corporate and franchised stores), and 25 stores in Rome (12 corporate and 13 franchised locations). From this price data, a pool of menu items for each city was created where there were at least three corporate and franchised store price points each to use to make a comparison of and measure the di erence between the average franchised store and average corporate store price. This included 88 items in Bologna; 113 items in Rome; 114 items in Lyon; 79 items in Paris, and 53 items in Marseille. 134 Que Choisir, “McDonald's- Les restaurants franchisés plus chers,” n°52, Nov. 2016, p. 21, https://www.quechoisir.org/actu- alite-mcdonald-s-les-restaurants-franchises-plus-chers-n22921/ 135 Matthew Newman, “McDonald’s faces fresh antitrust charges on Big Mac pricing in France,” MLex, July 12, 2016. 136 George Vazakas and Stamar Monoprosopi E.P.E. vs McDonald’s Hellas M.E.PE. (case #5283), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, p. 4; Carpe Diem Invest AS, et al, v McDonald’s Norge (case #14-143059 TV1-OTIR/07), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, pp. 6-7 A 2017 study of Yelp restaurant reviews for McDonald's stores in several major cities and regions in Europe found that in 137 general, the average Yelp Review rating at franchised stores was significantly lower than the average rating at corporate stores. Ratings were collected by searching for McDonald's stores by address on Yelp.com or through a search engine and collecting review data via Yelp review websites in the cities and areas included in the table below. Cities were chosen for their mix of franchise and corporate stores, so a comparison of average review ratings could be made. Yelp was chosen over other review websites due to its transparency in displaying a direct average of all reviews listed on its site. The analysis included 81 stores and 429 reviews in Paris, 148 stores and 1,599 reviews in Germany, 116 stores and 325 reviews in Italy, and 20 stores and 62 reviews in Prague. Alan Pyke, “Workers Sue McDonald’s for Wage The Violations in Three States,” Think Progress, Mar. 13, 2014, 138 http://thinkprogress.org/economy/2014/03/13/3402141/mcdonalds-wage-the-suits/; McDonald’s fact sheet published by the National Labor Relations Board, https://www.nlrb.gov/news-outreach/fact-sheets/mcdonalds-fact-sheet Alan Pyke, “Workers Sue McDonald’s for Wage The Violations in Three States,” Think Progress, Mar. 13, 2014, http://thinkprogress.org/economy/2014/03/13/3402141/mcdonalds-wage-the -suits/; Simon Neville, “McDonald’s ties 139 nine out of ten workers to zero-hour contracts,” Guardian, U.K., Aug. 5, 2013, http://www.theguardian.com/busi- ness/2013/aug/05/mcdonalds-workers-zero-hour-contracts; John Weekes, “Celebrations aer McDonald’s ends zero hour contracts,” New Zealand Herald, May 1, 2015, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&ob- jectid=11441887: in 2015, unions and McDonald’s came up to an agreement to end zero-hour contracts in New Zealand. “McDonald’s Workers Nationwide File OSHA Complaints Alleging Hazardous Work Conditions,” Press Release, National Council for Occupational Safety and Health, Mar. 16, 2015, http://coshnetwork.org/mcdonald%E2%80%99s-workers-na- tionwide-file-osha-complaints-alleging-hazardous-work-conditions; Christine Mai-Duc, “McDonald’s facing complaints 140 over worker burns,” LA Times, Mar. 16, 2015, http://www.latimes.com/business/la-fi-mcdonalds-osha-burn-com- plaints-20150316-story.html Que Choisir, “McDonald's- Les restaurants franchisés plus chers,” n°52, Nov. 2016, p. 21. See also for instance: “La grogne s'installe chez les salariés de McDo de Fréjus et Saint-Raphaël,” Var-matin, Aug. 28, 2014, http://archives.varmatin.com/- frejus/la-grogne-sinstalle-chez-les-salaries-de-mcdo-de-frejus-et-saint-raphael.1828269.html; “Licenciements abusifs. Un 141 franchisé McDo condamné à verser plus de 170.000 EUR,” Le Télégramme, Dec. 23, 2014, http://www.letelegramme.