WASHINGTON--(BUSINESS WIRE)--As McDonald’s Corp. (NYSE: MCD) seeks buyers for more than 3,000 stores throughout Asia, the Service Employees International Union sent a letter Monday to thousands of franchisees arguing that the company’s move towards a “master franchisee” model could lead to “harmful consequences” for operators across the continent.
SEIU reached out to franchisees in China, Japan, South Korea and Taiwan who would be affected by McDonald’s decision to replicate in Asia a model that has harmed operators in other markets. The vast majority of them would likely become sub-franchisees under the new ownership structure and could face higher royalty costs, a new conflicted competitor in the form of a master franchisee, and the prospect of paying for the McDonald’s brand without the high level of support they currently receive.
“McDonald’s has a poor track record in Asia, and its troubling master franchising model puts enormous downward pressure on its master franchisees and their sub-franchisees,” SEIU Executive Vice President Scott Courtney writes in the letter. “These dynamics could translate into conflict and neglect for franchisees like yourself…negatively impacting you, your communities, and the workers in your stores.”
McDonald’s announced in March of this year that it would seek master franchisees for its markets in China, Hong Kong, and South Korea. In 2015, it publicized that it also aims to sell operations in Taiwan and a significant portion of its ownership stake in Japan.
Courtney writes that McDonald’s master franchisee model allows it to reap significant benefits from its brand while avoiding costs and risks associated with running stores and supporting franchisees. Specifically, the SEIU letter argues the imposition of master franchisees in Asian markets could lead to:
- Higher royalty payments for sub-franchisees. In Latin America and India, master franchisees and their sub-franchisees often pay royalties that exceed those that McDonald’s charged to its own subsidiaries, affiliates and conventional franchisees prior to the sale of operations. As part of the terms it offered to potential buyers in China, McDonald’s indicated it would expect royalties of eight percent, up from the five percent offered to franchisees as recently as late last year.
- Erosion of the franchising relationship. In order to operate successfully, McDonald’s master franchisees may cut support to sub-franchisees or increase fees, such as charging more for rent or taking control of supply chain operations, making life tougher for long-term franchisees. “The incentives of McDonald’s master franchisees are fundamentally misaligned with their sub-franchisees,” Mr. Courtney writes.
- Conflict with sub-franchisees. In Puerto Rico, Arcos’ sub-franchisees filed two lawsuits alleging the company opened new stores that encroached on the territory of existing stores; harassed and mistreated them in an effort to force them out of the McDonald’s system; and abandoned the island’s advertising cooperative and stopped paying for advertisements in order to further damage franchisee sales.
The letter asserts that conflicts could be worse in Asia given the McDonald’s brand already faces significant difficulties there. Operational problems and corporate missteps—such as a supplier using expired meat and the discovery of a human tooth in French fries—have damaged McDonald’s brand on the continent, and the company’s decision to radically restructure its relationship with franchisees and reduce its own involvement may indicate it is unwilling to make the investment needed to repair that damage. Sales across the continent are unstable, with the company falling dramatically short of growth targets in many markets.
The letter informs franchisees of steps it could take to limit the damage from a potential transaction, such as demanding that royalties, rent or advertising contributions won’t go up; that any new stores won’t encroach on the territory of existing franchisees; and that the level of support franchisees receive from McDonald’s corporation remains steady.
SEIU has a proven track record of working with franchisees to improve their rights. The union teamed up with California franchisees to win the passage last October of the toughest franchise reform legislation in years.
The letter is the second in recent weeks from SEIU to parties connected to potential McDonald’s transactions in Asia. In June, SEIU’s Courtney wrote to hundreds of prospective buyers of McDonald’s assets on the continent, warning of financial risks associated with a potential deal.