Sunday, April 02, 2006

McDonald's in El Salvador

In December a Salvadoran court entered a judgment awarding Roberto Bukele, a McDonald's franchisee in El Salvador, $24 million in damages from the company with the golden arches. The court found that McDonald's had wrongfully tried to terminate Bukele's contract. McDonald's has announced it will appeal.

The Miami Herald has an article describing McDonald's decade long dispute with its first franchisee in El Salvador:

Operating in El Salvador has never been the golden opportunity Bukele hoped for when in 1972, the University of Wisconsin graduate got the license to open the first McDonald's in Latin America.

When civil war erupted at the end of the decade, Bukele's three restaurants in San Salvador made popular targets. One McDonald's was bombed in 1978; the next year, another was torched, killing two guards.

Two years after the war ended in 1992, McDonald's signed a new agreement with Bukele, renewing his licenses until 2014 and offering a $1 million loan to modernize the restaurants....

The 64-year-old who got a license to open the first McDonald's in Latin America has been fighting a legal battle with the fast-food chain that seems to never end.

McDonald's sued Bukele and his company, Servipronto, in 1996 to cancel their contract, claiming his food quality didn't meet the chain's standards. Five trials and appeals over nine years later, an appellate court in December ruled McDonald's must pay Bukele $24 million in damages. ''Someone told me I was never going to beat McDonald's. And here we are,'' Bukele said.

But the fight's not over yet: McDonald's has asked the country's Supreme Court to overturn the award.

I tried to decide if there are any deep insights to be drawn from this tale. Some will view it as a sign that El Salvador's legal system is not ready to protect the rights of foreign investors. Others will view it as a story of a successful fight against a rapacious multinational corporation. Some will view it as yet another example of globalization and wonder whether any one should care whether there are any McDonald's restaurants in El Salvador. I am not sure there is any moral, but it is clear that this highly publicized dispute has not prevented other US restaurant chains like Burger King, Domino's Pizza, Kentucky Fried Chicken, Pizza Hut and Tony Roma's Ribs from establishing operations in the country.

7 comments:

El-Visitador said...

While I am not privy to any inside details, and therefore cannot comment on the merits of either party's arguments, there are three things I can say about this:

a) The quality of the food, packaging, and buildings in 92-96, when I would try Bukele's McD's about once a year just to see if he had miraculously improved, was... despicable. I mean, bad. Worse than the worst you ever saw. Once a year, I went back to Servipronto, to see if the threat of lawsuit would make Bukele react... nothing. I can confirm that the guy was ruining the brand at at time we were getting flooded with Wendy's and Pizza Hut and a fast-growing Biggest.

b) Bukele was famous (deservedly or undeserverdly, I don't know) for paying bad. I do know about managers leaving at the drop of hat during that period, to pursue other opportunities... any opportunities.

c) The other key insight is that El Salvador's courts are ruinous. They haven't been able to sort out a measly franchise breach in 12 years! This is a major reason for any investor to give a pass to El Salvador (and much of Latin America, for that matter), and put their money elsewhere. My advice to any investors: do your contracts under Delaware, NY, London, or Fla. law, or go for binding arbitration. For all practical purposes, the local Court may as well be inexistent.

BTW, the paragraph above describes why many costs of doing business in ES are so high. Since you can never get recourse through the Courts, you have to get everything pre-paid or covered by a Letter of Credit in your favor. When fully-collateralized deals are not possible, you have to have a large operational margin to simply write-off any non-performing contracts. Shame.

(El-Visitador will now duck while he awaits the sure-fire Bukele defamation suit).

HODAD26 said...

yes, but on this count, as someone beenin El Salvador since 1983, you are absolutely correct with all the facts stated
McServi is/was horrible
and it is always best to support the little guy anyway such as the corner hamburger stand or taco joint versus the 'big guys'
Peace

Maarten said...

I have many Salvadoran friends and, coincidentally, was in El Salvador when the court ruled in favor of Roberto Bukele.

My friends never had anything positive to say about McDonald's in El Salvador. This probably explains why they always displayed a preference for Burger King when I began to mingle with the Salvadoran community in Washington DC, early 2001.

Anonymous said...

Wendy's all the way...

Tim said...

These comments make me curious. Why did the court rule in favor of Bukele? It sounds like there was good cause for McDonald's to terminate the franchise contract.

Conquistador said...

Bukele's victory has been overturned. He has now hire the Washington D.C. firm of Alston & Bird to represent him. The partner at Alston & Bird handling the case is former Sneator Bob Dole. When Dole ran for president, his campaign manager for the northeast was Charles Glazer - current US Ambassador to El Salvador. Dole, on behalf of Bukele, tries to lobby Glazer, apparently to no effect: the day after the phone call, Bukele published (CoLatino) a screed against Amb. Glazer for refusing to be pressured by his former boss. Good for Amb. Glazer. Incidentally, Bukele has also been convicted of embezzling millions in retirement funds from his ServiPronto employees.

Tim said...

Conquistador -- what's the source of your information that the award was overturned?