The European Commission is currently investigating McDonald’s sweetheart tax deals with Luxembourg and other tax arrangements across Europe. It should now also look into how McDonald’s uses its real estate rents to abuse its franchisees and its consumers, writes Harald Wiedenhofer.
Harald Wiedenhofer is general secretary of the European Federation of Food, Agriculture and Tourism Trade Unions (EFFAT).
“Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.” Many readers will recognise the line famously attributed to Ray Kroc, the late owner of McDonald’s and the man who turned the fast food brand into the global franchising giant it is today.
Yet it is likely that only few truly realise how accurately it describes McDonald’s business model – and the abuses this business model implies on the part of the company with the golden arches.
In January 2016, three Italian consumer groups, backed by a coalition of European and American trade unions, filed an antitrust complaint against McDonald’s with the European Commission. At the heart of the complaint was a system deliberately put in place by the McDonald’s corporation to maximise profits by squeezing its own franchisees (which operate over 80% of its stores), resulting in harmful effects for consumers (higher prices) and workers (lower wages) alike.
McDonald’s real estate business plays a key role in this system. True to Ray Kroc’s vision, McDonald’s owns virtually all of the real estate used by its franchisees. It requires franchisees to rent from it by tying franchise contracts to the conclusion of lease contracts including extremely harsh conditions, be it in terms of rent levels, duration or termination clauses.
In light of McDonald’s clearly dominant position in the fast food market, such practices could be considered anti-competitive under EU law, as prospective franchisees may have little choice but to do business with McDonald’s regardless of the fairness of the contract terms.
In a report published earlier this week, the trade union coalition unveiled exclusive new data shedding more light on the sheer scope of McDonald’s rent system in Europe and how it has harmed consumers – while massively benefiting the company itself.
To name just a few figures: in 2014, McDonald’s charged rents amounting to 13.4% of sales on average, and over 20% in some European countries like Germany and Italy – over three times higher than its underlying real estate costs. Such levels of rent are also significantly higher than those paid by McDonald’s corporate stores or by franchisees in competing chains.
To be sure, this system works well for McDonald’s itself: in 2014, the company earned a global gross margin of €2.6 billion from selling food directly to customers, but an estimated €4 billion from rents charged to its own franchisees!
The only problem is that this system hurts everybody else:
- franchisees of course, whose operating margins are dramatically squeezed;
- consumers, who have to pay higher prices at franchised stores – according to data gathered by France’s “Que Choisir Magazine”, products sold in McDonald’s franchised stores in France tend to be 10% to 27% more expensive than in corporate stores;
- and also workers, who end up footing the bill in the form of lower wages and poorer working conditions: “McJobs” is a well-known synonym for low-quality jobs around the globe; in January 2016 trade unions from across Europe filed a series of petitions with the European Parliament urging the EU to take action against McDonald’s harmful employment practices such as the wide use of “zero-hours contracts” in the UK or obstacles to union representation in France.
There is a common pattern behind all this, one that can also be seen in McDonald’s well documented tax avoidance practices: a business model conceived as a vehicle to privatise value while socialising harm, and that ends up driving a race to the bottom with implications for labour and consumer protection standards across the entire industry.
The good news is that this business model is finally attracting the regulatory attention it deserves, thanks largely to the persistent efforts of workers and civil society organisations. In the US, the “Fight For 15” movement of fast food workers, that started just over four years ago, has already achieved wage increases for over 20 million workers; in Europe, the European Commission is investigating McDonald’s tax arrangements with Luxembourg, which allowed the company to pay virtually no EU taxes between 2009 and 2013.
The company is also being investigated by tax authorities in the UK and France – with potential penalties running in the hundreds of millions of euros.
These efforts are highly welcome, but they should also cover how McDonald’s uses its real estate rents to abuse its franchisees and its consumers. Another issue for the European Commission and all competent authorities around Europe to follow up?