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McDonald’s Accused of Restricting Competition

  • Why it matters

    Why it matters

    McDonald’s has been accused of abusing its position as the world’s largest fast food chain to harm its franchises and customers.

  • Facts

    Facts

    • The complaint submitted to antitrust authorities alleges McDonald’s forced its franchisees to charge more in their restaurants.
    • Franchising is a key component of the McDonald’s business model, with franchises making up more than 80 percent of its restaurants across the world.
    • Customers are said to be unaware of the difference in prices between McDonald’s-owned restaurants and franchises.
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    Audio

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Kind isst einen Hamburger
Has US fast food chain McDonald's bitten off more than it can chew with franchisee contracts? Source: Picture Alliance

Exorbitant rents with a side of restrictive contracts and market abuse: it is not the kind of order McDonald’s wants to hear. A wide-ranging complaint was submitted Tuesday to Germany’s Federal Cartel Office against the world’s leading fast food restaurant chain. German franchisees are said to be disadvantaged and exploited by the McDonald’s system.

The complaint suggests that franchise operators are required to sell their products at higher prices as a result. This means that restaurants run by the company directly can offer hamburgers, cheeseburgers and Chicken McNuggets at a better price and thus enjoy an illegal competitive advantage.

Insiders have been hearing these arguments for years. “Of course there are distortions of competition,” said Claus Wystemp, who managed a McDonald’s restaurant in Baden-Württemberg for 15 years. “The leases are determined according to criteria that make no sense to the franchisees. And they are so high that many franchisees have been on the verge of bankruptcy for years.”

Several labor unions are also involved with the current complaint at the Federal Cartel Office in Bonn. What is more, the accusations are international. Similar complaints were filed on Tuesday in France and Italy, as well. These are latest woes to hit McDonald’s in Europe. The European Commission is investigating whether the company avoided paying tax by transferring revenue from other countries to Luxembourg.

“Ultimately all of us – whether employees, customers or citizens – are victims of Ronald McDonald’s insatiable greed.”

Indécosa-CGT, French consumer protection association

Franchises are traditionally seen as a way of starting up a business with less of the initial risk or costs. Franchisors, in this case McDonald’s, typically provide training and access to the benefits of a large-scale company, including advertising campaigns. With franchises accounting for more than 80 percent of McDonald’s restaurants worldwide, the company is heavily reliant on this business model.

What may be the last straw for German franchises is the increase in the nationwide minimum wage, which rose from €8.50 to €8.84 in 2017. The McDonald’s business is worker-intensive. Individual restaurants require between 30 and 90 employees to meet the company’s strict food preparation and service targets. The rise in personnel costs imposes a burden on McDonald’s franchisees.

Critics argue that it isn’t just franchisees losing out. In France, McDonald’s practices are said to have cost customers an estimated €232 million, or $247 million extra in 2015. The French consumer protection association, Indécosa-CGT, accuses McDonald’s of forcing customers at the franchise restaurants to bear unjustified costs: “Ultimately all of us – whether employees, customers or citizens – are victims of Ronald McDonald’s insatiable greed.”

These disadvantages are also evident in Germany. Customers eating at franchises pay an average of 19 to 25 cents more per food item, depending on the city. This price advantage affects a majority of restaurants: Of nearly 1,500 McDonald’s restaurants in Germany, nearly 1,300 are operated by franchisees.

06 p22 McDonald’s Franchises-01
Franchises account for 87 percent of McDonald’s restaurants in Germany.

Sebastian Graf von Wallwitz from the law firm SKW Schwarz compiled the complaint in Germany. The lawyer identifies several serious violations of antitrust law by McDonald’s: “The franchising contract is linked to the rental contract. So if McDonald’s cancels the franchising contract, the franchisee also loses the restaurant. That means he can’t leave the system. In practical terms: once McDonald’s, always McDonald’s.”

The lawyer is also critical that the exorbitant rents demanded by McDonald’s also make prices higher at franchises than at restaurants operated by the company itself: “Hamburgers are more expensive at franchise restaurants – but most customers don’t notice and know that.”

McDonald’s denies that it systematically favors its own restaurants. “As independent entrepreneurs, our franchisees themselves determine the prices in the restaurants they operate,” said company spokesman Philipp Wachholz. Refusing to answer questions about rental prices, he continued: “Our business model helps our franchisees occupy prime real estate locations.”

The US company is accused of mercilessly using its powerful position as main tenant. When a franchise is opened, McDonald’s makes the building shell available while remaining the main tenant. The franchisee pays for furnishing the interior and acts as a subtenant. The lease is said to often be excessively expensive, with the margins that McDonald’s earns on its real estate lying between 61 to 77 percent in various states.

This means that McDonald’s profits from rentals are far higher than from grilling burgers. Insiders have also complained to Handelsblatt about half-baked business ideas imposed by US headquarters on long-suffering franchisees here in Germany.

For example, McDonald’s wanted to offer coffee at cheap prices to draw customers in for breakfast. “That works in America because they don’t have any real bakeries,” says the former franchisee Mr. Wystemp. “But Germany has an entirely different breakfast culture. The customer buys his breakfast buns at his favorite bakery and then takes only the inexpensive coffee from McDonald’s. That’s not good business for the franchisee.”

 

Sönke Iwersen leads Handelsblatt team of investigative reporters. Volker Votsmeier is an investigative reporter with Handelsblatt. To contact the authors: iwersen@handelsblatt.com, votsmeier@handelsblatt.com

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