Global Rent excess at the World’s Largest · PDF filesuch as Yum Brands and Burger King...

Global Rent excess at the World’s Largest Franchisor

March 2017

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Global Rent excess at the World’s Largest Franchisor

McLandlord: Global Rent Excess at the World’s Largest Franchisor | 1

cDonald’s is a dominant force in the global fast food industry. Worldwide, its stores have approxi-mately double the sales of its nearest competitor. In Europe, McDonald’s claims to be larger than its

next nine competitors combined, and throughout its top markets, from the United States to France, to Brazil and to Japan, McDonald’s is consistently the fast food market leader. As a result, the golden arches produce profits worthy of their name: over the last five years, McDonald’s has produced operating profit averaging nearly US$8 billion per year and net income averaging US$5 billion annually.

A core foundation of McDonald’s ability to both realize dramatic growth and extract enormous profits from its global operations is that most of its profits come from its real estate operations rather than its burger business. McDonald’s is the largest real estate company in the world and controls most of the property on which its 36,000 stores in 120 countries are located. More than 80 percent of the company’s stores are operat-ed by 5,000 individual franchisees – not McDonald’s itself – and the corporation reaps over 50 percent more in gross profit from the rent it charges to its own franchisees than from selling food directly to customers.

McDonald’s franchise agreements require its franchisees, who are mostly small-business people, to rent land and buildings for their stores from the burger giant. This stands in contrast to most of its largest competitors – such as Yum Brands and Burger King – which control only a fraction, if any, of the property for their franchised stores.

McDonald’s has complete control over the location of franchised stores. It also requires that prospective franchisees undertake substantial unpaid training before revealing what store location will be made available if any, and under what lease terms, near the conclusion of the training period. Coupled with its unusual real estate strategy, these conditions allow the chain to set unreasonable rental rates and contract terms, leaving franchisees limited options other than accepting McDonald’s terms. As a result, franchisees squeeze the wages of their employees.

Such practices, implemented by market dominant corporations like McDonald’s, can potentially distort competition because prospective business partners, such as franchisees, may have little choice but to do business with them, regardless of the quality of their products or the fairness of their contract terms. Thus, business owners who want to open a fast food franchise in many countries likely have few alternatives to McDonald’s because the chain e�ectively blankets the industry, capturing an overwhelming portion of the customer dollars spent on burgers and fries. In addition, McDonald’s real estate strategy may lead to market foreclosure for its competitors by compromising their access to strategic locations, and therefore the market. The result may thus be limited choices for consumers.

McDonald’s enjoys a dominant position in many countries. In Europe in 2015, McDonald’s accounted for over 30 percent of sales in 19 countries in the American-style fast food market, including approximately 88 percent in Italy, and 76 percent in both France and Germany.

e x e c u t i v e s u m m a r y

March 2017

This report details how McDonald’s market power and real estate practices enable this massive corporation to extract potentially excessive rental payments from its franchisees in comparison to competitors. In particular, it describes:

That the rent McDonald’s charges to its franchisees appears to be excessive, representing more than four times its own real estate costs in the United States and more than three times those costs in Europe;That in some countries McDonald’s franchisees pay substantially more in rent than McDonald’s corporate-operated stores do; And, that McDonald’s charges its franchisees significantly higher rent as a percentage of sales than franchisees in competing chains pay to their landlords, who are usually third parties una�iliated with a franchisor.

It also describes how these practices are likely to have serious, negative e�ects that ripple throughout the local communities in which McDonald’s stores operate:

They directly hurt the business prospects of McDonald’s franchisees, who are mostly small-business people;They limit the investments franchisees can make in their stores and in quality ingredients for their food, ultimately hurting fast food consumers, leading to higher prices and lower customer reviews at franchised stores than those at corporate-owned stores and triggering industry-low food, customer service and brand reviews for McDonald’s as a whole;They allow McDonald’s to implement strategies through rent relief that reinforce franchisees’ economic dependency and their obligation to comply with McDonald’s policies, including potential resale price maintenance (as laid out by a study in France);They allow McDonald’s to control key real estate locations, contributing to an economy-wide prob-lem in which local, independent businesses are crowded out by chains and consumers have fewer and more homogenous choices;They restrict McDonald’s franchisees’ ability to provide fair wages, safe working conditions, and adequate sta�ing for their workforce, resulting in poverty wages and the potential for abusive labor practices such as wage the�;And, they are likely to hinder the fair functioning of the market by allowing a dominant company to extract excessive profits and competitive advantages from its market position.

Governments around the globe should investigate McDonald’s franchising practices, particularly its extractive real estate program, and pay particular attention to ensure that McDonald’s may not abuse its dominant market position at the expense of the people that eat in its stores.

2 | March 2017

McLandlord

I n t r o d u c t i o n


March 2017

McDonald’s is one of the world’s largest and most recognized corporations. Its iconic golden arches span more than 36,000 stores in 120 countries.1 In 2015, these stores generated almost US$83 billion in systemwide sales – a measure of the sales at both franchised and corporate stores – nearly twice the sales of its nearest competitor, Yum Brands.2 McDon-ald’s is the dominant fast food chain in many of the countries in which it operates, including most of the world’s largest fast food markets. In Europe, for instance, McDonald’s enjoys a dominant position with over 30 percent of sales in 19 countries in 2015 in the American-style fast food market (including brands like Burger King, Quick, and KFC) and huge market power in major markets such as Italy (88 percent of sales), France (76 percent of sales) and Germany (76 percent of sales).3

McDonald’s is also the world’s largest franchi-sor.4 Approximately 5,000 franchisees operate more than 80 percent of the McDonald’s stores around the globe.5 McDonald’s franchisees are o�en small-busi-ness people with a fraction of McDonald’s resources, operating an average of only four stores.6 And McDonald’s maintains the imbalance of power and expertise in most countries by only o�ering franchis-es to individuals, and not to established partner-

ships or corporations, unlike most of its competi-tors.8

The profound imbalance of power in McDonald’s franchise relationships is reflected in its franchise agreements, which contain one-sided terms and conditions, such as McDonald’s right to unilaterally change its operational policies and methods regard-less of the costs and obligations imposed on the franchisee.9 These mechanisms of control likely serve to dramatically limit the ability of franchisees to bargain with McDonald’s for better deals and increase the potential consequences for speaking out against the chain. In particular, the core of McDonald’s business model is that it, unlike most global fast food franchi-sors,10 requires its franchisees to lease real estate it controls for their stores and charges these franchi-sees rent that appears to dramatically exceed the market rate. In every market we reviewed (including the U.S., France, Italy, Germany, and the U.K.), McDonald’s franchisees pay more rent, as a percent-age of their sales, than franchisees of other fast food chains. And worldwide, McDonald’s earns more profit from collecting rent from franchisees than it does from selling hamburgers. While the company earned a global gross margin of US$2.5 billion from its corporate stores in 2015, it earned over US$4.2 billion on its real estate margin from franchisees in the same year.11

McDonald’s dominant market position in many countries means that prospective franchisees may feel it is necessary to accept the terms it dictates in order to operate a fast food franchise with access to a significant portion of industry sales. For example, McDonald’s has complete control over the locations of potential franchisees’ stores.12 Despite stating that it prefers local franchisees with local knowl-edge, it requires prospective franchisees to be ready to move anywhere McDonald’s chooses within their

Wha

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Franchising is a system in which franchisees sign an agreement with a franchisor to license the right to use the franchisor’s concept, trade name, know-how, and other industrial or intellectual property. Franchi-sees typically pay up-front fees, as well as ongoing royalties or service fees, usually based on a percentage of sales. Franchisors provide ongoing commercial and technical assistance to their franchisees.7

4 | March 2017

countries to be awarded a franchise.13 It o�en requires prospective franchises to undergo lengthy unpaid training periods,14 and only reveals what store location will be available, if any, and under what lease terms, near the conclusion of a new franchisee’s training.15 Franchisees’ bargaining power is therefore weakened by the fact that they will not risk losing the year they spent in training by negotiating terms and conditions, allowing McDon-ald’s to use its dominant position in the fast food industry to impose excessive rent and other onerous terms on its franchisees. As a result, McDonald’s earned a massive global profit ratio of 71.9 percent on the rent paid by franchisees, compared to a gross profit ratio of 15.2 percent of sales at company-oper-ated stores.16

One measure of the dominant market position enjoyed by McDonald’s, and the excessive profit that position enables it to take from its franchisees in the form of high rents, is its operating income as a percentage of systemwide sales. Operating income is the amount of profit a company realizes before accounting for interest and taxes, and is an import-ant indicator of a company’s overall profitability. Unlike its competitors, McDonald’s operating income includes the rental income it charges franchisees less its real estate costs – its real estate margin. For 2015, McDonald’s reported $7.1 billion in

operating income, or almost nine percent of system-wide sales.17 In contrast, its major fast food franchise competitors – Yum Brands, Burger King and Wendy’s – earned five percent of total systemwide sales or less in operating income in 2015.18 In short, McDon-ald’s is able to achieve profitability on its sales that is close to double that of its nearest competitors by this measure, suggesting that its unique business model is an important driver of global earnings. Due to its dominant position, its control of store real estate, and its financial power, McDonald’s o�en occupies strategic store locations to which its competitors do not have access, resulting in the exclusion of its competitors from the market and limiting consumer choice. This real estate strategy may lead to the exclusion from the market of McDon-ald’s competitors and to a limited choice for consumers. As an example, Burger King was able to access the Belgian and French markets mainly by acquiring the Quick restaurant chain and its locations in those countries.19 As discussed in detail in this report, McDonald’s market dominance, control of real estate, and one-sided relationship with franchisees, including potential resale price maintenance, provide a combination of factors that likely allows it to perpet-uate and strengthen its market dominance to the detriment of its competitors and consumers.

McDonald’s is the top fast food chain in most of the world’s top 20 largest fast food marketsFigure 1.

All figures based on Euromonitor Passport sales data for fast food, excluding convenience stores, 2015

McLandlord

#1

#2

#3

Rental income – the rent McDonald’s charges to franchisees, which typically has two components: base rent and percentage rent.

Base rent – the first component of rent; McDonald’s minimum monthly rent amount, payable regardless of franchisees’ sales performance, set by McDonald’s lease agreements with its franchisees.

Percentage rent – the second component of rent, McDonald’s charges its franchisees a percentage of every dollar of sales above a monthly sales target, set by McDonald’s lease agreements with franchisees, as percentage rent.

Triple net lease – a commercial lease arrangement under which the tenant is responsible for many operating costs, such as maintenance, insurance, and property taxes; McDonald’s often requires its franchisees to sign triple net leases for their store properties.


Typical Franchisor McDonald’s

f r a n c h i s o r

f r a n c h i s e e

f r a n c h i s o r

f r a n c h i s e e

third-party rental agreement

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contractcontract lease$ $$

ROYALTIESRENTSUPPORT

Figure 2.

How McDonald’s franchise system di�ers from other franchisors.

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McDonald’s is o�en cited as the world’s largest real estate company.20 It owns the buildings for over 25,000 restaurants and leases many more.21 Property and equipment makes up the overwhelming majori-ty of its assets worldwide.22 A decade ago, the company’s sprawling real estate empire was estimated to be worth US$46 billion, and its value has undoubtedly increased substantially since then.23 McDonald’s requires its individual franchisees to rent stores it owns or controls via a lease.24 This real estate strategy is highly unusual. Although all fast food chains require access to property in order to operate stores, and many such chains also franchise a significant portion of their stores around the world,

no other global chain systematically requires franchised stores to be located on property it controls.25 For example, Burger King and Yum Brands, McDonald’s two largest competitors, do not require that franchisees lease store property from them.26 Major burger chain Wendy’s also does not generally require its franchisees to lease property it controls. Globally, Burger King and Wendy’s own or lease the property for less than 20 percent of their franchised stores.27 Yum controls the property for 21 percent of its total global stores, almost precisely the portion that it operates as corporate-owned locations, suggesting that it owns the real estate for only a small number of franchised stores.28

March 2017

6 | March 2017

McDonald’s developed its real estate operation in the mid-1950s as a way to both increase income – adding a revenue stream to royalties – and to strengthen its control over franchisees.29

From the start, the real estate program proved extremely profitable: McDonald’s found landowners willing to build McDonald’s restaurants on their land; leased the land and the new building from the landowners; and subleased the package to franchi-sees. In the mid-1960s, McDonald’s started buying store real estate. This meant that a�er making ten years of installment payments to landlords and paying o� bank mortgages on its buildings, McDon-ald’s owned its stores outright, erasing lease costs from its expense structure.30 Today, McDonald’s owns 45 percent of the land and 70 percent of the

buildings that house McDonald’s stores around the globe, while leasing land and/or buildings on the remaining share.31

In the 1950s, McDonald’s charged franchisees a fixed monthly rent of 20 percent above its lease costs, but the company soon doubled its markup for franchisees to 40 percent, foreshadowing rent increases to come.32 This was franchisees’ minimum rent, which McDonald’s now calls base rent and is required regardless of store sales. McDonald’s also charged a second component of rent – percentage rent – equal to a set percentage of store sales that exceeded a pre-determined sales target. Initially, percentage rent was set at five percent of sales, although it has increased signifi-cantly in subsequent years as discussed below.33 Initially this real estate arrangement had bene-fits for both McDonald’s and its franchisees.34 The franchisees were small operators who lacked the

Occupancy costs – defined by McDonald’s as the rent it pays to third party landlords for leased property plus depreciation on property it owns.35

Real estate margin – McDonald’s rental income minus its occupancy costs.

Real estate profit ratio – McDonald’s real estate margin expressed as a percentage of its total rental income; for example, if McDonald’s has a real estate margin of €20 million based on rental income of €30 million and occupancy costs of €10 million, its profit ratio would be: (€30 million - €10 million) / €30 million = 67 percent.

“Now we will have a club over [the franchisees], and by God, there will be no more pampering or fiddling with them. We will do the ordering instead of going around and begging them to cooperate.

