McDonald's owners feeling sandwiched Company's growth plan brings too much competition, they say

February 18, 1997|By Liz Bowie | Liz Bowie,SUN STAFF

A McDonald's on every corner?

Maybe not, but last year 726 new Golden Arches appeared on the American landscape as the fast-food giant tried to push up profits in its stagnant domestic market. This year, analysts predict at least another 500 openings, perhaps as many as 700.

The results of this growth strategy have not always cheered the owners of nearby competing McDonald's. In fact, same-store sales have been down at McDonald's for every quarter in the past year.

"I think cannibalism is a big concern," said Damon Brundage, an analyst with NatWest Securities.

Baltimore businessman Osborne A. Payne says he has felt the effects of that cannibalism. Sales at the stores he operated for years are down and he blames it on new franchises that McDonald's opened nearby. Payne filed suit in U.S. District Court but lost the battle last week when a federal judge dismissed the case, saying that his agreement with McDonald's did not give him any exclusive territory.

But Payne's claim against the company is not likely to end there, according to his attorney, Robert Zarco, in Miami. "This decision has for all practical purposes granted franchisers the license to kill its own business partners -- the franchisee," Zarco said.

In response to questions about their franchisees, McDonald's issued a statement saying: "The overwhelming majority of McDonald's 2,700 franchisees in the U.S. are happy with our system and know that we routinely and successfully resolve any issues internally. It's a shame that a small handful of them -- less than a dozen -- have been convinced that they can solve their problems by suing us, despite the fact, as happened in Baltimore, these legal claims have been rejected by every court that has considered them."

At least 21 other McDonald's owners across the country have sued in the past year. And the list of others that are considering similar actions is growing, according to Dick Adams, a consultant and former director of franchising for the western United States for McDonald's. Adams is also chairman of The Consortium, a group of several hundred anonymous franchise owners who are angry at the chain over this and other issues.

The traditional franchise works this way: The company owns the land and building and leases it to an owner for a set period. The owner or franchisee usually invests about $600,000 in the venture, mostly in equipment, Adams said. The franchisee then pays McDonald's a percentage of sales. In the past that has been 11 1/2 percent, Adams said, but it has grown to 15 or 16 percent.

For franchisees like Payne, who opened stores more than 20 years ago, the initial investment in their business has grown, Adams said, and often is their retirement equity. "You built equity in the business. You have something to sell, but the minute the store goes up nearby, your equity goes up in smoke," Adams said. "These guys are not only struggling over the lost profit they have, but the equity they have."

Gerardo Perez opened a McDonald's in Cameron Park, Calif., on a stretch of highway between San Francisco and Lake Tahoe 10 years ago. "They have built four stores within a 20-mile stretch between me and the metropolitan area," he said. "Sales are down 30 percent."

Perez wanted to sell his franchise, but he said the company would not approve the sale even though he had provided several candidates willing to buy the business for more than $1.5 million.

Perez has sued. So has Charles Gonzales, who opened the third McDonald's in San Francisco years ago. He says sales are down because McDonald's encroached on his business by opening stores as close as six blocks away.

Pub Date: 2/18/97

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