Bidness ETC - McDonald’s Hikes Up Rent On Franchisees Despite Plummeting Sales

Fast Food chain increases rate by at least three percentage points by as much as 16% of sales.

In a move that does not make absolute sense and is likely to simmer discontent, McDonald’s Corporation (NYSE:MCD) has stated that it has increased the rental rate, which it charges to its franchises, by at least an extra 3% for over the last seven years to as high as 16% of sales, based on the information provided by an accountant, who is responsible for the financial management of more than 150 McDonald’s franchise.

The said rate is far higher for the industry, in which fast food chains normally charge franchises a rent of somewhere between 6-10%. The fact that McDonald’s has bumped the already partially overcharged rate to one that looks unsustainable comes as franchises are struggling with falling sales. That move might have made sense during better times, but this is not one of them. The company has not responded to queries from the Wall Street Journal, which had reported about the price and the decision itself.

Part of the movement may be attributed to McDonald’s same-store operations in which sales have been falling down for the last six straight quarters in the US. With traffic on the downward trend, the company responded by executing the turnaround, which calls on operators to pay up for more undertaking costly upgrade.

Adding further woes, franchises are feeling the heat from civil rights activist to bump up minimum wages for employees, following McDonald’s decision to increase pay for its company-owned stores. Operators of the franchises say that whilst the decision to boost wages only affected 10% of the stores operated by McDonald’s, they vented their anger by not taking them into account of the potential impact.

It is no wonder that the relationship between the operators of McDonald’s corporate sector is at its lowest since the past decade, since Kalinowski, a research agency, was handed the task in survey industrial relations. Analysts say that for the company to work successfully, it has to repair its relationship with the franchises before giving the turnaround strategy a shot, since McDonald’s cannot do this alone.

McDonald’s is known for its brand recognition among other competitors in the market. It faced various issues and challenges. One former franchisee said that not all is too late to turn around, if McDonald’s CEO, Steve Easterbrook, is able to secure cooperation with the franchise, since according to him, "They don’t work for him, and he cannot order them around."

McDonald’s stock price ended the day at $96.52, a gain of 0.24% from the previous day.