McLandlord

The Origins of McDonald’s Real Estate Empire


funds to buy land and build stores on their own, and McDonald’s took care of this part of the business by negotiating lease-and-build deals with landowners. For McDonald’s, the advantages were obvious: the base rent assured that McDonald’s made money on all restaurants as long as the stores stayed in business, while the percentage rent ensured that McDonald’s revenues grew with sales growth at franchisees’ stores. And the vast bulk of franchisee rent revenue was profit, as franchisees were respon-sible for paying both for store improvements and for ongoing costs such as taxes and insurance.37

In addition to a growing revenue stream, controlling real estate gave McDonald’s power over its franchisees’ operations in ways that franchise agreements did not. United States franchising law was not well-developed in the 1950s, and McDon-ald’s doubted the enforceability of its franchise agreements.38 In contrast, leases were well-estab-lished legal documents, so McDonald’s used lease language to enforce compliance with its rules. “I have finally found the way that will put every single McDonald’s we open under our complete control,” McDonald’s founder Ray Kroc wrote in 1957, noting that under the lease if a franchisee “does not conform in every way to the McDonald’s standards of quality and service, this lease will be canceled on thirty-day notice. Now we will have a club over them, and by God, there will be no more pampering or fiddling with them. We will do the ordering instead of going around and begging them to cooperate.”39 McDonald’s today still uses lease language to “have a club” over its franchisees and control their businesses. For example, its United States franchi-see lease states that “[t]enant’s breach of any of the

terms and covenants of the Franchise Agreement will also constitute a breach of this Lease. Termina-tion, expiration, default or revocation of the Franchise Agreement for any reason, either in whole or in part, will also terminate this Lease, without further notice being required.”40

While there are some variations, the basics of McDonald’s real estate scheme are fairly consistent across the countries in which it operates. In most cases, it owns or leases the land and/or buildings on which its restaurants stand; it leases or subleases the restaurant property to franchisees; and it charges them a minimum base rent regardless of sales plus a percentage rent on gross sales exceed-ing a particular sales target. For example, a franchi-see contract could specify that base rent equals US$200,000 a year with a sales target of US$2 million and 10 percent in percentage rent for sales above this sales target. That means that if store sales were equal to or less than the target sales, the franchisee would be required to pay the US$200,000 base rent. If store sales were to total $2.5 million, for instance, the franchisee would owe $200,000 in base rent plus an additional $50,000 in percentage rent or [(US$2.5 million-US$2 million)x10 percent]. McDonald’s leases with its franchisees, like many commercial leases, are also o�en triple net leases, under which franchisees are responsible for paying many of the costs associated with the proper-ty, namely maintenance, insurance, and property taxes.41

March 2017

How Rent Works at McDonald’s Today

Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.36

“

8 | March 2017

However, as the company’s global sales have dropped, McDonald’s has increased rent dramatical-ly—up from approximately 5 percent to as much as 16 percent of sales in the United States and even higher rates in Europe (as presented below). While the company was growing, McDonald’s could take a bigger and bigger share without starving franchi-sees. But the system has become too imbalanced, and McDonald’s now appears to unilaterally control its franchisees’ profitability and to use high rents as a means to keep control over franchisees and main-tain its dominant position.43 McDonald’s real estate approach is particularly problematic because it is now a dominant company with massive market share in the fast food industry, putting it in a position to potentially abuse its market position at the expense of franchisees, consumers, workers, and competitors. In particular, McDonald’s enormous market power, coupled with its strategy of controlling franchisee real estate, allows it to charge franchisees more in rent than they would likely pay on the open market, or if they operated stores under other brands. Its triple net leases with its franchisees, which require those franchisees to cover many of the costs associated with the properties on which their stores are located, allow it to turn an enormous profit on the rent it charges. This siphons profits out of the local commu-nities that support McDonald’s stores around the

world, and also is likely to a�ect or even exclude competitors. Further, it helps McDonald’s exert control over its franchisees to ensure compliance with the company’s policies, including those regard-ing pricing. Mark Kalinowski, an analyst who has covered McDonald’s for several investment firms, reported on a “typical” income statement for McDonald’s traditional store franchisees in 2012 in the United States. A�er food costs and labor, the rent and royal-ties paid to McDonald’s made up the largest portion of a U.S. franchisee’s expenses, at 14.5 percent of sales.44 By comparison, most of McDonald’s direct competitors, like Burger King and Wendy’s, do not collect rent from the large majority of their franchised stores, so the fees they collect are primar-ily in the form of royalties.45 This means that instead of the 13.5 percent McDonald’s collects on franchi-see sales globally, the other brands take far less – usually 4.5 percent at Burger King’s U.S. stores, and 4.0 percent at Wendy’s.46 And in the minority of cases where Burger King and Wendy’s charge rents to franchisees, percentages of sales in rent are substan-tially lower than the rates charged by McDonald’s.47

This comparison may not fully reflect rising rent costs at McDonald’s stores, though. In Europe, a typical franchisee has paid more than 17.5 percent of its sales to McDonald’s in the form of rent and royal-ties over the past few years.48

The only way that we can positively know that these units are doing what they are supposed to… is to make it so that they can have no alternative whatsoever. You can’t give them an inch.42

“

McLandlord


In France, some franchisees pay from 11.7 percent to 18.4 percent of sales as rent in addition to the five percent service fee and the four percent advertising fee.49 In Italy, some franchisees pay from 12.5 to 21.0 percent of sales in rent, in addition to the service and advertising fees.50 Rents for franchisees in the United States have risen as high as 16.0 percent of sales in addition to the service and advertising fees.51

Additionally, McDonald’s o�en requires its franchisees to fund expensive renovations to store locations that the chain itself controls. McDonald’s franchisees have complained that McDonald’s frequently imposes remodeling costs on franchisees that may improve marginal sales, driving up McDon-ald’s rental and royalty income, but do not actually pay o� in increased profitability for franchisees.52 In the United States, its current remodeling program costs its franchisees an estimated US$600,000 per store for an interior makeover.53 The company is also pushing franchisees to build double-lane

drive-thrus, which will require additional construc-tion.54 These investments are on top of earlier spend-ing on the “McCafé” beverage platform, including equipment purchases and store renovations.55 In France, McDonald’s launched a renovation program in 2009 requiring all its restaurants to be renovated before the end of 2013.56 In Germany, a remodeling program was launched in 2016 and requires franchi-sees to be remodeled by the end of 2019.57

The sections that follow describe McDonald’s real estate practices in di�erent regions around the world. In every one of them, the rent McDonald’s franchisees must pay to McDonald’s is multiple times the costs that McDonald’s itself bears to control the property on which franchised stores are located. And in each of these regions, a sample of financial information for franchisees of McDonald’s and other fast food chains indicates that McDonald’s franchisees pay more in rent than those at Burger King or other global competitors.

McDonald’s franchisees paying more in rent/royalties while customer visits decline, 2009-2015Figure 3.

Revenue from Franchised Restaurants Changes in Global Same-Store Sales and Customer Traffic

‘ 0 9 ‘ 1 0 ‘ 1 1 ‘ 1 2 ‘ 1 3 ‘ 1 4 ’ 1 5 ‘ 0 9 ‘ 1 0 ‘ 1 1 ‘ 1 2 ‘ 1 3 ‘ 1 4 ’ 1 5

Royalties: $3.0B

Rent: $5.9B$7 billion6543210

March 2017

6 %

4

20

-2

-4

traffic: -2.3%

Same Store Sales: 1.5%

10 | March 2017

McDonald’s rental income and property expenses in the United States, 2015All figures in millions of U.S. dollars

McDonald’s is by far the largest fast food chain in the United States with over US$35 billion in sales in 2015, approximately double those of its nearest competitor, Yum Brands.58 Despite the proliferation of competing fast food brands in the U.S., McDon-ald’s brings in almost a quarter of all chain fast food dollars in the country. The company operates only 1,360 of its more than 14,000 stores in the U.S. directly,59 choosing to franchise over 90 percent of its stores to more than 3,000 individual operators.60 McDonald’s franchisees in the U.S. are mostly small-business people, with the average U.S. franchisee operating only four stores.61 McDonald’s informs potential U.S. franchisees that the rents it charges them are based on the company’s costs to buy or lease property and to build restaurants.62 However, the relationship between the company’s real estate costs and its rental income has been tenuous from the beginning.

From the early days of its real estate operation, McDonald’s instituted a percentage rent structure through which its rental income would increase along with sales, regardless of the underlying real estate costs. Over the years, the company has steadily increased the percentage rents it demands from U.S. franchisees:

Percentage rent was five percent of sales in the mid-1950s, as discussed above.

In 1970, McDonald’s increased percentage rent to 8.5 percent of sales.63 It appears that it was still 8.5 percent in 1982.64

By 2000, McDonald’s presented percentage rent as a range from 8.5 percent to 11 percent,65 and the maximum rate has been rising ever since.

u n i t e d s t a t e s

McDonald’s took in over US$3 billion in rent from U.S. franchisees in 2015, which generated a real estate profit ratio of 75 percent.

McLandlord

Franchisee sales:

Rent paid by franchisees:

Occupancy costs, franchised stores:

By the numbers

Real estate margin:

Real estate profit ratio:

$31,639

$3,060

$755

$2,305

75 percent


Today McDonald’s states that percentage rent ranges from 8.5 percent to 15 percent or even higher,66 and a leading provider of accounting services to McDonald’s franchisees told the Wall Street Journal that rents for some McDon-ald’s franchisees have risen as high as 16 percent of sales.67

Rent charged to franchisees is enormously profitable for McDonald’s. McDonald’s USA, LLC, discloses both occupancy costs and rental income for its franchised stores. McDonald’s took in over US$3 billion in rent from U.S. franchisees in 2015,68 which generated a real estate profit ratio of 75 percent. That means only one out of every four dollars it received in rent from franchisees went towards occupancy costs for franchised stores.69

In contrast, McDonald’s reported that it earned only US$632 million as a gross profit margin on US$4.2 billion in sales at U.S. corporate stores in 2015, less than a third as much as it earned from rent. Compared to the U.S. real estate profit ratio of 75 percent, the company’s gross profit ratio on corporate store sales was just 15 percent.70

The substantial discrepancy between the high rents charged to franchisees and the comparatively

low occupancy costs borne by McDonald’s has a real impact on the company’s franchisees, who appear to pay more in rent as a share of sales than franchisees of other chains. While McDonald’s discloses a rent range of 8.5 percent to 15 percent of sales and even higher, restaurant research firm Technomic estimates that fast food companies in the U.S. charge their franchisees rent ranging from 6 percent to 10 percent of sales.71 This comports with data from Burger King’s largest franchisee, Carrols Restaurant Group, which paid approximately 7.5 percent of sales in rent on stores leased from Burger King in 2015.72 Similarly, Wendy’s charged franchisees an estimated 6.0 percent of sales for rent at franchised stores where Wendy’s owned or leased real estate in 2015.73 McDonald’s control of real estate, and its ability to set franchisee rent without competing on price with other real estate holders, appears to lead to inflated rent rates. McDonald’s control of franchised real estate also means that it has wide latitude to increase the amount that franchisees must pay in rent over time. Rising rents and other costs have led to tension and conflict between the company and its franchisees in the U.S., as discussed below.74

March 2017

McDonald’s is by far the largest fast food company in Europe, with almost 8,200 stores and €20.5 billion in systemwide sales on the continent in 2014.75 McDon-ald’s claims to sell more fast food in Europe than its next nine competitors combined.76 In the fast food sector McDonald’s enjoyed a dominant position in most E.U. countries in 2015. In particular, in the American fast food market (includ-ing brands such as Burger King, Quick, and KFC), McDonald’s accounted for over 30 percent of sales in 19 countries in 2015 and over 75 percent in major markets like France (76 percent), Germany (76 percent) and Italy (88 percent).77

McDonald’s operating model varies throughout Europe, adjusting for national laws and incorporat-ing menu items suited to local tastes. However, a few constants persist. First, McDonald’s franchises a significant portion of its stores in most European markets. Franchisees operate 79 percent of McDon-ald’s European stores,78 and the average franchisee in Europe had fewer than four stores in 2010.79 Second, it o�ers similar franchise agreements in all

countries and controls the real estate for franchised stores, requiring its individual franchisees to lease their stores from the company.80

And third, McDonald’s market power, coupled with its strategy of tying its franchise agreements to the leasing of property, allows the company to extract substantial profits on the rent it charges to franchisees. Prospective franchisees in many coun-tries likely choose McDonald’s as a franchisor in order to access an overwhelming portion of the fast food market, due to McDonald’s disproportionate share of fast food sales among franchised chains, regardless of how the terms imposed by McDonald’s compare to those of other brands. Their alternative is, in many cases, to seek a franchise with a much smaller and less successful chain. Furthermore, prospective McDonald’s franchisees must undergo a lengthy and unpaid training period before being granted a franchise.81 McDonald’s only reveals where new franchisees can operate stores and what rental rate they will be charged near the conclusion of this training period, likely limiting the impact of competi-

e u r o p e

McLandlord

Across Europe, as in the United States, rent is the largest single source of profit for McDonald’s.

McDonald’s rental income and property expenses in europe, 2014All figures in millions of euros

Franchisee sales:

Rent paid by franchisees:

Occupancy costs, franchised stores:

By the numbers

Real estate margin:

Real estate profit ratio:

€14,407

€1,843

€568

€1,276

69 percent

12 | March 2017


competition in the real estate market on the rent McDonald’s charges franchisees.82 Franchisees’ bargaining power is indeed weakened as they will not risk losing the year they spent in training by negotiating terms and conditions. Across Europe, as in the United States, rent is the largest single source of profit for the company. McDonald’s posted an average gross profit ratio on rental income of 69 percent in Europe in 2014, mean-ing that less than one-third of the rent monies charged to its franchisees went towards its own occupancy costs for franchised stores.83 That compares to McDonald’s gross profit ratio of only 18 percent on selling hamburgers in its European

corporate stores, where the company reported a margin of €1.1 billion on approximately €6.1 billion in corporate store sales in 2014.84

McDonald’s franchisees pay more rent, as a percent-age of their sales, than franchisees of other fast food chains. Additionally, in every market reviewed, McDonald’s rents are much higher than market rents. This strategy not only allows McDonald’s to extract more revenue from its franchisees, but it is also likely used as a means to keep control over franchisees through their level of profitability.

March 2017

100%

90%

80%

70%

60%

50%

40%

30%

20%

McDonald's market share in American-style fast food, 2015Figure 4.

