Brazilian McDonald's franchisees sue food giant

"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 bevy of McDonald's-owned restaurants located near franchisee stores "violates the essence" of franchisees' contracts

The Toronto Star
January 2, 2002

Brazilian McDonald's franchisees sue food giant
Accuse company of ‘cannibalizing’ shrinking sales
Tony Smith

SAO PAULO, Brazil — It's Monday, 8 p.m., dinner time in Brazil. Only three cars are in line as John Rowell pulls in to check the day's receipts at his McDonald's in the Sao Paulo neighbourhood of Mooca. 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 (U.S.) — and it's not getting any better.''

For many franchisees like Rowell, the "McCarnival" is over in Brazil, which until recently was the star emerging market for the world's biggest restaurant chain, McDonald's Corp. An economic slowdown and sliding currency are squeezing profits, and franchisees complain their sales are being decimated by a slew of new stores opened under the company's aggressive global expansion.

Some are suing McDonald's, alleging illegal rent manipulation and "cannibalization" of sales by McDonald's own restaurants.

After years of blistering 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 the current number of restaurants in Brazil by 2003.

But now, with growth slowing worldwide, the fast-food empire will add just 1,400 new restaurants to the global total of 29,000 next year, the lowest addition since 1994. McDonald's 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 the company could chew, claimed Rowell, a 59-year-old American who is leading the Brazilian franchisees' legal challenge.

In 1994, when Rowell opened his 172-seat drive-through, the first of two McDonald's he runs, company representatives told him of plans for another restaurant nearby, he said.

But on a recent Monday night, Rowell's pickup truck crisscrossed the neighbourhood around his drive-through, turning up 18 golden-arched restaurants that have sprouted within a three-kilometre radius, all but two owned by McDonald's.

"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 bevy of McDonald's-owned restaurants located near franchisee stores "violates the essence" of franchisees' contracts.

Ronaldo Marques, communications director for McDonald's Brazil, insisted the company is doing everything possible to help franchisees.

"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."


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Risks: Cannibalization, Encroachment (too many outlets in area), Rent increase, Expands too quickly, Corporate stores competing with franchisees, Brazil, 20020102 Brazilian McDonalds

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