I joined the Group 1 club, but no corporate tax? Why McDonald's price hike is so good?

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: January 16, 2025 (Thursday)
■ Dialogue: Lee Eun-hee, Professor of Consumer Studies at Inha University

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information. 
◇ Cho Tae-hyun: Everything goes up except for salary. I think it refers to prices these days. However, there are companies that often raise prices to attract consumers' resentment. It's McDonald's in Korea. Since the price was raised last spring, consumers will not be able to avoid it if they raise it by this year. However, while earning money like this, they are not paying corporate tax at all. Where on earth does this profit go? For the related information, I will talk with Lee Eun-hee, a consumer studies professor at Inha University. Is the professor out?

◆Eunhee Lee: Yes, hello. I'm Professor Eunhee Lee of Inha University's Department of Consumer Affairs.

◇ Cho Tae-hyun: Hello, professor. These days, I think it's very scary to talk about eating out. The price of lunch has gone up so much that I think it's burdensome if I say I'm going to eat somewhere, but the economic burden is actually getting bigger, right?

◆Lee Eun-hee: Yes. We're often called Lunch Plation. The consumer price index for eating out has gone up too much. According to the National Statistical Office, the consumer price index for eating out in 2024 was 121.01, up 3.1% year-on-year. It can be said that this has risen by more than 3% for three consecutive years. The overall consumer price index is stabilizing like this, but the fact that consumers' feelings do not comply with it can be seen as a part of this food service price index. There are many cases where the average price of outside lunch is 9,000 won to 10,000 won. In particular, many people use it to save lunch boxes at the cafeteria and convenience stores, and this also rose 6.9% and 4.9%, respectively.

◇ Cho Tae-hyun: It's going up a lot. On the index, even if it is a price stabilization tax, if the price of the item I use a lot rises, I can't feel those things, so why is the cost of food, especially eating out, so much?

◆Eunhee Lee: Rising prices of major ingredients are behind the deepening lunch market. If you look at the price of agricultural and livestock products last year. It went up to 5.9% year-on-year. It's more than twice the rate of increase in the overall consumer price index. In particular, the surge in vegetable prices and fruit prices has dealt a direct blow to the rise in dining out costs.

◇ Cho Tae-hyun: Since the price of raw materials goes up, the overall cost of eating out is bound to go up. Both labor and transportation costs would have affected this. Then there was something we used to say often when prices rose like this before. We talked a lot about eating a hamburger and having lunch together, but I think the price of hamburgers is not that expensive. If you look at the data from McDonald's over the past three years, they have raised prices very often. Did you announce your plan to raise the price again this year?

◆Eun-hee Lee: Yes, consumers are frowning because food companies raise prices almost every year. Even if McDonald's is posted twice a year, not every year, there are many times. So I posted it twice in 2022. Two times in 2023 and once last year. So I've raised the price five times in the last three years.

◇ Cho Tae-hyun: You posted a lot. Why are you posting it so often? Is there a problem inside the company?

◆Lee Eun-hee: Yes, according to the FSS electronic disclosure system, McDonald's has been in the red for five years since 2019. That's what they say. Therefore, it started with a deficit of 44 billion in 2019 and 48.4 billion in 2020, and a deficit of 20.3 billion in 2023, with a cumulative deficit of 358.6 billion won at the end of 2023, exceeding 70.1 billion won in capital, which can be seen as a complete capital erosion.

◇ Cho Tae-hyun: The financial situation is very bad. Usually, if your financial condition is bad like this, you may sell or liquidate a company. I heard that the sale attempt continued, but is this process going well?

◆Lee Eun-hee: Yes, the sale of management rights was not smooth because profitability deteriorated. So the sale collapsed a lot of times. So, since 2016, I tried to sell it to Maeil Dairy Dongwon Group, but it collapsed. In the end, it was sold last year. In September last year, it signed a strategic partnership with Middle East franchisee Kamal Almana Group. A strategic partnership can be said to be a relationship with leading operational rights for domestic businesses.

◇ Cho Tae-hyun: Then I think it can be said that they actually manage it. I'm sure there are a lot of people who are not familiar with Kamal. What kind of company is this?

◆Lee Eun-hee: It's a Qatari company. It is said that it operates 55 companies in eight countries around the world. The partnership with McDonald's was established in 1995 and holds the right to operate McDonald's in Qatar and Turkiye. It is said to be a major investor in Singapore and McDonald's Malaysia. And he's also good at managing. In 2023, we also won the Golden Arch Award, the most prestigious award for global McDonald's. Let me tell you this.

◇ Cho Tae-hyun: It can be seen as a good management company, but anyway, from McDonald's point of view, it can be seen as finding a new owner. That's why it seems to be speeding up to secure financial soundness. Recently, a paid-in capital increase was also carried out, so please tell us about this.

◆Lee Eun-hee: McDonald's carried out paid-in capital reduction in September 2024, three months after the capital increase. This paid-in capital reduction can be seen as a measure to settle funds and improve the financial structure after the company's operating rights are sold. To give you a little more detail, the company is withdrawing or burning stocks while paying existing shareholders in the process of reducing their capital. So, during the merger and acquisition process, it is usually used to complete settlement with existing shareholders and to adjust the financial structure so that new shareholders establish control of the company.

◇ Cho Tae-hyun: We are doing financial restructuring. Various measures will be taken to restore the financial condition, and I think there will also be a price increase. Did McDonald's earnings improve after the hike?

