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07/12/01 . By TONY SMITH AP Business Writer . Associated Press . SAO PAULO, Brazil  
Brazil Franchisees Sue McDonald's  
Brazil's Golden Arches Tarnished As Franchisees Sue McDonald's on Rent Manipulation Charge  

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 drive-through in the eastern Sao Paulo neighborhood 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, checking the till's computer printout. "Last month we were down to 180,000 reals -- now worth about $70,000 -- and it's not getting any better."

For many franchisees like Rowell, the McCarnival is over in Brazil -- until recently 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 plans.

Some are suing McDonald's, alleging illegal rent manipulation and "cannibalization" of their 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 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 franchisees' legal challenge.

When Rowell opened his 172-seat drive-through -- the first of two McDonald's 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 drive-through, showing a reporter 18 golden-arched restaurants that have sprouted within a two-mile radius. Only two are franchises, he says. The rest are owned by McDonald's itself.

"They flipped the burger," he said bitterly. "They're taking sales away from me. 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, insists the company is doing everything possible to help franchisees 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 franchisees' 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 pays the real estate owner 5 percent of takings. The arrangement is typical of McDonald'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 Rowell's group argue that the rent relief is not enough to keep them 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 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 franchisee who now runs a San Diego-based consultancy called Franchise Equity Group, many Mexican franchisees hit by the falling peso in 1994 lost their businesses in a similar way.

Allan Hickok, senior restaurant analyst at Minneapolis-based US Bancorp Piper Jaffray, said McDonald's rapid overseas growth during the 1990s was good news. "But what we are seeing now is the dark side of international development," he said.

He stressed, however, 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.

According to Marques, there's still room for McDonald's to expand in Brazil.

Last year, the company sold $600 million in burders, and from January to September this year, more than 422 million customers -- up 6.5 percent from last year -- ate at the golden arches.

"There is scope for geographical expansion and there's still potential in places where we are already present," said Marques, comparing Sao Paulo's 180 restaurants with 255 in Miami, 331 in Los Angeles and 440 in Chicago.

A risk for McDonald's is that it could face investigation by Brazil's antitrust watchdog, CADE, after leading senator Roberto Requiao made a strong anti-McDonald's speech in the Senate.

"We must protect the rights of franchisees," said Lindberg Cury, another senator who is garnering cross-party support for such an investigation. "These contracts should be fair to both sides."  
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