McDonald’s is hiking rent on its US franchisees during a crippling sales slump.
The burger chain charges its operators a rental rate equal to a percentage of their sales.
The company has increased that rate by at least three percentage points over the past seven years to as much as 16% of sales, The Wall Street Journal reports, based on information from an accountant for 150 McDonald’s franchisees.
That’s an astronomically high rent to charge for the industry.
Fast-food chains typically charge their franchisees rent equal to between 6% and 10% of sales, according to Technomic data cited by the Journal.
“I have never seen the operator community so demoralized, frustrated, and distrusting,” one McDonald’s franchisee told the Journal. “There are operators who are looking at the calendar and saying, ‘If business doesn’t get better in six months, I have a problem.'”
McDonald’s franchisees might be able to sustain higher rent costs in better times.
But same-store sales have declined for the last six straight quarters in the US. Traffic is down and the company is trying to execute a turnaround that requires operators to pay for costly restaurant upgrades.
For example, equipment for the company’s new customisable burgers, called “Create Your Taste,” will reportedly cost between $US120,000 and $US160,000.
Franchisees are also under new pressure to raise wages for their employees, following McDonald’s decision to increase pay for workers at company-owned stores.
Operators said they were blindsided by the company’s decision to raise wages, which affects just 10% of restaurants in the US. The other 90% of McDonald’s restaurants are run by franchisees.
“McDonald’s has stabbed us in the gut,” one franchisee wrote in response to a recent survey by Janney Capital Markets analyst Mark Kalinowski. “My ‘partner’ has only itself in mind [and] it has declared war on the operator.”
Franchisees rated their relationship with McDonald’s corporate as the lowest in the 11 years that Kalinowski has conducted the survey.
McDonald’s CEO Steve Easterbrook will have to repair the company’s relationship with franchisees if he wants his turnaround strategy to work, according to analysts.
“They don’t work for him, and he can’t order them around,” Richard Adams, a former franchisee, told Bloomberg. “For him to get anything done, he needs franchisee cooperation.”
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