THE BLOG
01/14/2016 12:37 pm ET Updated Jan 14, 2017

How McDonald's Is Ripping Off Consumers in Europe

PHILIPPE HUGUEN via Getty Images

When it comes to McDonald's, Americans tend to think of the "dollar menu" and bargain deals on burgers and fries. But on the other side of the Atlantic, the Golden Arches are fast becoming a poster child for mistreating consumers and jacking up prices.

This week, a coalition of European consumer rights organizations filed a complaint with the European Commission calling for an investigation into the widely-overlooked ways in which McDonald's abuses its power to squash competition and unfairly squeeze its franchisees and customers throughout Europe.

Some may ask: How could the fast-food giant famous for its "Happy Meals" be responsible for serious consumer harm? The explanation starts with the fact that, despite its reputation, selling burgers and fries is not the primary focus of McDonald's business model. The company's real business is selling real estate.

McDonald's forces its franchisees to lease property directly from the company - a stipulation that no other fast-food chain in Europe requires. And with this stranglehold on its franchisees' real estate options, the company charges rents up to 10 times above market rates, according to our analysis.

Indeed, most of McDonald's revenue in Europe from franchisees comes from collecting rent: two-thirds of its total revenue from franchisees comes from rents.

In addition to charging excessive rents, McDonald's forces franchisees to comply with a series of other restrictive conditions, including long contract terms, one-to-two year non-compete clauses, high royalty fees, and overly broad termination provisions.

What allows McDonald's to get away with this scheme is the fact that it is, by several orders of magnitude, the dominant fast-food company in Europe, with some 8,000 stores across the Continent serving 15.7 million customers. These stores generated $19 billion in sales in 2014, nearly twice the sales of its nearest competitor. In other words, McDonald's is big enough to write its own rules.

With such a lucrative set up, it's no wonder that McDonald's founder Ray Kroc once boasted, "Ladies and gentlemen, I'm not in the hamburger business. My business is real estate."

And while this business has generated billions in profits for McDonald's, it's McDonald's customers that end up absorbing the costs: Faced with such onerous rents and other fees, McDonald's franchisees ultimately pass off the costs to consumers in the form of higher prices.

Recent research shows higher prices for a vast majority of menu items in franchise stores than in corporate-owned ones in Europe. In Italy, the numbers are stark: In Bologna, for example, the survey shows that 97% of menu items had higher prices in franchised outlets than in corporate-owned ones; in Rome, 68% of items had higher prices in franchise stores.

The same pattern could be found in France. In Marseille, 79% of menu items had higher prices in franchise stores than in corporate-owned stores. In Paris, 71% had higher prices.

And these price differentials are significant: An order of small fries, for example, is 72% more expensive at franchised stores than corporate stores in Marseille, 64% more expensive in Paris, and 25% more expensive in Lyon.

McDonald's may be accustomed to throwing around its weight in America, but in Europe, this abuse of power is illegal. And unfortunately, it is part of a pattern: Late last year, the European Commission announced an investigation into McDonald's aggressive tax avoidance strategies in Europe, following allegations that the company has dodged more than one billion euros in taxes since 2009.

The practices we outlined in our complaint are serious violations of antitrust law, and come with a hefty penalty - under European Union laws, McDonald's could be fined up to 10% of its global revenue, or roughly $9 billion.

The potential consequences for the company are significant, and rightfully so. McDonald's is free to keep exporting its Quarter Pounder and fries if it wants, but it's long past time to take law breaking off its European menu.

Gianluca Di Ascenzo is President of Codacons. Antonio Longo is President of Movimento Difesa del Cittadino. Antonio Gaudioso is Secretary General of Cittadinanzattiva.