To say that relations between McDonald's and the Service Employees International Union (SEIU) have been strained is like saying Democrats and Republicans in Congress have a few challenges in working together. The union has been pushing a highly public campaign to force higher wages at the fast food chain in the U.S. and has supplemented protests with legal actions.
In this case, SEIU doesn't seem to be directly involved, but, along with some European unions, is supporting a coalition of Italian consumer organizations that filed a formal antitrust complaint with the European Commission. Among the allegations, according to a copy of the complaint I've seen:
- McDonald's forces franchisees to lease locations from the company at rates running between 6 percent and 21 percent of sales in addition to a fixed monthly rate based on development costs. The complaint claims that the combination is well over market rates. Typical rents supposedly run in the 13 percent to 15 percent range.
- Those rates are in addition to 5 percent of sales paid as royalties and between 4 percent and 4.5 percent for advertising.
- Franchisees may have to spend money on equipment and renovations that they cannot remove if they ever stop running that location.
- Broad termination clauses mean that the franchisee can easily be forced to sell the franchise back to McDonald's, losing the "bulk of the value of their investment."
- The European branch of the company has no restriction in opening locations that compete with those of a franchisee.
- All food, supplies, and equipment must be purchased from McDonald's and different franchisees cannot combine orders to gain some volume advantage.
- At least in Italy the complaint says that McDonald's centrally sets prices for all franchisees.
- Franchise agreements have unusually long durations and effectively prevent franchisees the ability to switch to another franchise system with broad non-competes that last a year or two. Franchisees are "prohibited from being involved in other businesses over the duration of the franchise."
The ultimate results, the complaint alleges, is that both the franchisees and consumers are hurt. McDonald's, it says, effectively runs a real estate business with a dominant position in the fast food industry that, with the control over franchisees, is effectively a monopoly. According to SEIU, if the European Commission finds in favor of the plaintiffs, penalties could run as high as 10 percent of global revenue, or $9 billion, based on 2014 financial results, plus anything else regulators decide to add on to ensure a more competitive atmosphere.
All that is in Europe -- atop an EU investigation into how the company handles its taxes in the region. So how is there a potential impact on US franchisees? Because McDonald's is dependent on real estate -- owning it, controlling it, and charging for it. If that business model is hampered in Europe, it means the company will have to look to other areas to make up the difference if shareholders are to remain happy.
And while a string of poor performance in the U.S. seems to have finally ended, 2015 still saw the first year of net store closings in the U.S. for the chain since 1970, so the deficit would need to be handled one way or another. That would likely mean more money from franchisees, which would mean lower profits and less to pay workers.