Case Against Large Fast Food Franchises

Franchise (Business Dictionary):

Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or tradename as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products.

Franchises are an easy way for an investor to have ownership rights without the responsibility of actually managing. Franchising is the business structure for large fast food companies like McDonalds, Burger King, Starbucks, Taco Bell, Subway, Pizza Hut, KFC, etc. McDonald’s is the largest fast food chain in the world with 35,000 outlets across 119 countries, employing 1.7 million people. Starbucks is now the largest coffee company in the world with 23,000 stores across 64 countries. From a technological or logistical perspective, there is no reason these companies should have such domination over flipping burgers, making a sandwich, and brewing a cup of coffee.

In 19^th century America, most businesses were locally owned and managed by the same people. As sole proprietorships, profits would stay with the owners, providing a livable income. In a food franchise, ownership is separate and absent from the management/operations of the food establishment. Operators (cooks) are reduced to a non-livable minimum wage and the local manager doesn’t fare much better. Profits are skimmed to support an absentee owner who has no real interest in the local community nor in the managing/operating of the food establishment. The franchisee pays royalties to the corporation to govern that aspect. The food is engineered, standardized, unhealthy, but cheap. Culinary creativity is nonexistent at the establishment level.

The CEO of McDonald’s has a yearly salary of $16M with generous salaries cascading through the executive leadership. That’s a lot of burgers. Each franchise can cost $2-5$MM. A local burger joint should not cost millions to start, but somehow it does and it’s still profitable. What could have been a local establishment that supports a livable income for sole proprietorships is an establishment that reduces cooks to minimum wage with absentee owners skimming all the profits, skewing wealth to the few, wealth that could have gone to the many.

Today, the preponderance of fast food franchises are owned by LLCs, a financial vehicle that obscures ownership and liabilities. Absentee owners have no concern for the local community nor for the workers. They just want a rate of return. Many LLCs are of foreign origin, the entry price to gain citizenship in America.

Merely taxing the wealthy will not fix the problem of skewed wealth. Changing the financial vehicles that propagate skewed ownership will fix the problem of skewed wealth. Limiting the proliferation of fast food franchises is an easy first step to fixing the problem of skewed wealth.