McDonald's Brazil restaurants hit by hard times

Monday, December 10, 2001

SAO PAULO, Brazil -- It's Monday, 8 p.m., dinner time in Brazil. Only three cars are in line at the drive-through as John Rowell pulls in to check the day's receipts at his McDonald's restaurant in eastern Sao Paulo.

Inside, just four tables have customers.

"Hard to believe I used to take 550,000 reals a month -- and that was when one real was worth a dollar," grumbled Rowell. "Last month we were down to 180,000 reals -- now worth about $70,000 -- and it's not getting any better."

For many franchise owners like Rowell, the McCarnival is over in Brazil, until recently the star emerging market for the world's biggest restaurant chain. Not only are an economic slowdown and sliding currency squeezing profits, but franchise owners also complain that their sales are being siphoned away by a slew of new stores opened under the company's aggressive global expansion plans.

Analysts say it's an example of how globalization, driven by the economic boom of the 1990s, is causing friction in one of the world's biggest developing markets.

"What we are seeing now is the dark side of international development," said Allan Hickok, senior restaurant analyst at Minneapolis-based consulting firm US Bancorp Piper Jaffray.

Worried franchisees point to Mexico, where many restaurant owners were forced to sell out to McDonald's Corp. in 1994 because of the falling peso.

Some franchise owners are suing McDonald's, alleging illegal rent manipulation and "cannibalization" of their sales by restaurants owned directly by the company.

After years of sizzling growth -- from 175 restaurants in 1995 to 563 this year -- Brazil is McDonald's eighth most important market worldwide. Until recently, the company was still planning to double its current number of restaurants here by 2003.

But now, with growth slowing worldwide, the Oak Brook, Ill.-based fast food empire will add just 1,400 new restaurants to its 29,000 global total next year, the lowest number since 1994.

It has closed 250 underperforming eateries across the globe, including 56 in Latin America and 20 in Brazil.

It's a clear case of biting off more than it can chew, claims Rowell, a 59-year-old American who is leading the Brazilian franchise owners' legal challenge.

When Rowell opened his 172-seat McDonald's -- one of two he runs -- in 1994, company representatives told him of plans for another restaurant just over a mile away.

But on a recent Monday night, Rowell's pickup truck crisscrossed the neighborhood around his store, showing a reporter 18 golden-arched restaurants that have sprouted within a two-mile radius. Only two are owned by franchisers, he says. The rest are owned by the company.

"They're taking sales away from me," he said, bitterly. "Things are so tight that it has become impossible to stay in business unless everything is going smoothly."

He argued that the large number of McDonald's-owned restaurants located near franchisee stores "violates the essence" of franchise owners' contracts.

Ronaldo Marques, communications director for McDonald's Brazil, insists the company is doing everything possible to help franchise owners survive.

"We expanded to prevent other competitors coming in and if any franchisee is impacted, we will assist them," said Marques. "Franchising is our heart and soul and we will go the extra mile to support our franchisees."

One of the franchise owners' big complaints has to do with rent paid to McDonald's. Rowell pays 21 percent of his sales to McDonald's in rent, while McDonald's has to only hand over 5 percent to the landowner. The arrangement is typical of the company's business model worldwide.

In 2000, McDonald's gave rent relief to the owners of 90 of 280 franchises, while this year, 180 of 264 franchises qualified, Marques said.

But unhappy franchisees argue that the rent relief is not enough to keep restaurants afloat.

"I have the feeling they want to break me," said Jacques Riegler, who has four stores in the southern city of Curitiba.

Riegler predicted that a number of franchisees, falling behind on their bank or royalty payments, would end up going "cap in hand" to McDonald's, which "will end up taking over the whole network for next to nothing."

According to Dick Adams, a former U.S. McDonald's franchise owner who now runs a San Diego-based consultancy called Franchise Equity Group, many Mexican franchise owners hit by the falling peso in 1994 lost their businesses in a similar way.

But Hickok stressed that he didn't believe there was "any nefarious design by McDonald's" to put franchisees out of business. "This is just a very tough situation," he said.

Marques agreed. "This is a business and business involves risk," he said.

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