United Kingdom

40%

Netherlands71%

denmark68%

belgium45%

ireland43%

france76%

germany76%

spain58%

italy87%

hungary70%

romania63%

greece17%

poland71%

Bulgaria56%

slovakia92%

Czech Republic

67%

austria90%

sweden39%

finland33%

portugal69%

Country by Country Analysis85

14 | March 2017

France

France is one of McDonald’s largest markets and the second most profitable market in the world. As of December 2016, McDonald’s has 1,410 French stores, 84 percent of which are operated by franchisees. In total, McDonald’s stores in France brought in almost €4.7 billion in sales in 2015.86 McDonald’s enjoys a dominant position in France; it accounts for over 76 percent of sales in the American-style fast food market (including brands like Burger King, Quick, and KFC).87 A sample of McDonald’s franchisee financial statements in France suggests that franchisees there pay an average of 13.6 percent of sales in rent, ranging from 11.7 percent to 18.4 percent.88 McDon-ald’s underlying costs for real estate in France were an estimated 4.4 percent of sales for 2014. The disparity between franchisee rental rates and McDonald’s 4.4 percent real estate costs suggests that for a typical store, franchisees pay more than three times as much in rent as McDonald’s incurs in costs.89 Even the lowest rate of rent found for a McDonald’s franchisee in France was more than 2.5 times McDonald’s average underlying real estate costs, and the highest rate found, of 18.4 percent of sales, was more than four times these costs. McDonald’s franchisees appear to pay more in rent than franchisees of competing fast food chains in France. Quick Burger, which also controls real estate for its conventional franchised stores, charges its franchisees an estimated average of 7.4 to 7.9 percent of sales in rent despite underlying real estate costs of 6.2 to 6.6 percent of sales, substantially higher than those borne by McDonald’s.90 Overall, as a percent of sales, McDonald’s franchisees pay approximately 72 to 84 percent more in rent than franchisees of Quick.

Italy

As of December 2016, McDonald’s has 554 stores in Italy, 84 percent of which are operated by franchi-sees. In total, McDonald’s Italian stores had sales of €1.1 billion in 2015, representing 88 percent of sales in the American style fast food market. Franchisees in Italy paid McDonald’s €94.4 million in rent in 2014, the equivalent of 12.0 percent of sales.91 Further-more, a sample of McDonald’s franchise agreements in Italy suggests that franchisees there pay up to as much as 21.0 percent of sales in rent, suggesting an even higher rate of rental charges.92 McDonald’s occupancy costs for its franchised stores in Italy, however, were estimated at just €35.0 million, or 4.2 percent of franchised sales.93 For a typical franchisee paying 12.0 percent of sales in rent to McDonald’s for a store on which McDonald’s bore 5.0 percent of sales in occupancy costs, McDonald’s would earn a profit of 63 percent on franchisee rent.

Germany

As of December 2016, McDonald’s has 1,470 stores in Germany, 90 percent of which are franchised. McDonald’s accounts for 76 percent of sales in the American-style fast food market. The main franchi-sor in Germany is McDonald’s Deutschland, LLC. This company is the German branch of a Delaware, U.S. registered company, and as such is not required to make available financial statements and accounts, thereby preventing the public from accessing the amount of rent received by the company compared to rental costs. Regardless, McDonald’s franchisees in Germany appear to pay rent that significantly exceeds a fair market rate. The German press refers to rental payments that are up to 20 percent of franchisees’ sales, exceeding market rates by five to ten times.94

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The German press refers to rental payments that are up to 20 percent of franchisees’ sales, exceeding market rates by five to ten times .


United Kingdom

In the United Kingdom, McDonald’s has 1,274 stores as of December 2016, 73 percent of which are operat-ed by franchisees. In total, McDonald’s stores earned £2.4 billion in sales in 2015, 40 percent of sales among all franchised fast food chains. Franchisees in the U.K. paid an estimated £282.4 million to McDonald’s in rent in 2015. This amount is 20.0 percent of franchisee sales as reported by Euromonitor.95 McDonald’s various subsidiaries in the U.K. recorded total estimated occupancy costs of £120.0 million in 2015, representing 5.0 percent of systemwide sales based on Euromonitor data.96 For a franchisee paying a typical rental rate for a store on which McDonald’s covered occupancy costs in line with its national average, McDonald’s likely earned an estimated real estate profit ratio of 75 percent on the rent charged to its U.K. franchisees in 2015.97

McDonald’s has disclosed that the rent it charges to its own corporate stores when they operate on leased property “equates to the third party rental cost with no further mark-up.”98 There-fore, the average U.K. franchisee likely pays four times as much in rent as an average McDonald’s corporate store.99

McDonald’s franchisees also appear to pay rent that significantly exceeds a fair market rate. The U.K.’s Valuation O�ice Agency calculates “rateable value” for business properties in England and Wales, which represents the annual rental value of a prop-erty if o�ered on the open market.100 The average franchised store paid more than £300,000 to McDon-ald’s in rent in 2015 – calculated by dividing estimat-ed rental payments of £282 million by the number of franchised stores – but in major urban centers

including Birmingham, Bristol, Liverpool, and Manchester, not a single store listed as a McDonald’s location by the Valuation O�ice Agency had a rateable value anywhere near this amount. In fact, only one McDonald’s store in these four markets had a rateable value of more than half the estimated average rent McDonald’s charged its franchisees, and the overwhelming majority of stores were rated at less than a third of the average.101

Nationally, McDonald’s rateable property values are broadly in line with those of other main fast food chains and average approximately £85,000 per annum, less than a third of what its franchisees actually pay in rent.102 As an example, Lambtrad Ltd., a small McDonald’s franchisee, paid an average of £289,731 in rent per store in 2014 to McDonald’s.103 But the average rateable value for the stores operat-ed by Lambtrad Ltd. that are listed by the Valuation O�ice Agency is only £81,000.104 So the rent Lamb-trad Ltd. paid to McDonald’s can be estimated at 3.6 times the market rate for its stores. In the course of determining a property’s valua-tion, the same agency sets an expected price per square meter, considering a property’s type and unique characteristics.105 Based on that market price, McDonald’s properties do not appear to be more valuable than those of its top competitors. In the four major cities listed above, McDonald’s locations have a mean market price per square meter that is lower than other international chains such as Burger King, KFC, and Pizza Hut.106 There-fore, the high rents charged to McDonald’s franchi-sees do not seem to reflect characteristics of its locations, but rather the unique dynamics of McDon-ald’s franchising relationships.

March 2017

McDonald’s likely earned an estimated real estate profit ratio of 75 percent on the rent charged to its U.K. franchisees in 2015.

In the U.S., the high and rising costs outlined in this report have stoked rising tensions between franchi-sees and the corporation.107 In July 2015, U.S. franchisees’ assessment of their relationship with McDonald’s reached an all-time low, according to analyst Mark Kalinowski’s recurring survey of McDonald’s franchisees.108 “At least half of the opera-tors in my region are on the verge of collapse,” one franchisee commented. Another added, “The opera-tors sit on a cli� right now. With sales going in the wrong direction, all must be conservative in our decisions. It will take only one bad decision to put any operator down and out.”109 Franchisees remain dissatisfied, rating the relationship at 1.73, where 1 is poor and 5 is excellent, according to the October 2016 edition of the survey.110

Since 2007, McDonald’s and other franchisors have been required to disclose certain types of litiga-tion, including all suits between the chain and its franchisees, in their annual Franchise Disclosure Documents (FDDs) filed in the United States.111 Between 2008 and 2015, McDonald’s was a party to some 61 lawsuits and complaints considered materi-al to its FDD filings. Of those, fully 45 cases (74 percent) included franchisees as either plainti� or defendant.112 The allegations made against McDon-ald’s in these cases included “fixing prices,”113 “tortious interference,”114 and “non-fulfillment of contract.”115 Some sought injunctive relief or mone-tary damages, as well as reductions in rent.116

Recently, franchisees and their advocates have asked for regulatory action to combat McDonald’s abusive practices. Several McDonald’s franchisees in Puerto Rico, who sued the company in 2007 for allegedly engaging in abusive conduct and failing to disclose material information,117 have since advocat-ed for legislation to address McDonald’s practices,118 and filed a request for enforcement with the U.S. Federal Trade Commission.119 In May of 2015, the Service Employees International Union petitioned the U.S. Federal Trade Commission to investigate abusive and predatory practices by franchisors, including McDonald’s.120

In Brazil, sales for McDonald’s stores deteriorat-ed in the late 1990s. Franchisees blamed the decline on cannibalization from the rapid opening of corpo-rate stores, as well as on exorbitant rents on McDon-ald’s property.121 They launched a series of regulato-ry investigations into McDonald’s alleged exploit-ative and anti-competitive business practices and pursued over 100 separate legal actions, some rising to the Brazilian Supreme Court.122

These cases are likely only the tip of the iceberg, since no disclosure of out-of-court settlements is mandatory, and franchisees likely think twice before filing a complaint that puts their business further at risk.123

Additionally, in response to risks of litigation about rent, McDonald’s has developed a “rent relief” practice,124 thereby allowing franchisees to benefit

M c D o n a l d ’ s s t r a t e g i e s t o w a r d s f r a n c h i s e e s

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16 | March 2017

“The operators sit on a cliff right now. With sales going in the wrong direction, all must be conservative in our decisions. It will

take only one bad decision to put any operator down and out.

from a reduction of their rental payments provided they comply with conditions set forth by McDonald’s, such as price policies. Despite this practice, McDon-ald’s rental income remains exorbitant as described above in this report. This rent relief practice has a double advantage for McDonald’s: first, it allows McDonald’s to extract higher revenues by unilateral-ly fixing franchisees’ profitability. Second, it may be used as a means to control franchisees through their level of profitability and induce them to comply with McDonald’s policies. In other words, fixing above-the-market rents allows McDonald’s to then o�er rent relief to its franchisees in consideration for strict compliance with the McDonald’s System. In this respect, McDonald’s tighter control over its franchisees in consideration for rent relief may include compliance with potential resale price main-tenance policies that may harm consumers: McDon-ald’s Franchise Disclosure Document refers indeed to two price-fixing cases, and the press reported a price-fixing issue in France.125 It also appears that McDonald’s has implement-ed strategies to reinforce loyalty and commitment to the brand from its operators, thereby limiting risks of litigation. One strategy consists of replacing fully-in-dependent franchisees by long-term McDonald’s executives and employees, who have obviously proved their loyalty and commitment to the brand. For instance in France, priority for existing or new franchised restaurants is given to former o�icers and executives at McDonald’s headquarters or long-term employees in restaurants.126 Additionally, franchi-

sees who comply with the McDonald’s System have a chance to expand and at some point to be partners with McDonald’s through joint ventures operating numerous restaurants (operators running joint ventures have an average of 12 restaurants in France).127 McDonald’s also favors the expansion of franchised restaurants within families, by allowing franchisee family members to open a McDonald’s franchised restaurant or to take over the business operated by one parent who likely proved his or her loyalty.128 McDonald’s predatory real estate practices do not only impact its franchisees. As discussed below, they are also likely to hurt McDonald’s workers, its customers, and, due to the chain’s massive size, the overall competitive environment in fast food.

Consumers may also feel the impact of McDonald’s extraction of enormous real estate profits from its stores. Understa�ing, low wages, and unsafe condi-tions translate into a challenging environment for workers to provide quality meals and customer service. Similarly, tight margins can force franchisees to skimp on investing in their stores or in the prod-ucts they serve and can also force franchisees to raise prices, directly impacting customers. Fast food customers have already noticed the impact that McDonald’s extraction has on the quality

72%higher

64%higher

25%higher

Marseille paris lyon

McDonald’s Anti-Competitive Practices May Lead to Higher Prices at Franchised Stores*Figure 5.

*Price differentials for small fries are shown above.


March 2017

Not Lovin’ It: McDonald’s Extractive Practices Likely Lead to a Worse Deal for Customers

18 | January 2016

of the customer experience. The American Customer Satisfaction Index ranked McDonald’s the worst fast chain in the United States in 2015, and its scores have been deteriorating in recent years.129 In the United Kingdom, McDonald’s is a perenni-al contender for the title of most hated brand, and in 2015 it was ranked as the most hated service sector company in the U.K.130 In France, McDonald’s was ranked second to last among branded fast food companies in 2016 by the Que Choisir Magazine.131 McDonald’s extractive practices likely also a�ect the quality of McDonald’s food, which is in part a function of how much pressure franchisees apply on their employees to produce the products quickly, to the possible detriment of their quality. In a 2014 Consumer Reports survey on the quality and taste of food at United States fast food chains, consumers rated McDonald’s burgers worst in the country.132

Customers at franchised McDonald’s stores may pay higher prices as a result of the high rent McDon-ald’s charges its franchisees. Data collected in November and December of 2015 indicates that in several major cities in Europe, McDonald’s franchised stores charge higher prices than corpo-rate-owned stores in the same geographic areas.133 For example, in Bologna, 99 percent of the items examined had di�erent average prices between corporate and franchised stores, and of those, 98 percent had higher prices at franchised stores. The di�erential between prices at corporate and franchised stores can be substantial. In Bologna, for example, menu items priced higher at franchised stores were €0.34 more on average than the same

items at corporate stores, a di�erence of 8 percent. In France, data gathered by the Que Choisir Maga-zine confirms an average di�erence of 4.4 percent, with at least 10 products being 10 percent to 27 percent more expensive in franchised stores than in corporate-owned stores.134

Higher prices charged by McDonald’s franchi-sees may result from McDonald’s extractive practices combined with possible price-fixing policies imple-mented by McDonald’s, a practice which is prohibit-ed by European and national laws. Indeed, accord-ing to a 2016 economic study conducted in France, prices for more than 80 percent of McDonald’s prod-ucts are identical or similar from franchised store to franchised store. This suggests a possible concerted practice resulting from the imposition of retail prices.135 Cases filed in Greece and Norway also include price-fixing allegations.136 This kind of practice is detrimental to consumers as they are deprived of possible lower prices at franchised stores. The financial and operating pressures faced by McDonald’s franchisees as a result of the chain’s high fees and restrictive terms may also limit franchised stores’ ability to provide even the same level of value, customer service, and quality food as is provided at McDonald’s corporate stores. In major cities in the Czech Republic, France, Germany and Italy, franchised McDonald’s stores consistently received lower average ratings than their corporate counterparts on Yelp, a leading online portal for customer reviews.137 Of the 12 major geographies examined, all had higher ratings for corporate stores than franchised stores.

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Paris

89%

80%Lyon

84%

90%Marseille

85%

93%Bologna

99%

98%

Percent of items priced di�erently between corporate and franchised stores. Proportion of said items that were more expensive in franchised stores than corporate.