- fr/bretagne/licenciements-abu sifs-un-franchise-mcdo-condamne-a-verser-plus-de-170-000-eur- 23-12-2014-10471979.php; “Et comment ça se passe chez McDonald’s? actualité mai 2015,” Le Coin des Equipiers McDonald's, May 19, 2015, http://equipiermcdo.blogspot.fr/; Jean-Pierre Anselme, “Une journée de travail chez McDo,” Mediapart, June 23, 2015, https://blogs.mediapart.fr/jean-pierre-an selme/blog/230615/une-journee-de-travail-chez-mc- do; “Elle se fait licencier par McDonald's pour avoir passé ses examens,” Le Figaro, Sept. 29, 2014, http://www.lefigaro.- fr/emploi/2014/09/29/09005-20140929ART FIG00097-elle-se-fait-licencier-par-mcdon ald-s-pour-avoir-passe-ses-exam- ens.php; “Nour, ex-manager à McDo,” Rue 89, Oct. 31, 2012, http://rue89.nouvelobs.com/rue89-eco/2012/10/31/nour-ex- manager-mcdo-les-mains-malmenees-le-dos-en-miettes-236661; “Polémique. Des équipiers de McDo témoignent,” La Depeche, Apr. 27, 2007, http://www.ladepeche.fr/article/2007/04/27/369261-polem ique-des-equipiers-de-mcdo-temoi- gnent.html; “Débrayage au McDo contre les conditions de travail,” Le Parisien, Oct. 29, 2011, http://www.leparisien.- fr/chelles-60350/debrayage-au-mcdo-contre-les-conditions-de-travail-29-10-2011-1691308.php; “Un syndicat annonce une grève illimitée aux Mc Donald's de Nice,” Nice-matin, July 4, 2015, http://archives.nicematin.com/nice/un-syndi- cat-annonce-une-greve-illimitee-aux-mc-donalds-de-nice.2274025.html; “Mc-Donald's : les salariés dénoncent leurs conditions de travail,” Ouest France, Oct. 31, 2013, http://www.ouest-france.fr/bretagne/brest-29200/mc-don- alds-les-salaries-denoncent-leurs-conditions-de-travail-1668036; Christophe Lurie, “Opération coup de poing des salariés de trois restaurants McDonald's,” France Bleu, Dec. 17, 2014, https://www.francebleu.fr/infos/economie-social/opera- tion-coup-de-poing-des-salaries-de-trois-restaurants-mcdonald-s-1418816112 142 “McJobs -Low Wages and Low Standards around the World”, May 29, 2015, http://www.iuf.org/w/sites/default/- files/mcjobsreport_0.pdf 143 Fight for 15, “April 14: Our Biggest-Ever Global Strikes and Protests,” http://fightfor15.org/april-14-our-biggest-ev- er-global-strikes-and-protests/ 144 Emily Jane Fox, “McDonald's workers sue for wage the¬,” CNN, Mar. 13, 2013, http://mon- ey.cnn.com/2014/03/13/news/companies/mcdonalds-wage-the¬-class-action/ 145 Emily Peck, “McDonald’s workers detail horrifying sexual harassment,” Hu ington Post, Oct. 6, 2016, http://www.hu - ingtonpost.com/entry/mcdonalds-harassment-complaint_us_57f5385ae4b0b7aafe0b4584 146 Lars Andersen, “European Parliament to investigate McDonald’s working conditions”, The Brussels Times, Nov. 30, 2016, http://www.brusselstimes.com/belgium/7059/european-parlia- ment-will-investigate-mcdonald-s-working-conditions 147 Rebecca Burn-Callander, “Employees send McDonald’s to bottom of top 10 ranking of fast food chains,” The Telegraph, Aug. 7, 2015, http://www.telegraph.co.uk/finance/jobs/11786866/Its-o i- cial-Flipping-burgers-at-McDonalds-is-the-worst-fast-food-job-in-the-UK.html 148 McDonald’s franchisees: Archangles SARL, Annual Accounts 2013-2015; Arches Avignon, Annual