McDonald’s Refranchising Plan in Asia Holds Financial Risks, SEIU Warns Investors

Letter Shows Expanding Global Reach of Union’s Campaign to Hold
McDonald’s Accountable to Workers, Taxpayers, Investors

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 potential purchasers detailing financial risks posed by the
“master licensee” model at the core of the company’s growth strategy
across the continent.

SEIU reached out to hundreds of global firms who are potential buyers
and are active in Asia. The letter, which was sent in English, Korean,
Japanese, and Chinese, cites cases from Latin America to India to
Eastern Europe where similar franchising arrangements resulted in
McDonald’s shifting significant costs and liabilities onto master
franchisees while allowing the company to isolate itself from risks and
reap considerable financial gains.

“We believe McDonald’s past practices pose risks for its future
licensees, those firms’ investors, McDonald’s franchisees in Asia and
the workers employed at McDonald’s stores,” states the letter, signed
by SEIU Executive Vice President Scott Courtney.
“A bad deal for the
buyer of McDonald’s business in any one of its major markets could
negatively impact these stakeholders for years to come.”

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. The company has not
indicated that it has secured investors for any of these markets.

The six-page letter describes similarities between McDonald’s potential
master licensee arrangements in Asia and its current agreement with
Arcos Dorados, McDonald’s largest global franchisee and the master
franchisor in Latin America. McDonald’s 2007 decision to transfer
operational control in Latin America to Arcos has proven financially
calamitous not only for Arcos Dorados itself, but also for its
investors, sub-franchisees and workers:

  • Arcos Dorados: Prior to the creation of Arcos, McDonald’s
    transferred 2 percent of its Latin American sales out of the region in
    the form of royalty payments; now, under its master franchising
    agreement with McDonald’s, Arcos pays the company 5 percent of sales
    in royalties, and this amount will rise to 7 percent by 2022. Onerous
    provisions in the master franchising agreement allow McDonald’s to
    prohibit Arcos from closing unprofitable stores. The company also
    transfers currency risks to Arcos by requiring all royalty payments in
    U.S. dollars.
  • Investors: After a 2011 IPO that valued Arcos at $17 per share,
    Arcos’s shares have lost 83 percent of their value, underperforming
    the S&P 500 by 139 percent.
  • Sub-Franchisees: In Puerto Rico, McDonald’s imposition of Arcos
    as a master franchisee triggered a lawsuit by sub-franchisees. The
    lawsuit is now entering its tenth year.
  • Workers: Financial problems may have contributed to labor
    conflicts with Acros – in Brazil, a federal prosecutor earlier this
    year opened a criminal investigation into McDonald’s and Arcos
    following allegations that Arcos violated labor laws in the country.

The letter notes that the proposed sell-off of McDonald’s stores to
master franchisees comes at a particularly risky time for potential
purchasers. Corporate mismanagement, consumer scandals and unstable
sales have weakened the company’s business performance across Asia.

The union’s letter concludes with an invitation for dialogue among
potential buyers of McDonald’s assets in Asia to discuss “a favorable
path forward for the brand, its franchisees, workers and customers.”

Contacts

Service Employees International Union
Jack
Temple, 646-200-5280
jack.temple@berlinrosen.com