Price data for McDonald’s stores by city, November and December 2015Figure 6.


stores around the world.142 For instance, in April 2016, workers from more than 300 cities and 40 countries around the world protested for better wages.143 In the United States, workers in three states filed lawsuits against McDonald’s and its franchisees for wage the�.144 More recently, workers at U.S. McDonald’s stores filed 15 separate complaints of sexual harassment against the company and its franchisees.145 In the European Union, the European Parliament's Petition Commis-sion launched an investigation concerning working conditions at McDonald’s restaurants in November 2016 in response to three petitions, which gathered 31,000 signatures, denouncing McDonald’s use of zero-hour contracts in the U.K., McDonald’s reliance on flexi-jobs in Belgium and McDonald’s strategies to hinder union representation.146

In the United Kingdom, a recent poll of fast food workers found that McDonald’s is the worst fast food employer in the country.147 In France, McDonald’s franchisees appear to invest less in their workforce than the franchisees of any other major fast food chain. According to a review of available financial statements for a sample of French franchisees from

McDonald’s workers at franchised stores see direct consequences from the chain’s extractive practices. High rents and fees and low store-level profit margins lead franchisees and store managers to keep labor costs low, resulting in low wages and, in some cases, violations of employment law.138 Store managers engage in aggressive scheduling arrange-ments, such as on-call systems and zero-hour contracts,139 which aim to ensure that each store is leanly sta�ed. Cost pressures, in turn, can lead to unsafe conditions, where workers are required to work quickly with dangerous equipment. In 2015, McDonald’s workers at 23 stores in the United States filed complaints with the Occupational Safety and Health Administration (OSHA), alleging that under-sta�ing, lack of protective equipment, pressure to work quickly, and greasy floors put workers at risk of burns and other injuries.140 In France, employees regularly denounce understa�ing, low wages and alleged violations of labor law.141 It is no surprise, then, that workers have highlighted poor labor conditions at McDonald’s

McJobs and McWages

March 2017

Yelp Rating Comparison for McDonald's Corporate and Franchise Stores, February 2017Figure 7.

Average Yelp Ratings All stores weighted equally

Average Yelp RatingsAll reviews weighted equally

City Franchised Dif ferenceCorporate Franchised Dif ferenceCorporate

2.93.63.23.03.02.82.92.84.03.53.03.4

2.62.92.52.42.62.62.62.63.83.22.93.3

11.6%19.0%19.8%19.6%12.5%

9.1%8.1%6.8%4.2%9.1%3.9%3.4%

3.03.43.32.93.02.83.72.94.03.52.93.4

2.62.82.62.42.62.42.62.33.23.22.73.2

11.7%18.1%

23.0%19.8%15.6%14.4%27.8%21.0%21.4%

8.1%5.1%

4.6%

ParisPragueBerlinCologneDusseldorfFrankfurtNurembergStuttgartBolognaMilanRomeOther Italian Areas

20 | March 2017

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di�erent fast food chains, the average McDonald’s franchisee spent less on labor as a percent of sales than the franchisees of any other chain.148 Among a sample of franchisee statements, the average McDonald’s franchisee in France spent 19 percent of sales on labor costs, while the average franchisee of other chains spent 25 percent. This suggests that McDonald’s franchisees may be paying workers less, providing less valuable fringe benefits, hiring fewer sta�, or perhaps combining all of these cost-saving strategies to slash labor costs more aggressively than their competitors.

In addition, McDonald’s control of high-value retail locations, maintained in some cases even if a specific McDonald’s franchisee in that location fails, is likely to exclude competitors and also limits consumer choice. For example, in Latin America, McDonald’s master franchisee Arcos Dorados attempts to use its market power to sustain a dominant position. The company disclosed to the U.S. Securities and Exchange Commission in 2012 that “some restau-rants are located based on a strategic view, such as to a�ect competitors” as opposed to being located in order to maximize sales or profit.149 Additionally, the master franchise agreements between McDonald’s and Arcos Dorados limit the circumstances under which Arcos Dorados and its sub-franchisees can close stores, specifically allowing McDonald’s to prevent store closures that may lead to the sale or transfer of real estate to a list of competitors150 or in certain iconic locations.151 Strategic use of store locations to constrain competing chains – such as holding on to real estate for unsuccessful stores in order to reduce the supply of potential store locations for competitors – can mean using the chain’s market dominance and real estate control to reduce competition.

Finally, McDonald’s outsized market power means that its real estate approach may disrupt the fair functioning of the American-style fast food market. Excessive rents may reflect a market distortion because, in many countries, McDonald’s huge share of fast food sales among franchised chains gives it a dominant role in the supply of fast food franchises. Prospective franchisees likely have few options other than McDonald’s and therefore may be more willing to accept unfairly high rents.

No Such Thing as a Free Market Lunch

Wages and salaries as a percent of sales by chainFigure 8.

fast food franchisees, france

Fast Food Chain Salaries as a Percent of Sales Range Salaries as a Percent of Sales Chain Average

McDonald’sKFC (YUM)QuickSubwayLa Brioche DoréePomme de PainPaul BoulangeriePizza Hut (YUM)La Mie CalineSushi Shop

18-2318-2923-2620-3122-3322-3621-3322-31

25-3628-38

19%22%24%25%28%28%29%29%29%34%


March 2017

This, in turn, limits the diversity of food options for consumers in the marketplace. Given the amount of control that McDonald’s exercises over Arcos Dora-dos, these practices may mirror McDonald’s own practices in other regions. Chain businesses’ increasing prevalence in key real estate locations is also generally likely to hurt local and independent businesses. For instance, fast food chains are leading consumer foodservice indus-try growth in the United Kingdom, with McDonald’s at the top.152 In February 2015, the Telegraph report-ed that, “Start-up eateries are unable to expand due to a chronic shortage of a�ordable sites in the capital. London’s restaurant squeeze is hurting small brands as chains gobble up popular high street spots.”153 In 2012, branded chains increased by 670 outlets in the U.K. while independent restaurants decreased by about 370 outlets.154 In 2013, 40 percent of independent restaurants reported having a branded chain within a mile of their business, which had increased by 26 percent in five years, with chain growth limiting the diversity of food choices available to consumers.155 McDonald’s growth in Germany also negatively impacted traditional German restaurants, which had diminished to only about 30 percent of the market by 1996.156 In recent years, chain restaurants, with

McDonald’s at the top position, continuously devel-oped to the detriment of their independent counter-parts.157 McDonald’s aggressive expansion and cut-rate pricing squeezed both independent cafes and the German co�ee chain Tchibo, which lost market share to McCafé in 2008 and 2009.158 In Spain, independent restaurants are struggling to compete, and in 2015 Euromonitor reported that the “rise of chained consumer foodservice continues to erode the shares of independents.”159 Similarly, in Italy, chains are fueling foodservice industry growth and taking market share from independent restaurants, a high number of which closed in 2014.160 The prior year, McDonald’s had committed €350 million to add more than 100 new locations.161

In France, a study on McDonald’s and Quick restaurant openings in Paris between 1984 and 2004 underlines McDonald’s predatory practices over strategic locations and strategies to a�ect competi-tors.162

While none of these industry trends are solely caused by McDonald’s, they demonstrate that the real estate strategies it pursues – keeping tight control of real estate for franchised stores and thus limiting competitors’ access – likely have negative consequences for consumer choice and on the prices charged by franchisees to consumers.

22 | March 2017

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McDonald’s is best known for its iconic golden arches, Big Macs and Happy Meal toys. It is also known for its tax avoidance strategies adopted around the world and in Europe especially as outlined by the investigations launched by the European Commission and by national tax authori-ties, as well as at McDonald’s hearing at the TAXE committee of the European Parliament.163 But its real estate empire is arguably the single most important part of its extractive business model. The company’s franchise contracts and their onerous rental requirements ensure a lucrative revenue stream, tight corporate control over the thousands of franchisees who operate the bulk of McDonald’s stores, low wages for McDonald’s workers, higher prices for customers at franchised stores and less choice for customers in the market. McDonald’s real estate strategies benefit its bottom line at the expense of everyone else. McDon-ald’s massive footprint, as well as the small size of most of its franchisees, means that it has a dispro-portionate ability relative to other franchisors to enforce terms that may be deemed otherwise out of line with a competitive real estate market. The extraction of these rents and McDonald’s control over franchisees’ profitability translate into increas-ingly limited investments in quality products, family-supporting jobs, decent wages and tax revenues for the communities in which McDonald’s operates. Ultimately, it is McDonald’s responsibility to o�er fair terms to its franchisees, terms that support

individual franchisees in making a profit and avoid franchisees’ economic dependency and that allow for McDonald’s stores to support healthy and prosperous communities and to provide decent jobs. It is also McDonald’s responsibility not to use its franchising network in order to reinforce its domi-nant position to the detriment of its competitors. It is finally McDonald’s responsibility to ensure that franchisees o�er the best price and quality of service to their customers by avoiding involvement in any kind of price-fixing through resale price mainte-nance strategies. However, government regulators can play a critical role in ensuring the appropriate competitive functioning of markets and protecting against the consolidation of corporate power. For example, the European Commission is responsible for regulating anti-competitive practices in Europe, including agreements between firms that restrict competition and any firm’s abuse of a dominant market position. In particular, Europe’s competition laws regulate potential abuse of dominance, exploitative prices, such as the potentially excessive rents McDonald’s charges franchisees,164 and resale price maintenance policies imposed in the vertical relationship by a franchisor to its franchisees. Similarly, Brazil’s competition laws disallow practices that limit, restrain, or harm competition, or that allow a company to control a particular market.165 Brazil also has a law specifically designed to target excessive rents, which prohibits excessive markups on subleased property.166

c o n c l u s i o n

It is McDonald’s responsibility to offer fair terms to its franchisees that allow for McDonald’s stores to support healthy and prosperous communities.

Competition authorities and other regulatory bodies in countries where McDonald’s franchis-es stores should investigate McDonald’s real estate practices to determine whether they constitute abuse of market dominance or otherwise violate competition and consumer protection laws. Countries in which McDonald’s realizes a large share of franchised fast food sales should particularly focus on high rents charged to franchisees and other exploitative practices that could distort the market, includ-ing any resale price maintenance policies.

Laws specifically designed to limit potentially excessive rents or fees also should be vigorous-ly applied to McDonald’s franchising system where permitted. Any legal framework intend-ed to protect market participants from exploitation by more powerful entities is likely to be directly relevant to McDonald’s practices with regards to its market power.

Courts reviewing the frequent conflicts between McDonald’s and its franchisees should consider the broad context of these franchising relationships in determining whether McDon-ald’s practices are abusive.

Finally, in all cases where governments and courts find McDonald’s practices to be in viola-tion of the law, they should pursue penalties su�icient to the scale of profits McDonald’s enjoys, as well as remedies to ensure McDon-ald’s cannot continue engaging in practices that would be found to produce unfair market outcomes.

Taking these steps would ensure that McDonald’s franchisees, customers, workers and competitors benefit from fair practices around the globe.

Recommendations

1.

2.

3.

4.


March 2017

The following steps can be taken in nearly every country where McDonald’s operates to address the troubling practices identified in this report:

E n d n o t e s

12

3

45

6

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8

910

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1213

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McDonald’s Corporation, SEC Form 10-Q, Nov. 3, 2016, Item 2, p. 11Systemwide sales are calculated by combining sales from company owned stores and franchised sales. McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, Item 6, p. 12; Euromonitor passport data; Piper Ja�ray reports that YUM! Brands worldwide system sales in 2013 were US$49,184 million, Piper Ja�ray Restaurant Benchmark Analysis, “Ninth Annual Cookbook,” July 2014, p. 8. All currency translations in this report use yearly average currency exchange rates published by the U.S. Internal Revenue Service at http://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates.All sales data is sourced from Euromonitor passport data unless otherwise noted. Market share is calculated as the share of McDonald’s sales in American-style fast food restaurants in each country, including chains such as Burger King, Quick, and KFC. Small operators of local specialties and European concepts, such as Italian (but not pizza)-themed fast food, or Greek fast food, or German fast food, have been excluded.“Top 200 franchise systems,” Franchise Times, http://www.franchisetimes.com/pdf/2014/Top200-2014.pdf"Our Business Model," McDonald's Corporation website, http://www.aboutmcdonalds.com/mcd/our_company/busi-ness-model.htmlBased on the number of stores operated by “conventional franchisees” divided by McDonald’s reported number of 5,000 individual franchisees. McDonald’s Corporation, SEC Form 10-Q, Nov. 3, 2016, Item 2, p. 7“Franchising FAQs,” http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html; see also for Spain, “Mi familia, amigos o asociados pueden aportar fondos para comprar la franquicia?” http://www.mcdonalds.es/empresa/franqui-cias; for Belgium, “Une société ou un groupe d’investisseurs peuvent-ils devenir franchises?” http://www.mcdon-alds.be/fr/entreprise/franchise/faq; for the U.K., “Franchise Approval Process,” http://www.mcdonalds.co.uk/uk-home/Aboutus/Franchising/the-process.html; for Italy, “Il Franchising,” www.mcdonalds.it/azienda/il-franchisingEuropean Franchise Federation, “European Code of Ethics for Franchising,” (accessed Feb. 14, 2016) http://www.e�-franchise.com/Data/Code%20of%20Ethics2.pdf McDonald’s USA, LLC, Franchise Disclosure Document, 2015, p. 77 (Exhibit B, p. 3 ¶ 4).Burger King Worldwide, SEC Form 10-K, Feb. 21, 2014, p. 9; Yum Brands, SEC Form 10-K, Feb. 17, 2015, pp. 3 and 13; see also Markus Voss, “10 Gründe, warum Sie besser keine Fastfood-Filiale übernehmen sollten,” Focus Money, Nov. 23, 2014, http://www.focus.de/finanzen/news/unternehmen/insid er-bericht-10-gruende-warum-sie-bess-er-keine-fastfood-filiale-uebernehmen-sollten_id_4295466.htmlMcDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 20 and 41. Real estate margin is calculated by subtracting franchising revenue other than rent from franchised margins.“Franchising FAQs,” http://www.aboutmcdonalds.com/mcd/franchising/FAQs.htmlFor instance, see McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias: “La disponibili-dad geográfica por parte del candidato debe ser total en el ámbito nacional. No formamos a un franquiciado para un local concreto (salvo excepciones muy escasas), ya que la ubicación de nuestros restaurantes se hace con criterios de rentabilidad del mismo. McDonald’s realiza todo el proceso de evaluación y selección de los locales. Nosotros adquirimos la titularidad del local y realizamos la inversión remodelación o construcción del edificio. Cuando los locales están próximos a ser utilizados, y dependiendo de las necesidades de la compañía ofrecemos los mismos a aquellos candidatos que están a punto de terminar su formación." See also “Comment on ouvre un McDo,” La Depeche, Sept. 2, 2013, http://www.ladepeche.fr/article/2013/09/02/1699682-comment-on-ouvre-un-mcdo.html: "Après avoir signé un contrat de 20 ans renouvelable, il ne reste plus qu’à savoir où le candidat sera muté. Car à McDo, être mobile géographiquement est essentiel. On peut vivre à Marseille et se voir proposer un restaurant à Amiens." See also McDonald's Belgium, “Rapport 2005 de Responsabilité Sociale d’Entreprise pour la région Europe,” p.7, https://www.mcdonalds.be/sites/default/files/csr_rapport_francais.pdf“Existing Restaurants,” http://www.aboutmcdonalds.com/mcd/franchising/us_franchis ing/acquiring_a_franchise/ex-isting_restaurants.html; “World Class Training,” http://www.aboutmcdonalds.com/mcd/franchising/us_franchis-ing/why_mcdonalds/world_class_training.html; “Franchise Approval Process” at McDonald’s U.K., http://www.mc-donalds.co.uk/ukhome/Aboutus/Franchising/the-process.html and http://www.mcdonalds.co.uk/ukhome/People/-Franchising.html/franchising-explained.html: referring to a 9-month unpaid training in the UK; https://www.mcdon-alds.fr/entreprise/entreprise/franchise: referring to a 12-month training in France; https://www.mcdonalds.es/empre-sa/franquicias: referring to a 12-month un paid training: “Aunque McDonald’s no reembolsa los gastos ni el tiempo que el candidato a franquiciado emplea en su formación, sí paga el coste de los materiales de entrenamiento y gastos de profesores y entrenadores.” “Franchising FAQs,” http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html; see “Franquicias,” https://ww-w.mcdonalds.es/empresa/franquicias: "Este programa de entrenamiento puede ser suspendido por cualquiera de las partes. McDonald’s sólo considerará válido un candidato a obtener una franquicia, cuando haya superado con éxito la totalidad del programa de formación."McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 20 and 41; real estate profit ratio from franchised restau-rants is calculated by dividing the real estate margin by total rental income; gross profit ratio at company-operated stores is calculated by dividing sales from company-operated restaurants by their operating costs and expenses and is reported directly by McDonald’s Corporation.