Accounts 2012-2015; Drive de Pontet, Annual Accounts 2012-2015; Les Arches de Perigueux, Annual Accounts 2012-2015; SL Voltaire, Annual Accounts 2008-2015. Quick franchisees: Fabien Dubos, CLENT, Annual Accounts, 2009-2015; Fabien Dubos, ANCLEFA, Annual Accounts, 2009-2014; Franck Duwicquet, Roanne Rest, Annual Accounts, 2010-2015; Marc Chaudron, BELC, Annual Accounts, 2009-2014; Marc Chaudron, Niort Rest, Annual Accounts, 2009-2014. KFC franchisees: MCF17, Annual Accounts 2014-2015; Societe Tenitram, Annual Accounts 2014; Bezirest, Annual Accounts 2012-2015; Kennedy’s Mantes, Annual Accounts 2009-2015; MC Aslan, Annual Accounts 2011-2015; Merichick, Annual Accounts 2009-2015; Narbest, Annual Accounts 2012-2015; Pessachick, Annual Accounts 2010-2015; Villachick, Annual Accounts 2010-2015. Pizza Hut franchisees: ABY Pizza, Annual Accounts 2014-2015; Caen Sud 3, Annual Accounts 2011-2013; Codam, Annual Accounts 2014-2015; HAMM, Annual Accounts 2011-2013; Kospol-Distribution, Annual Accounts 2014; and SPPH, Annual Accounts 2011-2015. Subway franchisees: Drop Food, Annual Accounts 2009-2013; Piper Sub, Annual Accounts 2009-2015; Sebway, Annual Accounts 2009-2014; Sub Valmy, Annual Accounts 2009-2013; Subway Issoire, Annual Accounts 2014; Subway Vichy, Annual Accounts 2014. La Brioche Dorée franchisees: Myraj Bakery, Annual Accounts 2013-2015; Pain d’Ange, Annual Accounts 2013-2015; SARL Mahana, Annual Accounts 2014; SARL MP2L, Annual Accounts 2014-2015; SARL PCLC Restauration, Annual Accounts 2012, 2014, 2015. La Mie Caline franchisees: Abbott, Annual Accounts 2013, 2015; Avrancheline, Annual Accounts 2013; Cle Mie Ra, Annual Accounts 2013-2014; Delis’Adour, Annual Accounts 2011 and 2013; La Mie Beline, Annual Accounts 2013 and 2015; Nova Forte, Annual Accounts 2014; SARL Brondy, Annual Accounts 2012. Paul Boulangerie franchisees: CBN, Annual Accounts 2011, 2013, 2014; HEVALO- MA, Annual Accounts 2011 and 2013; Maria et Sandrine, Annual Accounts 2011 and 2013; PWL Bakery, Annual Accounts 2013-2015; Zenith Bakery, Annual Accounts 2013-2015. Pomme de Pain franchisees: Huger-White Cross, Annual Accounts 2013-2015; JTE, Annual Accounts 2013; PDP Pau, Annual Accounts 2014; Pomme Roaix, Annual Accounts 2013-2014; RARLE, Annual Accounts 2013. Sushi Shop franchisees: 54, Annual Accounts 2014-2015; Enjo, Annual Accounts 2011-2015; Gelau, Annual Accounts 2012-2015; King Kong, Annual Accounts 2012; Sauboget, Annual Accounts 2014-2015; Zen’itude, Annual Accounts 2011-2015. 149 Arcos Dorados, SEC Correspondence, October 15, 2012, p. 4. 150 - “Brazilian Master Franchisee shall not, and shall not permit any of its Subsidiaries or Franchisees to, close any Franchised Restaurant except pursuant to an Approved Closing.” Second Amended and Restated Master Franchise Agreement (Brazil), Nov 10, 2008. Section 6.2 Closings, p. 8. - ““Approved Closing” means any proposed closing of a Franchised Restaurant that (a) has been approved by McDonald’s, such approval not to be unreasonably withheld, it being understood that (i) whether a closing is reasonable shall be determined by McDonald’s in light of the use of the related Real Estate in the operation of a McDonald’s Restaurant, without regard to any other potential use of such Real Estate; and (ii) a failure by McDonald’s to approve any closing shall not be deemed to be unreasonable if McDonald’s reasonably believes that such closing is proposed in contemplation of or in connection with the Transfer or use of the related Real Estate (or any related Site