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

Washington / DC. (seiu) As McDonald’s Corporation seeks buyers for more than 3’000 stores throughout Asia, the Service Employees International Union (SEIU) 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 USD 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».