McDonald’s franchisees rebel as chain raises store fees

Slowed Expansion

Under pressure from franchisees, the company slowed the expansion. It opened 1,130 net new domestic restaurants in 1995; by 1998, it had cut that number to 92.

“There was a time at McDonald’s when the franchisee morale was extremely low and everyone was extremely upset,” Adams said. “We’re getting there again.”

Today’s tensions between Oak Brook, Illinois-based McDonald’s and store operators coincide with the company’s struggles to grow after consumer confidence fell in July after increasing for the past three months and with the unemployment rate stalled at 7.4% or higher. On July 22, the shares fell 2.7%, the most in nine months, when McDonald’s reported second-quarter profit and revenue that trailed analysts’ estimates. Chief Executive Officer Don Thompson said economic weakness would hurt results for the rest of the year.

McDonald’s fell 0.2% to $99.11 at 9:37 a.m. in New York. The shares increased 13% this year through yesterday, trailing the 20% gain for the Standard & Poor’s 500 Restaurants Index.

Franchisee Income

The Big Mac seller, which owns or leases most of its U.S. stores, has been generating more income from franchisees. Revenue from franchised stores, which includes rent and royalties, increased 8% on average during the past five years, while total revenue rose 4%.

Some franchisees are paying as much as 12% of store sales in rent, according to notes of an April 23 meeting attended by store operators. Instead, they want the company to return to a historic rate of about 8.5%, the document shows.

U.S. McDonald’s restaurants average about $2.5 million in annual sales, according to Chicago-based researcher Technomic Inc. That means franchisees who have recently renewed leases are paying an average of $300,000 a year, up from $212,500 at the 8.5% rate.

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