Agreement) to or in connection with a Competitive Business; (b) is the result of a condemnation of the related premises by a Governmental Authority; or (c) is the result of the opening within the same trading area of a Franchised Restaurant having comparable Gross Sales and menu scope.” Second Amended and Restated Master Franchise Agreement (Brazil), Nov 10, 2008. Exhibit 1-1 – Definition of “Competitive Business.” - ““Competitive Business” means any Person engaged in a QSR Business or any Person operating under the list of marks or trade names provided by McDonald’s on the date hereof, which list may be amended by McDonald’s from time to time.” Second Amended and Restated Master Franchise Agreement (Brazil), Nov 10, 2008. Exhibit 1-2 – Definition of “Competitive Business.” - No specific list is provided as an attachment to the Brazilian MFA, but the following list is attached to the Amended and Restated Master Franchise Agreement among McDonald’s and Arcos Dorados, Nov 10, 2008 as “Exhibit 25-1 – Selected Competitive Businesses”: 7-Eleven, Arby’s, Baskin Robbins, Bob’s, Burger King, Carl’s Jr., Chick-fil-A, Church’s, Domino’s, Dunkin’ Donuts, El Pollo Loco, Häagen-Dazs, Habib’s, Hardee’s, In-N-Out Burger, Jack-in-the-Box, KFC, Little Caesars, Papa John’s, Pollo Tropical, Pollo Campero, Pizza Hut, Popeye’s Chicken, Starbucks, Subway Sandwiches, Taco Bell, TCBYYogurt, Wendy’s. 151 Amended and Restated Master Franchise Agreement among McDonald’s and Arcos Dorados, Nov 10, 2008. Section 7.14.3 p. 32. Specific locations covered by this article, including locations in Brazil, are listed in Exhibit 14 Restricted Real Estate. 152 “Consumer Foodservice in the United Kingdom,” Euromonitor, May 2016, http://www.euromonitor.com/consum- er-foodservice-in-the-united-kingdom/report 153 Rebecca Burn-Callander, “London’s best restaurant sites are being eaten up by chains,” The Telegraph, Feb. 6, 2015, http://www.telegraph.co.uk/finance/festival-of-busi- ness/11393514/Londons-best-restaurant-sites-are-being-eaten-up-by-chains.html 154 “Fri 12th Apr 2013 - Friday Opinion,” Propel, http://www.propelinfonews.com/pi-Newsletter.php?date- time=2013-04-12%2009:00:00 155 Rebecca Burn-Callander, “London’s best restaurant sites are being eaten up by chains,” The Telegraph, Feb. 6, 2015 156 Rupert Spies and Gretel Weiss, “Is Germany's traditional restaurant a dying breed?” Cornell Hotel & Restaurant Administration Quarterly, June 1, 1998. Accessed via: http://business.highbeam.com/4074/article-1G1-20897004/ger- many-traditional-restaurant-dying-breed 157 “Consumer Foodservice in Germany,” Euromonitor, May 2016, http://www.euromonitor.com/consumer-foodser- vice-in-germany/report 158 “McCafé revitalises Germany’s foodservice coee sales,” Euromonitor, Feb. 22, 2010, http://www.caeculture- show.com/files/euromonitor__mccafe_revitalises_germanys_foodservice_coee_sales.pdf 159 “Full-service restaurants in Spain,” Euromonitor, May 2016, http://www.euromonitor.com/full-service-restau- rants-in-spain/report 160 “Full-service restaurants in Italy,” Euromonitor, May 2016, http://www.euromonitor.com/full-service-restaurants-in-it- aly/report 161 Francesca Landini, “McDonald's takes on pizza for Italy growth spurt,” Reuters, Jan. 9, 2013, http://www.reuters.com/article/us-mcdonalds-italy-idUSBRE9080SE20130109 162 Sébastien Liarte, "Mutualisme, prédation et parasitisme : la concurrence comme critère de choix de la zone d’implan- tation", XVème Conférence Internationale de Management Stratégique (AIMS), Annecy / Genève, June 13-16, 