By Savannah Smith  |  05-02-2017   News
Photo credit: Artashes Ogandzhanyan | Dreamstime.com

When people think of McDonald's, of course they think hamburgers, and maybe fries to go with them. Many would also know that McDonald's would easily be one of the biggest and most profitable fast-food restaurants, not just in the U.S. but around the world. But very few, perhaps, would know that while McDonald's certainly earn from their burgers and fries, that would be peanuts compared to where they draw their biggest profit from: real estate.

A labor union is requesting state attorneys general to investigate McDonald's for overcharging franchisees on rents and even accusing the fast-food restaurant giant on committing deception on how the rents are actually calculated.

The Service Employees International Union (SEIU) said in a statement on Tuesday that U.S. franchisees paid the world's biggest fast-food chain more than $3 billion in rents last year. The union said such rate of return on McDonald's real-estate investments go as much as triple the industry average. The group alleged that such high cost makes it harder for franchisees to pay living wages to their employees and staff. SEIU further claimed that the "windfall" rents are calculated in a secretive process that violates state laws in California and Illinois.

The labor union wrote letters to California Attorney General Xavier Becerra and Illinois Attorney General Lisa Madigan to ask them to subpoena McDonald's to make them explain how they calculate rents. The group also asked the two state attorney general to order McDonald's to present any documents about undisclosed or hidden franchisee costs. SEIU said they believe that the U.S. is unlikely to act, noting that the Federal Trade Commission has not brought an enforcement action in 20 years under franchise regulation.

In its complaint letter, SEIU said that McDonald's is luring potential franchisees into paying rents that far exceed industry standards, and all the while giving the reassurances that everything is appropriate. The union also said that McDonald's returns compared to its competitors' cast doubt "on the company's claims that its base rent generates merely an appropriate return on real estate investments."

McDonald's, based in Oak Brook, Illinois, requires franchisees to lease their restaurants from the company with SEIU saying the rent eating up an average of about 10.7 percent of sales. SEIU also contends that the chain's rate of return on its real estate ranges from 10.5 percent to 19.3 percent- between double and even triple the industry average of just 5.9 percent.

McDonald's for its part responded in a statement that they are confident in the legality and appropriateness of their financial relations with their franchisees and their disclosures of those relationships. The chain also said that their business model helps their franchisees secure prime real estate locations. McDonald's said that such reflects a significant level of company investment in the restaurant premises.

McDonald's and SEIU have clashed over increases to the minimum wage. SEIU said their findings are based on an analysis of publicly available franchising documents and a survey that the union conducted of 267 current and former McDonald's franchisees. The union further claimed that the fast-food restaurant chain's disclosures to franchisees about their rent costs are inaccurate and misleading because they are not transparent with the rent formula.

The labor group also shared that the giant chain's first chief executive officer, Harry Sonneborn, once famously told investment analysts that McDonald's "was in the real estate business, not the hamburger business". That was said about 50 years ago, but SEIU said nothing has changed. McDonald's is in the business of burgers and fries, and other fast-food staples like fried chicken, sundaes or ice cream, maybe apple pies, but that their real profit comes from being one of the largest real estate companies in the world.

Source:

https://www.bloomberg.com/news/articles/2017-05-02/mcdonald-s-accused-by-union-of-inflating-franchisee-rents

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