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24

25

26

27

282930313233343536

37383940414243

44

45

46

McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016 p. 12Burger King system-wide sales and operating income numbers are drawn from its parent company Restaurant Brands International (RBI), here drawn from the RBI SEC Form 10-K, February 26, 2016, pp. 30-31. YUM Brands figures from YUM SEC filing 10-K, Feb. 16, 2016, p. 21 for operating income; system-wide sales aggregated from Euromonitor global data for 2015 for KFC, Pizza Hut, and Taco Bell. The Wendy’s Company, SEC Form 10-K, March 3, 2016, p. 30; system-wide sales from Euromonitor global data for 2015.ADLC, n°15-DCC-170, Dec. 10, 2015: relative à la prise de contrôle exclusif de la société Financière Quick par la société Burger King France, p. 2 §3 : “L’objectif de l’opération est de faire basculer progressivement, en quatre ans, 300 restaurants à l’enseigne Quick en France vers l’enseigne Burger King à un rythme moyen annuel de 70 à 80 établisse-ments. Un programme d’incitation sera élaboré à destination des franchisés Quick.”Steven Mark Adelson, “McDonald’s and the new franchising paradigm,” Financial History Magazine, Summer 2012, http://www.moaf.org/publications-collections/financial-history-magazine/103/_res/id=File1/McDonalds.pdfMcDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 7 and 24McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 32Pershing Square Capital Management, “A Value Menu for McDonald’s,” 2005, p. 5, http://www.valuewalk.com/wp-con-tent/uploads/2014/05/76865670-Ackman-All.pdfFor example, “Franquicias” at http://www.mcdonalds.es/empresa/franquicias and “Une Question?” at http://ww-w.mcdonalds.be/fr/entreprise/franchise/faq detail that McDonald's selects the premises and acquires ownership, and franchisees must be available to franchise at a location selected by McDonald'sIn the past, Quick Burger has required franchisees to rent buildings and/or land from the chain (http://groupe.quick.-fr/fr/la-franchise/l-apport-financier), but it operated in only a handful of markets, and its global market share and power is far less than McDonald’s. Additionally, the rent it charged is lower than McDonald’s – see the European section of this Report. In 2015, Burger King’s master franchisee in France, Groupe Bertrand, purchased Quick and is planning on converting those stores to Burger King branded stores. It is unknown whether the new owner will continue to require subfranchisees to lease or sublease stores from the company, https://www.groupe-ber-trand.com/restauration/#bkBurger King Worldwide, SEC Form 10-K, Feb. 21, 2014, p. 9; Yum Brands, SEC Form 10-K, Feb. 17, 2015, pp. 3 and 13; see also Markus Voss, “10 Gründe, warum Sie besser keine Fastfood-Filiale übernehmen sollten,” Focus Money, Nov. 23, 2014, http://www.focus.de/finanzen/news/unternehmen/insid er-bericht-10-gruende-warum-sie-bess-er-keine-fastfood-filiale-uebernehmen-sollten_id_4295466.html.Restaurant Brands International, SEC Form 10-K, Feb 26, 2016, p. 4 and p. 9; and Wendy’s SEC Form 10-K, Mar. 3, 2016, pp. 5 and 16Yum Brands, SEC Form 10-K, Feb. 16, 2016, pp. 15 and 21John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 155-157John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, pp. 168McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 24John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, pp. 153-154, 159John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, pp. 155John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 153McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 20Robert Kiyosaki, “Free Money: Why The Rich Get Something for Nothing…And the Poor Don't,” Feb. 26, 2013, http://www.richdad.com/RESOURCES/RICH-DAD-FINANCIAL-EDUCA TION-BLOG/FEBRUARY-2013/FREE-MON-EY-WHY-THE-RICH-GET-SOMETHING-FOR-NOTHING.ASPXJohn F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 154John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 156John F. Love, McDonald’s: Behind the Arches, Revised Edition, New York: Bantam Books, 1995, p. 156-157McDonald’s Operator’s Lease, p. 8, ¶4.07, Exhibit G to McDonald’s Franchise Disclosure Document 2015McDonald’s Operator’s Lease, pp. 4-5, Exhibit G to McDonald’s Franchise Disclosure Document 2015John F. Love, McDonald’s: Behind the Arches, p. 144Hayley Peterson, “McDonald's franchisees are terrified for the future,” Business Insider, July 16, 2015, http://ww-w.businessinsider.com/mcdonalds-franchisees-are-terrified-for-the-future-2015-7; Tony Smith, “Economic troubles take a bite out of Brazil’s McDonald’s”, Jan. 13, 2002, https://www.washingtonpost.com/archive/poli-tics/2002/01/13/economic-troubles-take-a-bite-out-of-brazils-mcdonalds/5ea4e982-68a6-40�-b915-0504afdd8922/?utm_term=.1fb68ade35ae; Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Mar. 26, 2015, http://www.capital.de/das-magazin/die-fettigen-jahre-sind-vorbei-4132.htmlMark Kalinowski, “MCD: A “Typical” U.S. Franchised Restaurant’s Annual Income Statement,” Janney Capital Markets, Feb. 8, 2012, p. 2All three brands also require the payment of advertising fees, but these are normally paid to co-operatives, not directly to the franchisor. All three brands also have similar ad rates, in the vicinity of 4 percent of sales.McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, p. 12; Franchise Direct, “Burger King Franchise Cost & Fees”, web profile, http://www.franchisedirect.com/foodfranchises/burger-king-franchise-07118/ufoc/, and “Wendy’s Franchise Cost & Fees,” web profile, http://www.franchisedirect.com/foodfranchises/wendys-franchise-08373/ufoc/

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53

545556

57

585960

61

62

63

64

65666768

See the United States section of this reportMcDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, calculated by dividing franchised revenues (p. 18) by franchised sales (p. 19), since globally almost all franchised revenues consist of royalties and rent (p. 40). McDonald’s reported franchised and corporate sales in Europe until the end of 2014: McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, pp. 18-19. McDonald’s no longer reports Europe system wide sales as from 2015, as it reorganized its segments into “U.S.”, “International Lead Markets”, “High Growth Markets” and “Foundational Markets & Corporate.”Archangles SARL, Comptes Annuels, 2015, pp. 5, 19; Archangles SARL, Comptes Annuels, 2014, pp. 5, 18; Archangles SARL, Comptes Annuels, 2012, pp. 5, 18; Drive le Pontet, Comptes Annuels, 2014, pp. 5, 19; Drive le Pontet, Comptes Annuels, 2012, pp. 5, 18; Arches Avignon, Comptes Annuels, 2014, pp. 5, 18; Arches Avignon, Comptes Annuels, 2012, pp. 5, 18; Chatorest, Comptes Annuels 2015, PDF pp. 5, 19; Chatorest, Comptes Annuels 2014, PDF pp. 8, 23; Chatorest, Comptes Annuels 2012, PDF pp. 8, 22; Cristole, Comtes Annuels 2014, PDF pp. 20, 35; Comptes Annuels 2012, PDF pp. 16, 30; Foncorest, Comptes Annuels 2014, PDF pp. 16, 31; Foncorest, Comptes Annuels 2012, PDF pp. 16, 30; La Cerisaie, Comptes Annuels 2015, pp. 5, 18; La Cerisaie, Comptes Annuels 2014, PDF pp. 5, 27; ; La Cerisaie, Comptes Annuels 2012, PDF pp. 5, 19; L'Oseraie, Comptes Annuels 2014, PDF pp. 20, 35; L'Oseraie, Comptes Annuels 2012, PDF pp. 16, 30; Realrest, Comptes Annuels 2014, PDF pp. 21, 36; Realrest, Comptes Annuels 2012, PDF pp. 17, 31; Com 2, Comptes Annuels 2012, PDF pp. 9, 21; JBM, Comptes Annuels 2012, PDF pp. 9, 27; Nynon, Comptes Annuels 2012, PDF pp. 9, 22.Sample of Italian franchise agreements, including Dadina Srl (16 to 21% as rent), Gemar Srl (13 to 15% as rent), Eurostar Srl (13 to 16% as rent), Molko Srl (12.5 to 15% as rent). In addition to the rental fees, franchisees are required to pay a 5% service fee and a 4% advertising fee.Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015, http://ww-w.wsj.com/articles/discontent-simmers-among-mcdonalds-franchisees-1433272884Mark Kalinowski, Janney Capital Markets, “MCD: Franchisee Survey Leads to Street-Low June U.S. Comp Estimate”, July 16, 2014; see also Lisa Baertlein, “McDonald’s is testing a new custom burger program,” Reuters, Apr. 29, 2015, available at http://uk.businessinsider.com/r-mcdonalds-tests-custom-burg er-program-with-drive-thru-op-tion-2015-4?r=US&IR=TLeslie Patton, “McDonald’s is Pushing Out the Small Fries,” Bloomberg, Sept. 1, 2016, https://www.bloomberg.com/news/articles/2016-09-01/mcdonald-s-is-pushing-out-the-small-fries; Leah Goldman, “A Tour Inside McDonald's Big $550,000-Per-Store Renovations,” Business Insider, May 13, 2011, http://www.businessin-sider.com/remodeled-mcdonalds-photos-2011-5, with McDonald’s contributing about $220,000 of the total costJulie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015McDonald's Corporation Investor Meeting Transcript, Dec. 10, 2014McDonald’s France, “UN PROGRAMME DE RÉNOVATION AMBITIEUX,” http://www.mcdonalds-donneescorporate.fr/-construction-architecture/un-programme-de-renovation-ambitieuxErica Sha�er, “McDonald's Germany embarks on remodel initiative,” Meat + Poultry, July 2, 2016, http://www.meat-poultry.com/articles/news_home/Busi ness/2016/07/McDonalds_Germany_embarks_on_r.aspx-?ID=%7B5A715698-5CE7-4C78-A0C1-B0EF27419985%7D&cck=1Euromonitor passport data, 2015McDonald’s U.S.A. Franchise Disclosure Document 2016, Exhibit A, p. 6 McDonald’s U.S.A. Franchise Disclosure Document 2016, Item 1, p. 1; McDonald’s Corporation, SEC Form 8-K, July 23, 2015, Exhibit 99.2, pp. 10-11.Calculated by dividing the number of franchised stores in the U.S. by the number of franchisees. McDonald’s U.S.A. Franchise Disclosure Document 2016, p. 1; McDonald’s Corporation, SEC Form 8-K, July 23, 2015, Exhibit 99.2, pp. 10-11.For example, McDonald’s states in its 2015 Franchise Disclosure Document that base rent is “based upon the total amount invested by McDonald’s in the acquisition and development of the land and the building as well as monthly rent paid in the first year to a third party landlord.” Meanwhile, McDonald’s also provides a table clearly implying that percentage rent is also tied to its real estate costs. The table associates each percentage rent level, from 8.5 percent to 15 percent, with a range of McDonald’s “Acquisition and Development Costs.” McDonald’s Franchise Disclosure Document 2015, Item 6, Other Fees, p.13.Steven Mark Adelson, “McDonald’s and the new franchising paradigm,” Financial History Magazine, Summer 2012, http://www.moaf.org/publications-collections/financial-history-magazine/103/_res/id=File1/McDonalds.pdfPatrick J. Kaufmann & Francine LaFontaine, “Costs of Control: Economic Rents for McDonald’s Franchisees,” Working Paper #689, University of Michigan School of Business Administration, July 1992, p. 6, Table 1, http://www.-jstor.org/stable/725738. According to this table and notes to it, combined royalties and rent were 11.5 percent of grosssales, while royalties were 3 percent, implying percentage rent of 11.5 percent – 3 percent = 8.5 percent.McDonald’s Uniform Franchise O�ering Circular, 2000, Item 6, Other Fees, Fixed Percentage Rent tableMcDonald’s Franchise Disclosure Document 2016, Item 6, p. 15Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015McDonald’s U.S., LLC, Franchise Disclosure Document, 2016, p. 79 (Exhibit A, p. 11)

