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SEIU Alerts Buyers about McDonald's Refranchising Plans

Zacks Equity Research

McDonald’s Corp.’s MCD plans to refranchise over 3,000 restaurants in Asia seem to have hit a roadblock.

The Service Employees International Union (SEIU), which functions on behalf of non-unionized fast food workers, has sent a letter to potential McDonald’s buyers, cautioning them about the financial and operational risks associated with the company’s master licensee model, which is the core of the company’s growth strategy in Asia.

Details

Notably, the SEIU has sent notifications to hundreds of firms that are operating in Asia.

In the notice, the SEIU has cited cases from Latin America, India and Eastern Europe, where McDonald’s has carried out similar franchising agreements. These refranchising contracts have helped the company shift substantial costs and obligations to master franchisees, thereby raking in sizeable gains.

MCDONALDS CORP Price

MCDONALDS CORP Price | MCDONALDS CORP Quote

Meanwhile, the SEIU backs a high-profile campaign to elevate pay and improve conditions for low-wage retail and fast-food workers in the U.S.

What’s the Fuss About?

Management at McDonald’s believes that a heavily-franchised business model will generate more stable and predictable revenue and cash flow and require a less resource-intensive support structure.

In line with this, McDonald's revealed it plans of seeking master franchisees for key Asian markets like China, Hong Kong and South Korea this March. Also, last year, the company announced that it intends vending its Taiwan operations and a significant part of its Japanese business.

However, the latest letter states that the planned sell-off of McDonald’s stores to master franchisees comes at a precarious time for potential buyers as corporate negligence, consumer scandals and unsteady sales have damaged the company’s business performance in the continent.
 
The union also highlighted the weak performance of McDonald's largest global franchisee Arcos Dorados since its IPO in 2011 and drawn resemblance between its deal with Arcos Dorados and the company’s potential master license agreements in Asia.

Notably, in 2007, McDonald’s decided to hand over operational power in Latin America to Arcos Dorados. However, the decision has proved to be financially catastrophic for Arcos Dorados, its workers, sub-franchisees, and investors as Arcos Dorados has been grappling with currency and economic issues in the Latin American region.

Our Take

With the SEIU warning investors of the financial risks associated with a potential purchase, it is to be seen whether the company is able to procure partners to expand its Asia business and carry on with its refranchising plans.

Zacks Rank & Stocks to Consider

McDonald's currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Papa John's International Inc. PZZA, Darden Restaurants, Inc. DRI and The Wendy's Company WEN. All the three stocks carry a Zacks Rank #2 (Buy).

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MCDONALDS CORP (MCD): Free Stock Analysis Report
 
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