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NLRB Ruling on McDonald’s Puts Franchising Stocks in Jeopardy

The National Labor Relations Board opened a big can of worms

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As was noted, with the first chain being officially named as a target, it becomes much easier for the National Labor Relations Board to put other franchises on its legal hit-list. And, there are plenty in a variety of industries from coast to coast, some of which may surprise you. For instance…

  • McDonald’s: Of the 14,000 golden arches in the United States, 90% are franchises.
  • Subway: It’s not a publicly-traded company, but it’s still a huge franchiser. In fact, it’s the nation’s most popular franchise opportunity. Nearly 27,000 of its 42,241 stores are located in the U.S., and every single one of them is a franchise.
  • Hilton Hotels and Resorts (HLT): Yes, believe it or not, many of the well-known hotel chain’s locations are actually franchised. In fact, on a global basis, most of them — 444 in all — are franchised on a global basis, versus only 114 Hilton hotels being company-owned.
  • GNC Holdings (GNC): Yes, America’s most prolific nutrition and supplement store also relies on franchisees to drive a big chunk of its sales. Of the 6400 units found in the United States, 1,026 of them are franchises. Another 2,223 of the shops found in Rite-Aids also qualify as franchises.

While restaurant stocks may be feeling a little more pressure now, the risk has been heightened just as much for some retailing stocks and even a few hotel stocks (or at least parent companies or private equity funds that own these chains). Indeed, labor-intensive hotel franchises may be more vulnerable to the National Labor Relations Board’s recent ruling than the restaurant industry is.

The Impact of the NLRB Ruling on Franchising

As Newton’s third law of motion explains it, for every action, there’s an equal and opposite reaction. At stake for all of these franchisers is a much tougher — perhaps even debilitating — labor environment.

Given the much-publicized traction that enough McDonald’s employees have gained with the NLRB, workers at other restaurants, hotels, service providers and retailers could new feel empowered enough to begin rattling their own cages. That’s not to say these groups of employees don’t have a right to organize and/or report broken laws, but it does put the franchisers in a tricky situation … more of the risk of being an employer, but no additional revenue or income for taking on that risk.

The end result can only be higher franchise fees, stricter standards when making franchising decisions, or both. Eventually, it’s the consumer that will end up footing the bill, either through higher prices or fewer restaurant and hotel choices, or a combination of both.

Bottom Line for the Franchise Model

It’s too soon (and unnecessary) to write off the franchise business model, and none of this is to say restaurant stocks and hotel stocks that rely on franchising are headed for their complete and utter demise. This is going to be another looming liability that becomes part of the normal course of business though, and like all liabilities, it will eventually chip away at balance sheets and income statements. It’s something investors at least need to keep in mind.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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