69

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72

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7778

79

80

81

82

83

8485

8687

McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 18-20; and McDonald’s USA, LLC, Franchise Disclosure Document, 2016, p. 79, Exhibit A, p. 11.McDonald’s Corporation, SEC Form 10-K, Feb. 25, 2016, pp. 18, 20Julie Jargon, “Discontent Simmers Among McDonald’s Franchisees,” Wall Street Journal, June 2, 2015, https://ww-w.wsj.com/articles/discontent-simmers-among-mcdonalds-franchisees-1433272884Average lease cost calculated by dividing the lease payments to Burger King by the number of stores leased by Burger King. Rent as a percent of sales is calculated by dividing average rental costs for stores leased from Burger King by average sales per store. Carrols Restaurant Group, SEC Form 10-K, Mar. 9, 2016, pp. 7 and Item 14, p. 89.Average rent per store was calculated by dividing Wendy’s rental income from franchisees by the number of stores Wendy’s leases or subleases to its franchisees. Average sales per franchised store was calculated by dividing North American franchised sales by the total number of franchised stores in North America. Rent as a percent of sales was calculated by dividing the estimated average rent paid by franchisees to Wendy’s by the average sales per franchised store in North America. Wendy’s, SEC Form 10-K, Mar. 3, 2016, pp. 16, 38, and 39.Leslie Patton, “McDonald’s Franchisees Rebel as Chain Raises Store Fees,” Bloomberg, Aug. 6, 2013, http://ww-w.bloomberg.com/news/articles/2013-08-06/mcdonald-s-franchisees-go-rogue-with-meetingsMcDonald’s reported franchised and corporate sales in Europe until the end of 2014: ($7.8 billion in company-operat-ed sales and $18.4 billion in franchised sales in Europe. See McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, pp. 18-19. McDonald’s no longer reports Europe system wide sales as from 2015, as it reorganized its segments into “U.S.”, “International Lead Markets”, “High Growth Markets” and “Foundational Markets & Corporate.” Store figures from McDonald’s Europe Virtual Press O�¬ice, “A Quick Snapshot” (accessed Feb. 4, 2015), http://www.mcdpresso�ice.eu-/aboutus.phpMcDonald’s Europe President Douglas Goare, McDonald’s Corporation Europe & APMEA Investor Meeting, May 16, 2014Euromonitor Passport dataMcDonald’s in Europe, Virtual Press O�¬ice, (accessed on Feb.2, 2017) http://www.mcdpresso-ice.eu/aboutus.php, data valid as of end December 2016McDonald’s in Europe, “McDonald’s economic footprint in Europe,” p. 46, http://www.mcdpresso-ice.eu/down-loads/Economic_footprint_Report.pdfMcDonald's U.K., Franchise FAQs, “Can I set up the franchise in my own property?”, http://www.mcdonalds.co.uk/uk-home/Aboutus/Franchising/FAQs.html; McDonald’s France, “La Franchise McDonald’s: Bien Plus Qu’un Simple Contrat”, p.6; McDonald’s Italy, “Il Franchising,” www.mcdonalds.it/azienda/il-franchising; McDonald's Belgium, “Rapport 2005 de Responsabilité Sociale d’Entreprise pour la région Europe,” p. 7, https://www.mcdon-alds.be/sites/default/files/csr_rapport_francais.pdf: “D’une manière générale, nos contrats de franchisage sont très similaires partout dans le monde.”See McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias: “Este programa de entrenamiento puede ser suspendido por cualquiera de las partes. McDonald’s sólo considerará válido un candidato a obtener una franquicia, cuando haya superado con éxito la totalidad del programa de formación.”McDonald’s describes its franchising process, which fits this general description in most countries, on its national websites, such as McDonald's U.K., “Franchise approval process,” http://www.mcdonalds.co.uk/ukhome/Aboutus/-Franchising/the-process.html and McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias. See also McDonald's in Europe, “McDonald’s economic footprint in Europe,” p.45, http://www.mcdpresso�ice.eu-/downloads/Economic_footprint_Report.pdf. Concerning the unpaid training period, see for instance, McDonald's U.K., “Franchising Explained,” http://www.mcdonalds.co.uk/ukhome/People/Franchising.html/-franchising-explained.html, which refers to a 9-month unpaid training in the UK; see McDonald's France, “La Franchise,” https://www.mcdonalds.fr/entreprise/entreprise/franchise, which refers to a 12-month training in France; see McDonald's Spain, “Franquicias,” https://www.mcdonalds.es/empresa/franquicias, which refers to a 12-month unpaid training: “Aunque McDonald’s no reembolsa los gastos ni el tiempo que el candidato a franquiciado emplea en su formación, sí paga el coste de los materiales de entrenamiento y gastos de profesores y entrenadores.”Europe figures derived from McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, p. 19. Rental income is calculated by subtracting estimated royalties, based on advertised rates of 5 percent of sales, from franchised revenues. Occupancy costs are derived from subtracting franchised margins from franchised revenues. Gross profit ratios are the proportion of rental income that does not comprise occupancy costs.McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, pp. 18, 20All sales data from Euromonitor unless otherwise noted. All store count and franchising information from McDonald’s Europe Virtual Press O�ice, “A Quick Snapshot” (accessed on Feb. 2, 2017), http://www.mcdpresso�ice.eu/abou-tus.php, unless otherwise noted.Euromonitor Passport data Euromonitor Passport data, 2015; on December 10, 2015, the French Competition Authority authorized the takeover of Quick by Burger King, see République Francaise, Autorité de la concurrence, Espace Presse, “L'Autorité de la concur-rence autorise, sous réserve d'engagements, le rachat de Quick par Burger King,” Dec. 10, 2015, http://www.autorit-edelaconcurrence.fr/user/standard.php?id_rub=606&id_article=2676

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Archangles SARL, Comptes Annuels, 2015, pp. 5, 19; Archangles SARL, Comptes Annuels, 2014, pp. 5, 18; Archangles SARL, Comptes Annuels, 2012, pp. 5, 18; Drive le Pontet, Comptes Annuels, 2014, pp. 5, 19; Drive le Pontet, Comptes Annuels, 2012, pp. 5, 18; Arches Avignon, Comptes Annuels, 2014, pp. 5, 18; Arches Avignon, Comptes Annuels, 2012, pp. 5, 18; Chatorest, Comptes Annuels 2015, PDF pp. 5, 19; Chatorest, Comptes Annuels 2014, PDF pp. 8, 23; Chatorest, Comptes Annuels 2012, PDF pp. 8, 22; Cristole, Comtes Annuels 2014, PDF pp. 20, 35; Comptes Annuels 2012, PDF pp.16, 30; Foncorest, Comptes Annuels 2014, PDF pp.16, 31; Foncorest, Comptes Annuels 2012, PDF pp. 16, 30; La Cerisaie, Comptes Annuels 2015, pp. 5, 18; La Cerisaie, Comptes Annuels 2014, PDF pp. 5, 27 ; La Cerisaie, Comptes Annuels 2012, PDF pp. 5, 19; L'Oseraie, Comptes Annuels 2014, PDF pp. 20, 35; L'Oseraie, Comptes Annuels 2012, PDF pp. 16, 30; Realrest, Comptes Annuels 2014, PDF pp. 21, 36; Realrest, Comptes Annuels 2012, PDF pp. 17, 31; Com 2, Comptes Annuels 2012, PDF pp. 9, 21; JBM, Comptes Annuels 2012, PDF pp. 9, 27; Nynon, Comptes Annuels 2012, PDF pp. 9, 22McDonald’s France SAS is the largest McDonald’s subsidiary in France, and has significant real estate and property holdings. Real estate costs for France were estimated by combining the depreciation costs on buildings with the total ‘Other expenses and external charges’ costs. This latter category includes rent, and likely includes other costs as well. This figure for real estate costs was divided by systemwide sales for France. Any mortgage expense was excluded because McDonald’s does not consider financing part of its occupancy costs for property, and because McDonald’s France’s total reported interest expense for 2013 of €1,176,411 was only 0.03% of systemwide sales. McDonald’s France SAS, Annual Accounts, 2014, Compte de Resultat, pp. 6 and 15; McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, p. 19; Euromonitor sales data.Occupancy costs were calculated by combining the rental expense and depreciation on land and buildings for France Quick and Quick Invest, netting out intercompany payments, and dividing by the systemwide sales reported in Financière Quick’s Annual Accounts. Rental income was calculated by combining rental income from franchisees as reported by France Quick and Quick Invest, then dividing that figure by franchised sales. Franchised sales were provided as a range of options: first, based on Euromonitor estimates; and second, calculated by applying the franchised percent of sales as reported by Euromonitor to the total systemwide sales in France as reported by Financière Quick. France Quick, Annual Accounts, 2014; Quick Invest, Annual Accounts, 2014; Financière Quick, Consolidated Annual Accounts, 2014; Euromonitor Passport data.McDonald's Development Italy 2014 Accounts, p. 530; franchised sales figures from Euromonitor data: Euromonitor reports €997.6 million in total sales in Italy (franchised and corporate-owned restaurants), 79 percent of which was from franchised stores (€789.1 million).Franchise agreements for Dadina Srl dated March 30, 2011 (16 to 21% as rent), Gemar Srl dated December 21, 2009 (13 to 15% as rent), Eurostar Srl dated July 15, 2007 (13 to 16% as rent), and Molko Srl dated July 30, 2014 (12.5 to 15% as rent) mandate rents in this range.Occupancy costs are calculated by combining rent expense for franchised restaurants with depreciation on buildings assuming the depreciation is proportionally split between corporate and franchise stores according to sales. Any mortgage expense was excluded because McDonald’s does not consider financing part of its occupancy costs for property, and because McDonald’s total reported external interest expense for Italy in 2013 was only 0.01% of systemwide sales. McDonald's Development Italy, 2014 Accounts, pp. 519 and 530; McDonald’s Corporation, SEC Form 10-K, Feb. 24, 2015, p. 19; and Euromonitor sales data.See Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Capital, March 26, 2015, http://www.capital.de/dasmagaz-in/die-fettigen-jahre-sind-vorbei-4132.html, which refers to rental payments that are up to five times the market rent; Silvia Liebrich,“Zo� im Hamburger-Land,” Süddeutsche Zeitung, May 17, 2010, http://www.sueddeut-sche.de/wirtscha¬/mcdonalds-aerger-mit-paechtern-zo -im-hamburger-land-1.25204-3McDonald's Restaurants Limited, 2015 Accounts, Profit and loss account and Notes 2, 3, and 10; Euromonitor sales data. An alternative calculation of franchisee sales can be made by dividing franchisees’ marketing contribution in the U.K. by the rate McDonald’s requires, five percent: in 2014, this suggests that franchisees paid 15.2% of sales in rent. Franchisees contributed £82,963,840 in 2014; that amount, divided by 5%, suggests franchised sales of £1,659.3 million. Using this alternative methodology, McDonald’s U.K. occupancy costs represent 4.7% of sales. As of 2015, McDonald’s Marketing Cooperative no longer discloses these figures. McDonald’s Marketing Cooperative Ltd., Annual Accounts 2014, p. 15Any mortgage expense was excluded because McDonald’s does not consider financing part of its occupancy costs for property, and because McDonald’s total reported interest expense for the U.K. in 2014 was only 0.16% of systemwide sales. McDonald's Real Estate LLP, 2015 Accounts, Profit and loss account and Notes 2, 3, and 7; McDonald's Restau-rants Limited, 2015 Accounts, Profit and loss account and Notes 3 and 10; Euromonitor sales data and McDonald’s Marketing Cooperative Ltd., Annual Accounts 2014, p. 15.

97

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106

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109

110

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Rental income is calculated from licensee income reported by McDonald’s Restaurants Ltd., Annual Report 2015, Note 2, by subtracting estimated royalties. Royalty payments are estimated at 5 percent of franchised sales based on McDonald’s advertised royalty rates. Occupancy costs are calculated by combining the depreciation on land and buildings and rental expenses paid by McDonald’s Restaurants Ltd. with the same expenses for McDonald’s Real Estate LLP net of payments from group companies, with figures from McDonald’s Restaurants Ltd., Annual Report 2015, Notes 2, 3, and 10, and McDonald’s Real Estate LLP, Annual Report 2015, Notes 2, 3, and 7, and dividing by systemwide sales figures from Euromonitor Passport data and by dividing the marketing cooperative contribution figures of both corporate and franchised stores by the advertised marketing contribution required, of 5 percent of sales.McDonald’s Real Estate LLP, Report and Financial Statements 2012, p. 2.Corporate store real estate costs were calculated by: adding depreciation and rent for land and buildings among group companies; removing intra-group payments; and dividing by systemwide sales. This resulted in an underlying real estate cost of 4.4 percent in 2013 and 4.5 percent in 2012. McDonald's Restaurants Limited, Annual Report 2013, Note 3, p. 16 and Note 10, p. 20; McDonald's Real Estate LLP, Annual Report 2013, Notes 2 and 3; and Euromonitor Passport data for systemwide sales figures.Valuation O�ice Agency FAQs page for Rateable Value, http://www.2010.voa.gov.uk/rli/static/HelpPages/English/faqs/-faq116-what_does_rv_mean.htmlData from U.K. Valuation O�ice Agency, at http://www.2010.voa.gov.uk/rli/en/advanced/searchResults. Queried from the list year 2010, for those with “CR” in description, meaning Restaurants and Premises. Results were sorted based only on locations where a store brand is listed in the store address, so not all brand locations may be included. Those with blank valuations, usually due to site closure or construction, were excluded. Data was downloaded November 13-17, 2015.The underlying rateable property values per square meter are broadly comparable between the main chains. For instance, in Manchester, the 16 investigated restaurants had a rateable value per square meter of approximately £290, compared with £300 for KFC and £275 for Pizza Hut.Lambtrad Ltd., 2014 Abbreviated Accounts, p. 13, section 3; total lease costs of £1,158,923 divided by four stores open in 2014.Data from U.K. Valuation O�ice Agency, at http://www.2010.voa.gov.uk/rli/en/advanced/searchResults. Details on Lambtrad Ltd. locations from Charlotte Richardson, “Tim is the link with four McDonald’s,” Weston Mercury, April 2013, http://www.thewestonmercury.co.uk/news/business/tim_is_the_link_with_four_mcdonald_s_1_2002963. One location, which is listed with a rateable value of £0, may be closed or under construction and has been excluded to avoid artificially lowering the average rate.Valuation O�ice Agency FAQs page for Price per Square Meter, http://www.2010.voa.gov.uk/rli/static/HelpPages/En-glish/faqs/faq072-how_do_you_arrive_at_price_per_m2.htmlData from U.K. Valuation O�ice Agency, at http://www.2010.voa.gov.uk/rli/en/advanced/searchResults. Queried from the list year 2010, for those with “CR” in description, meaning Restaurants and Premises. Results were sorted based only on locations where a store brand is listed in the store address, so not all brand locations may be included. Those with blank valuations, usually due to site closure or construction, were excluded. Data was downloaded November 13-17, 2015.Jed Graham, “McDonald's Franchisees Are in a Funk — Like Its Stock,” Investor’s Business Daily, Oct. 17, 2016,http://www.investors.com/news/mcdonalds-franchisees-are-in-a-funk-like-its-stock/ Julie Jargon, “McDonald’s Franchisees Say Recent Management Moves Yet to Bear Fruit,” Wall Street Journal, July 16, 2015, http://www.wsj.com/articles/mcdonalds-franchisees-say-recent-management-moves-yet-to-bear-fruit- 1437068737, Annie Gasparro, “McDonald’s Franchisees Express Frustration at Revamp Plans,” Wall Street Journal, April 15, 2015, http://www.wsj.com/articles/mcdonalds-franchisees-express-frustration-at-revamp-plans-1429124389Hayley Peterson, “McDonald's franchisees are terrified for the future,” Business Insider, July 16, 2015, http://www.businessinsider.com/mcdonalds-franchisees-are-terrified-for-the-future-2015-7Jed Graham, “McDonald's Franchisees Are in a Funk — Like Its Stock,” Investor’s Business Daily, Oct. 17, 2016,http://www.investors.com/news/mcdonalds-franchisees-are-in-a-funk-like-its-stock/ Federal Trade Commission, “Franchise Rule 16 C.F.R. Part 436 Compliance Guide,” May 2008, p. 35; Federal Trade Commission, “Amended Franchise Rule FAQ's”, Dec. 2013, from https://www.�c.gov/tips-advice/business-center/guid-ance/amended-franchise-rule-faqs, question 5; FTC’s guidance states that “All suits pertaining to the franchise relationship—even a small number of suits—are presumed to be material,” Federal Trade Commission, “Franchise Rule 16 C.F.R. Part 436 Compliance Guide,” May 2008, p. 36Based on analysis of cases listed in Item 3 of Franchise Disclosure Documents filed in 2009, 2010, 2011, 2012, 2013, 2014, 2015, and 2016, specifically: McDonald’s USA LLC, 2009 filing to the FTC, “Franchise Disclosure Document,” Mar. 27, 2009, Item 3, pp. 4-18; McDonald’s USA LLC, 2010 filing to the FTC, “ Franchise Disclosure Document,” May 1, 2010, Item 3, pp. 4-17; McDonald’s USA LLC, 2011 filing to the FTC, “Franchise Disclosure Document,” Mar. 29, 2011, Item 3, pp. 4-17; McDonald’s USA LLC, 2012 filing to the FTC, “Franchise Disclosure Document,” Mar. 23, 2012, pp. 4-16; McDonald’s USA LLC, 2013 filing to the FTC, “Franchise Disclosure Document,” Mar. 21, 2013, pp. 4-15; McDonald’s USA LLC, 2014 filing to the FTC, “Franchise Disclosure Document,” Mar. 20, 2014, pp. 4-13; and McDonald’s USA LLC, 2015 filing to the FTC, “Franchise Disclosure Document,” Mar. 16, 2015, pp. 4-13; McDonald’s USA LLC, 2016 filing to the FTC, “Franchise Disclosure Document,” Mar. 30, 2016, pp. 4-11.

