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A coalition of European and American trade unions released a report this week shining a bright light on how McDonald's Corporation's market power and real estate practices enable it to extract excessive rental payments from its franchisees. That, they say, could be leading to higher prices for consumers and lower wages for workers.
The report, McLandlord: Global Rent Excess at the World's Largest Franchisor, sponsored by the Service Employees International Union and the European Federation of Trade Unions, summarizes that McDonald's Corporation is a dominant force in the global fast food industry. It explains, "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." It reveals that over the past five years the hamburger chain has produced operating profits averaging nearly $8 billion per year and net income averaging $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, not selling burgers. McLandlord reports, "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."
In contrast to most of its competitors, McDonald's franchise agreements require its franchisees, who are mostly small-business people, to rent land and buildings for their restaurants from the hamburger giant. Other franchise companies like Yum Brands and Burger King control only a fraction, if any, of the property for their franchised stores, the summary states.
Having complete control over its franchise locations, McDonald's is able to require prospective franchisees to undertake substantial unpaid training prior to revealing what location will be available, if any, and under what lease terms, until near the conclusion of their training period, the trade union report states. It explains, "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."
The union organizations warn that these practices implemented by big franchise corporations can distort competition because prospective business partners, such as franchisees, may have little choice but to do business with them, regardless of the quality of the products or fairness of the franchise contracts. The McLandlord report states,
Thus, business owners who want to open a fast food franchise in many countries likely have few alternatives to McDonald's because the chain effectively 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.
Data included in the report collected in November and December of 2015 indicates that in several major cities in Europe, McDonald's franchised stores charge higher prices than corporate-owned stores in the same geographic areas. In Bologna, Italy, for example, menu items priced higher at franchised stores were €0.34 more on average than the same items at corporate stores, a difference of 8 percent. In France, data gathered by the Que Choisir Magazine confirms an average difference of 4.4 percent with at least ten products being 10 percent to 27 percent more expensive in franchised stores than in corporate-owned stores.
Kerstin Howald, tourism sector secretary of the European Federation of Trade Unions in the food, agriculture and tourism sectors, said, "It is shameful to see that a multi-billion euro company enforces such abusive rent practices with its franchisees as this, in turn, might restrict franchisees' ability to provide fair wages, as well as decent and safe working conditions for their employees."
Scott Courtney, executive vice president of Service Employees International Union, emphasized, "Today's report is yet another illustration of how McDonald's continues to abuse its dominant market position, ultimately hurting franchisees, consumers and workers alike. McDonald's has a clear record of mistreating workers and communities virtually everywhere it operates and it's time that the company is held accountable."
The 26-page McLandlord report follows an antitrust complaint against McDonald's filed with the European Commission by a coalition of Italian consumer groups last year. The complaint alleges that the exorbitant rents and onerous contracts McDonald's imposes upon franchisees gives it an unfair advantage.