- The Washington Times - Tuesday, December 11, 2001

SAO PAULO, Brazil It's Monday, 8 p.m., dinner time in Brazil. Only three cars are in line at the drive-through as John Rowell pulls in to check the day's receipts at his McDonald's restaurant in eastern Sao Paulo.

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 Mr. Rowell. "Last month we were down to 180,000 reals now worth about $70,000 and it's not getting any better."

For many franchise owners like Mr. Rowell, the McCarnival is over in Brazil, until recently the star emerging market for the world's biggest restaurant chain. An economic slowdown and sliding currency are squeezing profits, and franchise owners complain that their sales are being siphoned away by a slew of new stores opened under the chain's aggressive global expansion plans.

Analysts say it's an example of how globalization, driven by the economic boom of the 1990s, is causing friction in one of the world's biggest developing markets.

"What we are seeing now is the dark side of international development," said Allan Hickok, senior restaurant analyst at Minneapolis-based consulting firm US Bancorp Piper Jaffray.

Worried franchisers point to Mexico, where many restaurant owners were forced to sell out to McDonald's Corp. in 1994 because of the falling peso.

Some franchise owners are suing McDonald's, claiming illegal rent manipulation and "cannibalization" of their sales by restaurants owned directly by the company.

After years of sizzling growth from 175 restaurants in 1995 to 563 this year Brazil is McDonald's eighth most important market worldwide. Until recently, the company was planning to double its number of restaurants here by 2003.

Now, however, with growth slowing worldwide, the Oak Brook, Ill.-based fast-food empire will add to its 29,000 global total next year only 1,400 new restaurants the lowest number 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 it can chew, said Mr. Rowell, 59, an American who is leading the Brazilian franchise owners' legal challenge.

When Mr. Rowell opened his 172-seat McDonald's one of two he runs in 1994, company representatives told him of plans for another restaurant just over a mile away.

But on a recent Monday night, Mr. Rowell's pickup truck crisscrossed the neighborhood around his store, showing a reporter 18 golden-arched restaurants that have sprouted within a two-mile radius. Only two are owned by franchisers, he says. The rest are owned by the company.

"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 large number of McDonald's-owned restaurants located near franchise stores "violates the essence" of franchise owners' contracts.

Ronaldo Marques, communications director for McDonald's Brazil, insists the company is doing everything it can to help franchise owners survive.

"We expanded to prevent other competitors coming in, and if any franchisee is impacted, we will assist them," said Mr. Marques. "Franchising is our heart and soul, and we will go the extra mile to support our franchisees."

A big complaint of one of the franchise owners has to do with rent paid to McDonald's. Mr. Rowell pays 21 percent of his sales to McDonald's in rent, while McDonald's hands over only 5 percent to the landowner. The arrangement is typical of the company's business model worldwide.

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