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George Vazakas and Stamar Monoprosopi E.P.E. vs McDonald’s Hellas M.E.PE. (case #5283), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016,” Mar. 25, 2016, p. 4; Carpe Diem Invest AS, et al, v McDonald’s Norge (case #14-143059 TV1-OTIR/07), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016,” Jan. 4, 2017, p. 7.H. Keith Melton, et al v Charles Robeson and McDonalds USA, LLC (case # 2008 CA040438), detail from McDonald’s USA, LLC filing to FTC, “Franchise Disclosure Document,” Mar. 27, 2009, p. 6Jose Quijano and JCQ Foods, Inc v McDonald’s USA, LLC et al, (case #CAC-40202014-3456), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Mar. 25, 2016, p. 7For instance, see Dadina Srl v McDonald’s Development Italy, Inc (case# 9487/03), filed and settled in 2003; the settlement forgave €269,000 of receivables and expenses, and also relieved franchisee Dadina Srl of rent for 2003; detail from McDonald’s USA LLC, 2007 filing to the FTC, “Franchise Disclosure Document,” Feb. 6, 2007, p. 11. See also Gemar 2000 Srl v McDonald’s Development Italy, Inc (case# 9486/03), filed and settled in 2003. The settlement forgave €215,000 due, and also restructured rents until 2006. Detail from McDonald’s USA LLC, 2007 filing to the FTC, “Franchise Disclosure Document,” Feb. 6, 2007, p. 12Lawsuit #KAC2007-0725, Court of First Instance of San Juan, Puerto Rico, filed Jan. 26, 2007.Jose Chico Vega, “Informe Final sobre la R. de la C. 1071,” Camara de Representantes de Puerto Rico, Nov. 16, 2010Luis Moyett et. al., “Complaint by 78% of Puerto Rico Franchisees against McDonald’s Corporation and Others in Concert Therewith Pursuant to FTC Act Section 5 and the Franchise Rule,” p. 1“Petition for Investigation of the Franchise Industry,” submitted by the Service Employees International Union, http://nrn.com/site-files/nrn.com/files/up-loads/2015/04/FTC-Req-for-Investigation_final,%20May%2019%202015%5B1%5D.pdf Eduardo Ferraz, “Sinal amarelo,” Exame.com, Feb. 9, 2000, http://exame.abril.com.br/revista-exame/edicoes/0722/no-ticias/sinal-amarelo-m0053326Miriam Jordan and Shirley Leung, “McDonald’s Faces Revolt in Brazil,” The Wall Street Journal, Oct. 21, 2003, http://online.wsj.com/news/articles/SB106669192039977200Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Capital, March 26, 2015, http://www.capital.de/dasmagazin/die-fet-tigen-jahre-sind-vorbei-4132.htmlSee Tony Smith, “Economic troubles take a bite out of Brazil’s McDonald’s”, The Washington Post, Jan. 13, 2002, https://www.washingtonpost.com/archive/poli tics/2002/01/13/economic-troubles-take-a-bite-out-of-bra-zils-mcdonalds/5ea4e982-68a6-40¬-b915-0504afdd8922/?utm_term=.1fb68ade35ae, which discusses rent relief programs in Brazil; see Jens Brambusch, “Die Fettigen Jahre sind vorbei”, Capital, March 26, 2015, http://www.capi-tal.de/dasmagazin/die-fettigen-jahre-sind-vorbei-4132.html, which discusses rent relief programs in Germany.George Vazakas and Stamar Monoprosopi E.P.E. vs McDonald’s Hellas M.E.PE. (case #5283), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, p. 4; Carpe Diem Invest AS, et al, v McDonald’s Norge (case #14-143059 TV1-OTIR/07), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, p. 7; Matthew Newman, “McDonald’s faces fresh antitrust charges on Big Mac pricing in France,” MLex, July 12, 2016, http://consumersversusmc.com/wp-content/uploads/2016/10/MLEX.pdfManon Soucasse, “Comment on ouvre un McDo”, La Dépêche, Sept.2, 2013, http://www.ladepeche.fr/arti-cle/2013/09/02/1699682-comment-on-ouvre-un-mcdo.html: “La plupart des candidats ont gravi les di¬érents échelons de l’entreprise, ils passent en priorité”. See also Cecile Mulato, “Journee des Metiers Chez McDonald's,” Drome Ecobiz, Apr. 10, 2015, http://www.drome-ecobiz.biz/jcms/prod_281956/fr/journ-ee-des-metiers-chez-mcdonald-s: More than 10 percent of McDonald’s franchisees in France have been identified as former executives or o�¬icers at McDonald’s France headquarters or long-term employees in restaurants; the former professional position of a majority of franchisees could not be identified; the actual percentage of former long-term McDonald’s employees or o�icers may therefore be much higher.In France, 225 restaurants out of 1,385 restaurants (16.25 percent of total restaurants) have been identified as joint-ventures and are operated by 19 individuals, i.e. an average of 11.8 restaurants per operator.Research carried out in France reveals that a number of current McDonald’s operators have the same family name and are generally parent and child or brothers. In addition, some former operators have the same name as current operators, thereby meaning that the restaurant operation was transferred to a family member. In this respect, 45 current operators have the same name as a current or former McDonald’s restaurant operator.American Customer Satisfaction Index, “Benchmarks by Industry: Limited-Service Restaurants,” http://theacsi.org/in-dex.php?option=com_content&view=article&id=147&catid=&Itemid=212&i=Limited-Service+Restaurants Lucy Crossley, “Sometimes you just hate it: Marmite in top ten most hated brands in Britain along with Ukip and Starbucks but Heinz and Cadbury's are among our favourites,” Daily Mail, Feb. 15, 2015, http://www.dailymail.-co.uk/news/article-2954511/Some-times-just-hate-Marmite-ten-hated-brands-Britain-Ukip-Starbucks-Heinz-Cadbury-s-favourites.html Que Choisir, “Comparatif Satisfaction fast-foods,” n°52, Nov. 2016, p. 17, https://www.quechoisir.org/comparatif-satis-faction-fast-foods-n22871/Paul Ausick, “McDonald’s Burgers Rate Last in Survey,” 24/7 Wall Street, July 2, 2014, http://247wallst.com/ser-vices/2014/07/02/mcdonalds-burgers-rate-last-in-survey/

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A 2015 study of McDonald's store menus in Paris, Lyon and Marseille in France, and Bologna and Rome in Italy, found that when the average price was di�erent at franchised and corporate stores, the average prices at franchised locations were higher than those at corporate locations at least 68 percent of the time. This study, conducted by surveyors in Italy and France and compiled by SEIU sta�, included taking photos of computer kiosk menus and menu boards at McDonald's stores in the cities mentioned above and compiling price points for more than 300 items on McDonald's menus in Italy and France. Menu photos were taken at 28 stores in Lyon (13 corporate and 15 franchised stores); 16 stores in Marseille (5 corporate and 11 franchised); 27 stores in Paris (12 corporate and 15 franchised stores); 12 stores in Bologna (6 each of corporate and franchised stores), and 25 stores in Rome (12 corporate and 13 franchised locations). From this price data, a pool of menu items for each city was created where there were at least three corporate and franchised store price points each to use to make a comparison of and measure the di�erence between the average franchised store and average corporate store price. This included 88 items in Bologna; 113 items in Rome; 114 items in Lyon; 79 items in Paris, and 53 items in Marseille.Que Choisir, “McDonald's- Les restaurants franchisés plus chers,” n°52, Nov. 2016, p. 21, https://www.quechoisir.org/actu-alite-mcdonald-s-les-restaurants-franchises-plus-chers-n22921/Matthew Newman, “McDonald’s faces fresh antitrust charges on Big Mac pricing in France,” MLex, July 12, 2016.George Vazakas and Stamar Monoprosopi E.P.E. vs McDonald’s Hellas M.E.PE. (case #5283), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, p. 4; Carpe Diem Invest AS, et al, v McDonald’s Norge (case #14-143059 TV1-OTIR/07), detail from McDonald’s USA LLC, “Franchise Disclosure Document 2016”, Jan. 4, 2017, pp. 6-7A 2017 study of Yelp restaurant reviews for McDonald's stores in several major cities and regions in Europe found that in general, the average Yelp Review rating at franchised stores was significantly lower than the average rating at corporate stores. Ratings were collected by searching for McDonald's stores by address on Yelp.com or through a search engine and collecting review data via Yelp review websites in the cities and areas included in the table below. Cities were chosen for their mix of franchise and corporate stores, so a comparison of average review ratings could be made. Yelp was chosen over other review websites due to its transparency in displaying a direct average of all reviews listed on its site. The analysis included 81 stores and 429 reviews in Paris, 148 stores and 1,599 reviews in Germany, 116 stores and 325 reviews in Italy, and 20 stores and 62 reviews in Prague.Alan Pyke, “Workers Sue McDonald’s for Wage The� Violations in Three States,” Think Progress, Mar. 13, 2014, http://thinkprogress.org/economy/2014/03/13/3402141/mcdonalds-wage-the�-suits/; McDonald’s fact sheet published by the National Labor Relations Board, https://www.nlrb.gov/news-outreach/fact-sheets/mcdonalds-fact-sheetAlan Pyke, “Workers Sue McDonald’s for Wage The� Violations in Three States,” Think Progress, Mar. 13, 2014, http://thinkprogress.org/economy/2014/03/13/3402141/mcdonalds-wage-the -suits/; Simon Neville, “McDonald’s ties nine out of ten workers to zero-hour contracts,” Guardian, U.K., Aug. 5, 2013, http://www.theguardian.com/busi-ness/2013/aug/05/mcdonalds-workers-zero-hour-contracts; John Weekes, “Celebrations a�er McDonald’s ends zero hour contracts,” New Zealand Herald, May 1, 2015, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&ob-jectid=11441887: in 2015, unions and McDonald’s came up to an agreement to end zero-hour contracts in New Zealand. “McDonald’s Workers Nationwide File OSHA Complaints Alleging Hazardous Work Conditions,” Press Release, National Council for Occupational Safety and Health, Mar. 16, 2015, http://coshnetwork.org/mcdonald%E2%80%99s-workers-na-tionwide-file-osha-complaints-alleging-hazardous-work-conditions; Christine Mai-Duc, “McDonald’s facing complaints over worker burns,” LA Times, Mar. 16, 2015, http://www.latimes.com/business/la-fi-mcdonalds-osha-burn-com-plaints-20150316-story.htmlQue Choisir, “McDonald's- Les restaurants franchisés plus chers,” n°52, Nov. 2016, p. 21. See also for instance: “La grogne s'installe chez les salariés de McDo de Fréjus et Saint-Raphaël,” Var-matin, Aug. 28, 2014, http://archives.varmatin.com/-frejus/la-grogne-sinstalle-chez-les-salaries-de-mcdo-de-frejus-et-saint-raphael.1828269.html; “Licenciements abusifs. Un franchisé McDo condamné à verser plus de 170.000 EUR,” Le Télégramme, Dec. 23, 2014, http://www.letelegramme.-fr/bretagne/licenciements-abu sifs-un-franchise-mcdo-condamne-a-verser-plus-de-170-000-eur- 23-12-2014-10471979.php; “Et comment ça se passe chez McDonald’s? actualité mai 2015,” Le Coin des Equipiers McDonald's, May 19, 2015, http://equipiermcdo.blogspot.fr/; Jean-Pierre Anselme, “Une journée de travail chez McDo,” Mediapart, June 23, 2015, https://blogs.mediapart.fr/jean-pierre-an selme/blog/230615/une-journee-de-travail-chez-mc-do; “Elle se fait licencier par McDonald's pour avoir passé ses examens,” Le Figaro, Sept. 29, 2014, http://www.lefigaro.-fr/emploi/2014/09/29/09005-20140929ART FIG00097-elle-se-fait-licencier-par-mcdon ald-s-pour-avoir-passe-ses-exam-ens.php; “Nour, ex-manager à McDo,” Rue 89, Oct. 31, 2012, http://rue89.nouvelobs.com/rue89-eco/2012/10/31/nour-ex- manager-mcdo-les-mains-malmenees-le-dos-en-miettes-236661; “Polémique. Des équipiers de McDo témoignent,” La Depeche, Apr. 27, 2007, http://www.ladepeche.fr/article/2007/04/27/369261-polem ique-des-equipiers-de-mcdo-temoi-gnent.html; “Débrayage au McDo contre les conditions de travail,” Le Parisien, Oct. 29, 2011, http://www.leparisien.-fr/chelles-60350/debrayage-au-mcdo-contre-les-conditions-de-travail-29-10-2011-1691308.php; “Un syndicat annonce une grève illimitée aux Mc Donald's de Nice,” Nice-matin, July 4, 2015, http://archives.nicematin.com/nice/un-syndi-cat-annonce-une-greve-illimitee-aux-mc-donalds-de-nice.2274025.html; “Mc-Donald's : les salariés dénoncent leurs conditions de travail,” Ouest France, Oct. 31, 2013, http://www.ouest-france.fr/bretagne/brest-29200/mc-don-alds-les-salaries-denoncent-leurs-conditions-de-travail-1668036; Christophe Lurie, “Opération coup de poing des salariés de trois restaurants McDonald's,” France Bleu, Dec. 17, 2014, https://www.francebleu.fr/infos/economie-social/opera-tion-coup-de-poing-des-salaries-de-trois-restaurants-mcdonald-s-1418816112

