Global Rent Excess at the World's Largest Franchisor

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. EFFAT.org Rue du Fossé-aux-Loups 38, Box 3 Brussels About SEIU The Service Employees International Union (SEIU) is an organization of two million members united by the belief in the dignity and worth of workers, and the services they provide. We are dedicated to improving the lives of workers and their families and creating a more just and humane society. SEIU.org 1800 Massachusetts Ave NW Washington, DC 20036 Global Rent excess at the World’s Largest Franchisor March 2017 executive summary cDonald’s is a dominant force in the global fast food industry. Worldwide, its stores have approximately 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 operated 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 eectively 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. McLandlord: Global Rent Excess at the World’s Largest Franchisor | 1 McLandlord 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 unailiated with a franchisor. It also describes how these practices are likely to have serious, negative eects 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 staing 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. 2 | March 2017 March 2017 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 franchisees 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 oen 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.

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