Is a Franchise Revolt Brewing Against McDonald's?

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Aug. 6 (Bloomberg) -- Zarco Einhorn Salkowski & Brito Founder Pobert Zarco discusses a possible franchise revolt against McDonald's with Erik Schatzker on Bloomberg Television's "Market Makers." (Source: Bloomberg)

Franchisees' operate about 90% of all the locations here in the u.s.. what are the main issues?

The problem they are facing now is that they are feeling the compression of sales as a result of the expansion of the quick service restaurant business, fasting segment.

Franchisees', in order to attract sales, they have to market to people the products that the franchise has decided, given the broader base of menu items.

The problem is that there's a tremendous amount of discounting.

That translates into higher revenues for mcdonald's corp.

Is when you have more customers coming in.

But the financial impact of those discounts on the individual franchisee locations is very damaging.

For instance, you are the transfer of sales, where a customer comes in to buy a regular priced product that i higher margins, now priced on the dollar menu.

That means the transaction is lost to a lower income generating product for the franchisees'. and they clearly do not like that.

I'm sure they do not.

But part of me says , didn't a sign on for this?

They did not go out and make their own business.

This reaction comes from the brink of national leadership council chair.

He says this -- and by the -- it has to do with reasonable expectation.

They have to deal in good faith with each other in making sure the business model worker the internal conflict where the interest of the dolls is generating the highs top line and the interest of the franchisee is to maximize the profits at each individual restaurant.

There is an inherent conflict.

Mcdonald's is trying to make sure they attract more customers to the individual stores.

Let's not forget that mcdonald's is really in the real-estate business and the hamburg -- rather than the hamburger business.

Mcdonald's benefits from enhanced investment in these restaurants.

What mcdonald's does in order to try to bring more customers into the restaurants, it does so by requiring the franchisees' to substantially remodeled these restaurants, to the tune of somewhere around $600,000 up to $1 million, and sometimes there is what is called a scrap and build, a two million dollar investment.

That enhances the book value of that with the state for mcdonald's. but what it does for the franchisee to might create a huge debt service.

The franchisee's debt to equity ratio changes and puts more pressure on them.

And mcdonald's looks more carefully at the franchisee's the the operations.

I call it the opm syndrome, other people's money.

It is easy to expand your own brand by using other people's money.

That is what these franchisees' are experiencing that they are objecting to.

The debt that the franchisee house to undertake in order to service these enormous real- estate loans, coupled that with the increased level by selling more products regenerative prices.

-- by generated prices.

This text has been automatically generated. It may not be 100% accurate.

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