2006, http://www.strategie-aims.com/events/conferences/8-xveme-con- ference-de-l-aims/communications/2280-mutualisme-predation-et-parasitisme-la-concurrence-comme-critere-de-ch oix-de-la-zone-dimplantation/download 163 Concerning the EU Commission’s investigation, see http://ec.europa.eu/competition/elojade/isef/case_de- tails.cfm?proc_code=3_SA_38945. Concerning France, see E. Paquette, “Menu Big Fisc pour McDonald’s”, L’Express-L’Expansion, Apr. 19, 2016, http://lexpansion.lexpress.fr/entrepris es/menu-big-fisc-pour-mcdon- ald-s_1784249.html; concerning the UK, see Marion Dakers, “McDonald's UK pays £123m in royalties to Luxembourg”, The Telegraph, Oct. 29, 2016, http://www.telegraph.co.uk/business/2016/10/29/mcdon alds-uk-pays-123m-in-royal- ties-to-luxembourg/. In Italy, three consumer associations (CODACONS, MOVIMENTO DIFESA DEL CITTADINO and CITTADINANZATTIVA) filed a complaint with the Italian tax authorities stressing the consequences of McDonald’s 2009 change in corporate structure and royalty flows for Italian public finances and taxpayers, see: Esposto del Codacons contro McDonald's: “Possibile evasione, deve al Fisco fino a 224 mln,” La Repubblica, Oct. 1, 2015, http://www.repub- blica.it/economia/2015/10/01/news/esposto_contro_mcdonald_s_sulla_possibile_evasione_fiscale-124010471/. In Spain, El Pais reported a current tax investigation: Jesus Servulo Gonzalez, “Hacienda investiga a McDonald’s en España,” El Pais, Feb. 21, 2016, http://economia.elpais.com/economia/2016/02/20/actuali- dad/1455994666_356182.html. In August 2015 in Brazil, the General Workers’ Union (UGT) filed a complaint asking Brazil’s public prosecution service to open an inquiry into allegations of tax dodging, unfair competition, and violations of franchise laws by McDonald’s. The tax complaint was filed just days before McDonald’s workers and elected o icials from around the world testified at an unprecedented global hearing before the Brazilian Federal Senate on the negative social impact of McDonald’s business model worldwide. In March 2016, a federal prosecutor opened a criminal investigation into McDonald’s and its Latin American master franchise owner, Arcos Dorados Holdings: Stephanie Strom and Vinod Sreeharsha, “Brazil Opens Investigation into McDonald's,” The New York Times, Mar. 3, 2016, http://www.nytimes.com/2016/03/04/business/international/bra zil-opens-investigation-into-mcdon- alds.html?_r=0. In Australia, the press reported a tax adjustment of $77.8 million in 2016: Nassim Khadem, “McDon- ald's halves its tax bill, back pays $78m,” The Sydney Morning Herald, Feb. 3, 2016, http://www.smh.com.au/busi- ness/the-economy/mcdonalds-halves-its-tax-bill-back-pays-78m-20160202-gmjgnk.html 164 “Antitrust: Overview,” European Commission, http://ec.europa.eu/competition/antitrust/overview_en.html; “Exces- sive Prices,” Working Party No. 2 on Competition and Regulation, OECD, Oct. 17, 2011, http://ec.europa.eu/competi- tion/international/multilateral/2011_oct_excessive_prices.pdf 165 Ana Paula Martinez, “Abuse of Dominance: The Third Wave of Brazil’s Antitrust Enforcement?” Competition Law International, Vol. 9, No. 2 (Oct. 2013), pp. 169-181, http://www.levysalomao.com.br/files/publicacao/anex- o/20130905115751_abuse-of-dominance.pdf 166 Miriam Jordan and Shirley Leung, “McDonald’s Faces Revolt in Brazil,” The Wall Street Journal, Oct. 21, 2003, https://www.wsj.com/articles/SB106669192039977200 SEIU.org EFFAT.org 1800 Massachusetts Ave NW Rue du Fossé-aux-Loups 38, Box 3 Washington, DC 20036 Brussels