Why McDonald's franchisees are simmering
The independent business owners complain that steadily rising rents and fees the company charges have gotten too high.
According to Bloomberg News, McDonald's (MCD) is facing a "brewing franchisee revolt" because the burger chain has increased fees and costs that the independent business owners pay, such as rent, software and remodeling. Not surprisingly, rising expenses are discouraging franchisees, who operate about 90% of the chain's U.S. locations, from opening new restaurants or refurbishing existing ones, the news service says.
The operators say McDonald's has been squeezing them for a while as its overall business stagnated. Bloomberg noted that the revenue, including rent and fees, McDonald's took in from franchised stores has risen an average of 8% during the past five years, double the 4% increase in total revenue during the same time.
Operators have felt that impact their bottom lines.
Some franchisees are paying 12% of their sales in rent, an increase from the historic levels of 8.5%. Since U.S. McDonald's locations on average net about $2.5 million in annual sales, operators who recently renewed leases are paying an average of $300,000 under the new rate, a steep increase from the $212,500 under the previous rate. Not surprisingly, franchisees want McDonald's to roll back fees to the old rate.
Remodeling a McDonald's costs about $800,000, more than twice as expensive as the $300,000 rival Burger King (BKW) charges its franchisees. It also tops the $375,000 Wendy's (WEN) expects to charge for its least-expensive model, according to Bloomberg News
And that's not all.
Operator Kathryn Slater-Carter told the news service that McDonald's has tacked on an additional $10,400 per store (she owns two) in annual costs for Wi-Fi, software and employee training costs in the past five years.
Franchisee discontent is the last thing McDonald's needs in the wake of its recent disappointing earnings report, which has prompted many on Wall Street to worry about its growth prospects. CEO Don Thompson has said that the rest of 2013 "will remain challenged."
That may be an understatement.
Jonathan Berr owns a small stake in McDonald's. Follow him on Twitter @jdberr.
It's all about the corporate bottom line. When the franchisee keeps profits it goes to them not the corporate bottom line. Got to keep them share holders happy and CEO paid, screw the people who make you money and the workers they employ.
Good old Trickle Down Economics at work.
Give it all to the fat cats at the top. And let the PENNIES trickle down to those that do all of the hard work.
It's too bad that so many who comment on these articles are so ignorant of how a company like McD's works. 90% of the stores are NOT owned by some huge, publicly traded corporation. Most of them are owned and operated by franchisees -ie small business owners. Most of these franchisees are your neighbors. Most of their kids go to the same school your kids do. Most of them contribute heavily to the community via charity work, sponsoring little league teams, etc... Stop confusing massive corporate entities with your local franchisee.
Haven't been to a McD's in at least 10 years. Or any of the others - BK, Wendy's, Taco Hell. Likely to be at least another 10 as well.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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