Statement on Sales of McDonald’s China and Hong Kong

Last month, McDonald’s announced the sale of the majority of its China and Hong Kong business to CITIC Ltd and Carlyle Group LP for a reported $2.08 billion.

 

The Hong Kong Confederation of Trade Unions (HKCTU) has concerns about the company’s announced plans, given McDonald’s track record in Asia and given issues with its franchise model all over the world. McDonald’s proposed model for China and Hong Kong is similar to arrangements around the globe—from Japan to Brazil— and given the company’s track record, we believe the proposed joint venture with CITIC and Carlyle is not in the best interest of McDonald’s workers in Hong Kong.

 

Through our global alliances with unions like the Service Employees International Union, HKCTU has come to understand that when McDonald’s exits a market or sells a large stake of its business, the resulting model puts enormous pressure on franchisees, which makes it harder for franchisees to provide adequate pay and conditions for their workers.

 

Recent news reports in CNBC.com and CBN Daily and etnet, to name a few, highlight some of SEIU’s concerns facing the China/Hong Kong transaction, and we share those concerns—especially with regard to how removing local franchisees and replacing them with large corporations could negatively affect workers.

 

McDonald’s is already a low-wage employer in Hong Kong and often pays the minimum wage as a starting salary. Only seven percent of McDonald’s workers are paid HK$34 or more—and those workers work in the company’s busiest locations. When the buyers and franchisees get squeezed by McDonald’s, workers may get even less as a result.

 

The HKCTU, which was founded in July 1990, consists of more than 90 affiliates and represents more than 170,000 members. The HKCTU is completely independent from any regime, political party, or consortium. For several years, it has been part of a global alliance of trade unions working to hold McDonald’s accountable everywhere it operates. We have attended global conferences, participated in global days of action and welcomed global union leaders to Hong Kong in our effort to shine a light on how McDonald’s is driving a race to the bottom around the world.

 

The troubling franchise model McDonald’s announced for China and Hong Kong is in use elsewhere and puts enormous tremendous cost and operational pressures onto its licensees. The model has translated into financial and operational problems, poor returns for the shareholders of the buyers, conflict and neglect for the small business owners that operate McDonald’s stores around the world, and poor working conditions for McDonald’s employees.

McDonald’s benefits from a stable and increasing stream of profits in the form of royalties—which in the case of the China and Hong Kong deal are reported to be at least six percent— while exposing its local partners to the operational and financial risks of the business. More and more money is sent out of places like Hong Kong and to Chicago, where McDonald’s executives and shareholders can pad their bank accounts.

 

One need look no further than Japan, where a similar joint venture model is in operation, to see the risks the deal poses for workers in Hong Kong. The model ensures that McDonald’s can maintain a high level of control over the every aspect of operations through both an equity stake in the business and strict contractual arrangements, while transferring most of the risks and capital requirements to the local operator.

 

In Japan, McDonald’s earned an estimated $90 million in royalties in 2015,i at the same time as McDonald’s Japan posted a $290 million net lost.  The company’s Japan venture has seen years of declining store counts and sales and has faced food safety issues that damaged its brand. The model is challenging because McDonald’s wears two hats---large investor and franchisor, requiring it to manage the needs of different sets of share owners and other stakeholders.

 

McDonald’s move to unload its business in Latin America has been a disaster for workers. The sale to a team of investors led by company insider Woods Staton, which created Arcos Dorados, has led to mismanagement, questionable corporate governance, declining sales and a plummeting stock price—resulting in escalating labor conflicts in Brazil, the company’s most important Latin American market.

 

Last December, the National Labor Prosecution Service hit McDonald’s with a $30 million fine—the largest it’s ever imposed on a single company— for repeatedly and continuously breaking Brazilian labor law, flouting a consent decree the company entered into with authorities in 2013 to settle a suit charging rampant workplace violations. The Labor Prosecutor found Arcos did not give workers breaks, provide adequate time off between shifts or provide a day off per week, as required by Brazilian law. The company also required more than two hours of overtime per day in violation of the country’s labor law.

 

Experiences elsewhere sound a cautionary note for workers in Hong Kong and HKCTU urges all stakeholders to examine this deal and its potential negative effects on workers closely.

 

 

i It is estimated that McDonald’s Japan and its franchisees pay a royalty of three percent of sales. Report from Japanese attorneys, Chapter 7: Translated Taxes and Accounting

ii McDonald’s Japan Financial Report, 2015, http://www.mcd-holdings.co.jp/english/financial/result.html

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