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“McJobs -Low Wages and Low Standards around the World”, May 29, 2015, http://www.iuf.org/w/sites/default/-files/mcjobsreport_0.pdf Fight for 15, “April 14: Our Biggest-Ever Global Strikes and Protests,” http://fightfor15.org/april-14-our-biggest-ev-er-global-strikes-and-protests/Emily Jane Fox, “McDonald's workers sue for wage the¬,” CNN, Mar. 13, 2013, http://mon-ey.cnn.com/2014/03/13/news/companies/mcdonalds-wage-the¬-class-action/Emily Peck, “McDonald’s workers detail horrifying sexual harassment,” Hu�ington Post, Oct. 6, 2016, http://www.hu�-ingtonpost.com/entry/mcdonalds-harassment-complaint_us_57f5385ae4b0b7aafe0b4584Lars Andersen, “European Parliament to investigate McDonald’s working conditions”, The Brussels Times, Nov. 30, 2016, http://www.brusselstimes.com/belgium/7059/european-parlia-ment-will-investigate-mcdonald-s-working-conditionsRebecca Burn-Callander, “Employees send McDonald’s to bottom of top 10 ranking of fast food chains,” The Telegraph, Aug. 7, 2015, http://www.telegraph.co.uk/finance/jobs/11786866/Its-o�i-cial-Flipping-burgers-at-McDonalds-is-the-worst-fast-food-job-in-the-UK.htmlMcDonald’s franchisees: Archangles SARL, Annual Accounts 2013-2015; Arches Avignon, Annual Accounts 2012-2015; Drive de Pontet, Annual Accounts 2012-2015; Les Arches de Perigueux, Annual Accounts 2012-2015; SL Voltaire, Annual Accounts 2008-2015. Quick franchisees: Fabien Dubos, CLENT, Annual Accounts, 2009-2015; Fabien Dubos, ANCLEFA, Annual Accounts, 2009-2014; Franck Duwicquet, Roanne Rest, Annual Accounts, 2010-2015; Marc Chaudron, BELC, Annual Accounts, 2009-2014; Marc Chaudron, Niort Rest, Annual Accounts, 2009-2014. KFC franchisees: MCF17, Annual Accounts 2014-2015; Societe Tenitram, Annual Accounts 2014; Bezirest, Annual Accounts 2012-2015; Kennedy’s Mantes, Annual Accounts 2009-2015; MC Aslan, Annual Accounts 2011-2015; Merichick, Annual Accounts 2009-2015; Narbest, Annual Accounts 2012-2015; Pessachick, Annual Accounts 2010-2015; Villachick, Annual Accounts 2010-2015. Pizza Hut franchisees: ABY Pizza, Annual Accounts 2014-2015; Caen Sud 3, Annual Accounts 2011-2013; Codam, Annual Accounts 2014-2015; HAMM, Annual Accounts 2011-2013; Kospol-Distribution, Annual Accounts 2014; and SPPH, Annual Accounts 2011-2015. Subway franchisees: Drop Food, Annual Accounts 2009-2013; Piper Sub, Annual Accounts 2009-2015; Sebway, Annual Accounts 2009-2014; Sub Valmy, Annual Accounts 2009-2013; Subway Issoire, Annual Accounts 2014; Subway Vichy, Annual Accounts 2014. La Brioche Dorée franchisees: Myraj Bakery, Annual Accounts 2013-2015; Pain d’Ange, Annual Accounts 2013-2015; SARL Mahana, Annual Accounts 2014; SARL MP2L, Annual Accounts 2014-2015; SARL PCLC Restauration, Annual Accounts 2012, 2014, 2015. La Mie Caline franchisees: Abbott, Annual Accounts 2013, 2015; Avrancheline, Annual Accounts 2013; Cle Mie Ra, Annual Accounts 2013-2014; Delis’Adour, Annual Accounts 2011 and 2013; La Mie Beline, Annual Accounts 2013 and 2015; Nova Forte, Annual Accounts 2014; SARL Brondy, Annual Accounts 2012. Paul Boulangerie franchisees: CBN, Annual Accounts 2011, 2013, 2014; HEVALO-MA, Annual Accounts 2011 and 2013; Maria et Sandrine, Annual Accounts 2011 and 2013; PWL Bakery, Annual Accounts 2013-2015; Zenith Bakery, Annual Accounts 2013-2015. Pomme de Pain franchisees: Huger-White Cross, Annual Accounts 2013-2015; JTE, Annual Accounts 2013; PDP Pau, Annual Accounts 2014; Pomme Roaix, Annual Accounts 2013-2014; RARLE, Annual Accounts 2013. Sushi Shop franchisees: 54, Annual Accounts 2014-2015; Enjo, Annual Accounts 2011-2015; Gelau, Annual Accounts 2012-2015; King Kong, Annual Accounts 2012; Sauboget, Annual Accounts 2014-2015; Zen’itude, Annual Accounts 2011-2015.Arcos Dorados, SEC Correspondence, October 15, 2012, p. 4.- “Brazilian Master Franchisee shall not, and shall not permit any of its Subsidiaries or Franchisees to, close any Franchised Restaurant except pursuant to an Approved Closing.” Second Amended and Restated Master Franchise Agreement (Brazil), Nov 10, 2008. Section 6.2 Closings, p. 8. - ““Approved Closing” means any proposed closing of a Franchised Restaurant that (a) has been approved by McDonald’s, such approval not to be unreasonably withheld, it being understood that (i) whether a closing is reasonable shall be determined by McDonald’s in light of the use of the related Real Estate in the operation of a McDonald’s Restaurant, without regard to any other potential use of such Real Estate; and (ii) a failure by McDonald’s to approve any closing shall not be deemed to be unreasonable if McDonald’s reasonably believes that such closing is proposed in contemplation of or in connection with the Transfer or use of the related Real Estate (or any related Site Agreement) to or in connection with a Competitive Business; (b) is the result of a condemnation of the related premises by a Governmental Authority; or (c) is the result of the opening within the same trading area of a Franchised Restaurant having comparable Gross Sales and menu scope.” Second Amended and Restated Master Franchise Agreement (Brazil), Nov 10, 2008. Exhibit 1-1 – Definition of “Competitive Business.” - ““Competitive Business” means any Person engaged in a QSR Business or any Person operating under the list of marks or trade names provided by McDonald’s on the date hereof, which list may be amended by McDonald’s from time to time.” Second Amended and Restated Master Franchise Agreement (Brazil), Nov 10, 2008. Exhibit 1-2 – Definition of “Competitive Business.” - No specific list is provided as an attachment to the Brazilian MFA, but the following list is attached to the Amended and Restated Master Franchise Agreement among McDonald’s and Arcos Dorados, Nov 10, 2008 as “Exhibit 25-1 – Selected Competitive Businesses”: 7-Eleven, Arby’s, Baskin Robbins, Bob’s, Burger King, Carl’s Jr., Chick-fil-A, Church’s, Domino’s, Dunkin’ Donuts, El Pollo Loco, Häagen-Dazs, Habib’s, Hardee’s, In-N-Out Burger, Jack-in-the-Box, KFC, Little Caesars, Papa John’s, Pollo Tropical, Pollo Campero, Pizza Hut, Popeye’s Chicken, Starbucks, Subway Sandwiches, Taco Bell, TCBYYogurt, Wendy’s.

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Amended and Restated Master Franchise Agreement among McDonald’s and Arcos Dorados, Nov 10, 2008. Section 7.14.3 p. 32. Specific locations covered by this article, including locations in Brazil, are listed in Exhibit 14 Restricted Real Estate.“Consumer Foodservice in the United Kingdom,” Euromonitor, May 2016, http://www.euromonitor.com/consum-er-foodservice-in-the-united-kingdom/reportRebecca Burn-Callander, “London’s best restaurant sites are being eaten up by chains,” The Telegraph, Feb. 6, 2015, http://www.telegraph.co.uk/finance/festival-of-busi-ness/11393514/Londons-best-restaurant-sites-are-being-eaten-up-by-chains.html“Fri 12th Apr 2013 - Friday Opinion,” Propel, http://www.propelinfonews.com/pi-Newsletter.php?date-time=2013-04-12%2009:00:00Rebecca Burn-Callander, “London’s best restaurant sites are being eaten up by chains,” The Telegraph, Feb. 6, 2015Rupert Spies and Gretel Weiss, “Is Germany's traditional restaurant a dying breed?” Cornell Hotel & Restaurant Administration Quarterly, June 1, 1998. Accessed via: http://business.highbeam.com/4074/article-1G1-20897004/ger-many-traditional-restaurant-dying-breed“Consumer Foodservice in Germany,” Euromonitor, May 2016, http://www.euromonitor.com/consumer-foodser-vice-in-germany/report“McCafé revitalises Germany’s foodservice co�ee sales,” Euromonitor, Feb. 22, 2010, http://www.ca�eculture-show.com/files/euromonitor__mccafe_revitalises_germanys_foodservice_co�ee_sales.pdf“Full-service restaurants in Spain,” Euromonitor, May 2016, http://www.euromonitor.com/full-service-restau-rants-in-spain/report“Full-service restaurants in Italy,” Euromonitor, May 2016, http://www.euromonitor.com/full-service-restaurants-in-it-aly/reportFrancesca Landini, “McDonald's takes on pizza for Italy growth spurt,” Reuters, Jan. 9, 2013, http://www.reuters.com/article/us-mcdonalds-italy-idUSBRE9080SE20130109Sébastien Liarte, "Mutualisme, prédation et parasitisme : la concurrence comme critère de choix de la zone d’implan-tation", XVème Conférence Internationale de Management Stratégique (AIMS), Annecy / Genève, June 13-16, 2006, http://www.strategie-aims.com/events/conferences/8-xveme-con-ference-de-l-aims/communications/2280-mutualisme-predation-et-parasitisme-la-concurrence-comme-critere-de-choix-de-la-zone-dimplantation/downloadConcerning the EU Commission’s investigation, see http://ec.europa.eu/competition/elojade/isef/case_de-tails.cfm?proc_code=3_SA_38945. Concerning France, see E. Paquette, “Menu Big Fisc pour McDonald’s”, L’Express-L’Expansion, Apr. 19, 2016, http://lexpansion.lexpress.fr/entrepris es/menu-big-fisc-pour-mcdon-ald-s_1784249.html; concerning the UK, see Marion Dakers, “McDonald's UK pays £123m in royalties to Luxembourg”, The Telegraph, Oct. 29, 2016, http://www.telegraph.co.uk/business/2016/10/29/mcdon alds-uk-pays-123m-in-royal-ties-to-luxembourg/. In Italy, three consumer associations (CODACONS, MOVIMENTO DIFESA DEL CITTADINO and CITTADINANZATTIVA) filed a complaint with the Italian tax authorities stressing the consequences of McDonald’s 2009 change in corporate structure and royalty flows for Italian public finances and taxpayers, see: Esposto del Codacons contro McDonald's: “Possibile evasione, deve al Fisco fino a 224 mln,” La Repubblica, Oct. 1, 2015, http://www.repub-blica.it/economia/2015/10/01/news/esposto_contro_mcdonald_s_sulla_possibile_evasione_fiscale-124010471/. In Spain, El Pais reported a current tax investigation: Jesus Servulo Gonzalez, “Hacienda investiga a McDonald’s en España,” El Pais, Feb. 21, 2016, http://economia.elpais.com/economia/2016/02/20/actuali-dad/1455994666_356182.html. In August 2015 in Brazil, the General Workers’ Union (UGT) filed a complaint asking Brazil’s public prosecution service to open an inquiry into allegations of tax dodging, unfair competition, and violations of franchise laws by McDonald’s. The tax complaint was filed just days before McDonald’s workers and elected o icials from around the world testified at an unprecedented global hearing before the Brazilian Federal Senate on the negative social impact of McDonald’s business model worldwide. In March 2016, a federal prosecutor opened a criminal investigation into McDonald’s and its Latin American master franchise owner, Arcos Dorados Holdings: Stephanie Strom and Vinod Sreeharsha, “Brazil Opens Investigation into McDonald's,” The New York Times, Mar. 3, 2016, http://www.nytimes.com/2016/03/04/business/international/bra zil-opens-investigation-into-mcdon-alds.html?_r=0. In Australia, the press reported a tax adjustment of $77.8 million in 2016: Nassim Khadem, “McDon-ald's halves its tax bill, back pays $78m,” The Sydney Morning Herald, Feb. 3, 2016, http://www.smh.com.au/busi-ness/the-economy/mcdonalds-halves-its-tax-bill-back-pays-78m-20160202-gmjgnk.html“Antitrust: Overview,” European Commission, http://ec.europa.eu/competition/antitrust/overview_en.html; “Exces-sive Prices,” Working Party No. 2 on Competition and Regulation, OECD, Oct. 17, 2011, http://ec.europa.eu/competi-tion/international/multilateral/2011_oct_excessive_prices.pdfAna Paula Martinez, “Abuse of Dominance: The Third Wave of Brazil’s Antitrust Enforcement?” Competition Law International, Vol. 9, No. 2 (Oct. 2013), pp. 169-181, http://www.levysalomao.com.br/files/publicacao/anex-o/20130905115751_abuse-of-dominance.pdfMiriam Jordan and Shirley Leung, “McDonald’s Faces Revolt in Brazil,” The Wall Street Journal, Oct. 21, 2003, https://www.wsj.com/articles/SB106669192039977200

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