◆Eun-hee Lee: First of all, sales have increased tremendously. It's a huge loss. McDonald's Korea has surpassed 1 trillion in sales for the first time since entering the market in 2023. So, direct sales increased 12.4% year-on-year to 1.118 trillion won. These operating losses continue to be in the red. It has continued to lose operating losses for five years since 2019. Net loss for the current period also continues to be a loss since 2019.

◇ Cho Tae-hyun: Then it can be said that only the appearance has grown and there has been no substance, but I don't think there are many companies that go to Group 1 clubs that don't have this much substance. What do you see as the background of this situation?

◆Eun-hee Lee: The cause of McDonald's Korea is that raw material prices have risen, interest rates have risen, and various cost factors are suggested, but consumers have doubts that the real cause is because royalties are too high. That's what I'm saying.

◇ Cho Tae-hyun: How much is it that the royalties to the headquarters are too large?

◆Eun-hee Lee: McDonald's Korea pays 5% of its net sales as royalties. So, as sales increase, the royalty burden increases. It paid 68.5 billion won in royalties in 2023, with a net loss of 31.9 billion won.

◇ Cho Tae-hyun: It can be said that it had a direct impact to some extent, but since we are headquartered in the United States, it is natural to pay royalties to them. This may be a problem because the proportion is too large, but the bad public opinion is that they are paying royalties and not paying taxes properly in Korea. It's this part. How is this possible?

◆Eun-hee Lee: In the case of other global brands, they sign tax treaties with each country. So foreign companies are only allowed to impose corporate taxes on net profits earned in Korea. So if you deduct royalties from McDonald's income, it becomes a deficit. That's why the tax base gets smaller, so you can't pay a penny of taxes.

◇ Cho Tae-hyun: There was a deficit, but since royalties are the effect, the corporate tax has become zero. I think it's true, and it's a bit absurd and complicated. McDonald's is also coming up with other ways to improve its profits. This is the expansion of the store. We will open 500 stores by 2030. What do you think of this possibility?

◆Lee Eun-hee: There are 399 McDonald's stores right now. Then, if you say you'll do 500 by 2030, you're going to increase it by 100 in about six years. You have to open about 17 each year consistently. So in the end, McDonald's Korea will increase its sales by increasing its stores in Korea and improve its profitability. In terms of cost, there are problems with raw material prices, delivery fees, and royalties to the U.S. headquarters, so only sales will increase, but the deficit will continue in the future. There are my doubts in the industry.

◇ Cho Tae-hyun: There may be external growth, but I'm not sure about profitability. But he said he would focus on expanding the DT store. Is the DT store the one you drive into?

◆Eun-hee Lee: That's right. It's called DT because it reduces drive-through. The number of DT store users is gradually increasing. So in 2012, it was around 10 million people. This has more than quadrupled and reached 43 million in 2022, the first time in 10 years.

◇ Cho Tae-hyun: Why are you increasing the number of DT stores?

◆Eun-hee Lee: DT stores have almost a short time for customers to stay in the store.

◇ Cho Tae-hyun: That's right. Because I only get the prizes in the car and go out.

◆Lee Eun-hee: That's right. That's why the turnover rate is fast, so it has the advantage of being able to increase sales more than regular stores.

◇Jo Tae-hyun: How much DT stores do you have in the country now?

◆Lee Eun-hee: There are 399 stores nationwide. There are 257 DT stores, 64% of them, and I'm going to increase this further. This is the plan.

◇ Cho Tae-hyun: In a way, it can be seen as a sign of securing profitability, but there was some opposition among existing franchisees due to the attempt to expand direct stores a few years ago. Considering these parts, isn't there a possibility that it will be another obstacle to store expansion?

◆Lee Eun-hee: Yes. The reason for increasing the number of direct stores is that in the case of direct stores, the sales amount is reflected in full sales. So I'm going to increase the number of direct stores and reduce the number of franchises. In the case of merchants, royalties paid to McDonald's Korea, and store sublease fees, food ingredients, and only this amount are counted as headquarters sales. So, as we try to expand our direct stores and reduce the number of franchisees, there are several obstacles to lawsuits for the rejection of renewal of franchise contracts among franchise owners.

◇ Cho Tae-hyun: Then, we're trying to increase the number of direct stores and secure profitability. Nevertheless, shouldn't we say that the reason we're raising prices again this year is because we've got more expenses to pay to the headquarters?

◆Lee Eun-hee: That's right. If you switch directly to a direct store now, the sales appearance will increase, but since direct stores incur various costs, switching to a direct store is also another factor that deteriorates profitability. That's why we're trying to solve the deterioration of profitability caused by the increase in direct stores by raising the price of the product and the price of the hamburger.

◇ Cho Tae-hyun: Okay. If you raise prices, pass on the burden to consumers, and don't pay corporate tax, public opinion won't be very good.

◆Lee Eun-hee: That's right. So, the important thing is not to focus only on external growth or sales achievement, but to secure profitability through sound management and then to discuss again with the headquarters whether the royalties to the U.S. headquarters are at an appropriate level.

◇ Cho Tae-hyun: Okay. A situation in which McDonald's Korea raises prices and passes the burden on consumers, while not paying taxes. Hwang, I think these things will inevitably be criticized. If companies' image deteriorates, they will naturally be affected by sales and long-term growth. So far, we have talked about various things surrounding McDonald's with Lee Eun-hee, a consumer studies professor at Inha University. Thank you for talking today.

◆Lee Eun-hee: Yes, thank you.

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