McDonald’s is under attack in Europe. An Italian-based labor group is accusing the chain is abusing market power to charge excessive rents to franchisees. The group claims these higher costs are passed along to the consumer.
Via BBC: “‘McDonald’s abuse of its dominant market position hurts everyone: franchisees, consumers, and workers. We strongly urge the European Commission to investigate the charges and to use all of its powers to hold McDonald’s accountable,’ said SEIU organising director, Scott Courtney.”
Since I’m long MCD my inclination is to dismiss the issue as fascist whining. To double check I ran a quick search. An Italian combo meal costs roughly half as much as a meal at an “inexpensive restaurant” and 1/8th as much as dinner for 2 at a mid-range eatery.
It comes down to wages. Labor groups want to attack McDonald’s corporate for the same reason Willy Sutton robbed banks, “because that’s where the money is”. Unfortunately for those who prefer their solutions to societal inequality super simple, McDonald’s doesn’t set wages at a store level. Franchisees set wages at the going market rate in each location.
McDonald’s has a wage problem. That’s one of the reasons McDonald’s plans to “refranchise” (read: sell) 3,500 units. By 2018 the company will be 90% franchised in the US. Currently 3/4 of the chain is franchised in Europe, which is MCD largest market because the world loves us. McDonald’s charges franchisees a lot because running a McDonald’s is much more profitable than operating a generic pizza stand. Franchising isn’t as lucrative as it once was but it’s still a hell of a deal.
McDonald’s is much bigger than its rivals but suggesting it has monopoly powers is a reach, even by European standards.
In Easterbrook We Trust
I’ve been long MCD since Steve Easterbrook became CEO on March 1st. It was a bumpy start but slowly the ship has turned. Last quarter MCD reported its first comp unit sales increase in the US in 2 years. For Q4 estimates are as high as 3.5%.
I love investing in new CEOs. If they’re good they get about a year where they can report just about anything they want in terms of earnings and still get a pass from Wall St. If they’re great the pass can get extended. It took a while for the Street to warm to Easterbrook but when SSS went positive the laggards got on board.
A little turnaround goes a very long way when you’re operating on the scale of Micky D’s. Over the last 12 months MCD is up 25%. The rest of the group has been charbroiled. Buffett and Ackman’s tax-dodging Canadian Burger King/ Tim Horton QSR has lost 20%. Wendy’s gets included just for being nearly flat. Dunkin’, included because it presumably competes for roadside “gas savings” is down 11%:
The European Commission has time to review the complaints and suggest remedies. The EU is also reviewing charges MCD is dodging taxes. If sales were falling I’d be worried. With comps expected to rise in all regions in the current period none of these protests matter.
To things keep me bullish even up 25%. First is the new CEO factor. Second, and more importantly, McDonald’s sells the best consumer product of all time. The salty perfection of the McDonald’s french fry is universal and unique. It can’t be knocked off and it is fully optimized in terms of quality. You can go anywhere in the world and recognize a MCD french fry blindfolded. It’s the same value proposition Starbucks offers, discounted for the lack of addictive caffeine.