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McDonald's sale of China, HK business may jeopardize workers
McDonald's sale of its China and Hong Kong operations raises numerous concerns about worker conditions, an American labor union has warned.
On Monday, Carlyle (NASDAQ: CG) and Chinese state-owned enterprise Citic (Shanghai Stock Exchange: 30-SZ) won the deal to purchase the U.S. fast-food giant's businesses in the two regions for $2.08 billion. The deal grants Citic and Carlyle franchise rights for 20 years, with Citic receiving a controlling stake of 52 percent, Carlyle taking 28 percent and McDonald's keeping the remaining 20 percent.
McDonald's owns and operates the bulk of outlets in the mainland and Hong Kong, but it has long indicated a desire to embrace a franchise model that would enable it to profit from sales while slashing operating costs.
The franchise system will benefit the brand in both areas but it will spell trouble for local employees, warned The Service Employees International Union (SEIU), a group that represents two million workers in the U.S. and Canada.
"Experience in other markets such as Brazil and Puerto Rico has shown the McDonald's master franchisee model being adopted in Greater China is not in the interests of workers, as it makes it harder for franchisees to provide adequate pay and conditions," SEIU explained in a statement on Monday.
Essentially, the model creates an inherent misalignment of incentives between McDonald's and the development licensee—i.e. the franchiser—that typically results in financial problems, with poor returns for shareholders and squeezed margins for operators, SEIU cautioned.
The issue of sub-franchising, a process in which smaller franchisees operate stores under the McDonald's brand through agreements with the developmental licensee, is a major factor here. Royalties paid by sub-franchisees are often passed on directly to McDonald's in full and exclude the developmental licensee, even though the latter assists sub-franchisees with operational matters, the SEIU said.
Only a minority of McDonald's stores in China are operated by franchisees but under the CITIC-Carlyle deal, these franchisees would then turn into sub-franchisees and thus face the challenges outlined above, the SEIU explained.
Moreover, "McDonald's extracts higher royalty payments from its licensees, and generally does not allow them to retain some of sub-franchisees' royalties to invest in local operations; it also exerts tighter control over management and operational decisions as well as imposing growth targets which may not be in its licensees' interest," the report found.
And as the primary franchiser gets squeezed, so do employee wages. McDonald's is already a low-wage employer in Hong Kong and often pays the minimum wage as a starting salary, SEIU noted, adding that only seven percent of Hong Kong workers get paid above $4.38 per hour.
Tensions in other Asian countries may be a precursor of what's to come in China and Hong Kong. In South Korea, small franchisees are struggling after McDonald's opened new stores close to existing ones and forced franchisees to buy expensive new equipment, Yonhap News reported last week.
In response to SEUI's claims, McDonald's told CNBC that it took workers' rights very seriously.
"Our staff in the mainland and Hong Kong will not be affected by this transaction. Royalties of our existing franchisee will be paid to the new company directly so McDonald's China will provide the same level of support and commitment to our existing franchisees," said a company spokesperson.
Carlyle and Citic offered no comment.
