McDonald’s Franchise System Raises Concerns Over Worker’s Conditions

Carlyle and Citic from Hong Kong and China respectively, were granted US fast food chain McDonald’s franchise for 20 years. The $2.08 billion deal will provide Citic with a controlling share of 52% while Carlyle will take 28%. The remaining 20% stays with McDonald’s.

McDonald’s has owned and operated the bulk of fast food outlets in the mainland and Hong Kong however; it has always indicated its desire to support a franchise model where it can profit from sales while minimizing its operational costs. On the other hand, the sale of McDonald’s operations in Hong Kong and China has raised many concerns regarding the conditions of workers.

The franchise system will benefit McDonald’s in the two locations but The Service Employees International Union (SEIU) warned that it may cause trouble for workers. SEIU that represents 2 million workers in the US and Canada said that it is difficult for franchises to provide adequate pay and working conditions.

Based from the experiences of McDonald franchises in Brazil and Puerto Rico, the master franchise model that will be adopted in China is not for the better interests of workers because it will create an inherent misalignment of incentives between McDonald’s and the franchiser. SEIU has warned of financial issues with poor returns on investment for shareholders and tight margins for the operators.

In sub-franchising, smaller franchises operate under the McDonald’s brand through agreements under a developmental licensee. Royalties that are paid by the sub-franchises go directly to McDonald’s in full. Only a minor number of McDonald’s stores in China operate through franchises but with the recent deal with Carlyle and Citic, the franchises will become sub-franchises.

In response to SEIU, McDonald’s told CNBC that it is taking the right of workers very seriously and that staff from mainland and Hong Kong have no reason to worry about the transaction since they will be provided with the same support and level of commitment as other existing franchises.

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