McDonald's doesn't sell burgers, it sells franchises.
It's a real estate company, not a fast-food restaurant.
[THREAD]
It's a real estate company, not a fast-food restaurant.
[THREAD]
1/ The company's goal is to have 95% of its restaurants franchised.
It's at 93% now.
It's at 93% now.
2/ There are four ways McDonald's does business.
1) Company-owned and operated (7% of restaurants)
2) Conventional Franchise
3) Developmental License
4) Affiliate
1) Company-owned and operated (7% of restaurants)
2) Conventional Franchise
3) Developmental License
4) Affiliate
3/ The company has 37,855 restaurants, 35,085 of which are franchised.
So that means 2,770 are company-owned and operated.
So that means 2,770 are company-owned and operated.
4/ Let's look at the margins on franchised locations vs. company-owned.
Company-owned gross margins: 16%
Franchise gross margins: 81%
It's no wonder the company is aiming for a 95% franchise model.
Company-owned gross margins: 16%
Franchise gross margins: 81%
It's no wonder the company is aiming for a 95% franchise model.
5/ And here is sales breakdown for franchise vs. company-owned.
Franchise revenue as % of overall sales: 55%
Company-owned revenue as % of overall sales: 45%
Franchise revenue as % of overall sales: 55%
Company-owned revenue as % of overall sales: 45%
6/ Here is how this has trended over the past few years. You can clearly see the emphasis on franchising.
7/ These two segments culminate in some very strong overall EBIT margins.
8/ Compare these 44% EBIT margins with Chipotle, who owns and operates all of its restaurants.
9/ So what gives? Why would Chipotle not do any franchising?
There are a bunch of reasons, but at the end of the day, the absolute dollar amount of profit matters more than margins.
Here are the TOTAL revenue per store #'s for both.
McDonald's: $555k
Chipotle: $2.1 million
There are a bunch of reasons, but at the end of the day, the absolute dollar amount of profit matters more than margins.
Here are the TOTAL revenue per store #'s for both.
McDonald's: $555k
Chipotle: $2.1 million
10/ Chipotle has 2,546 restaurants compared to 37,855 for McDonald's.
The franchise model is obviously much more scalable.
The 35,085 franchised locations did $86 billion in sales last year, and McDonald's made $11 billion from that.
Here is the "take-rate" from franchisees
The franchise model is obviously much more scalable.
The 35,085 franchised locations did $86 billion in sales last year, and McDonald's made $11 billion from that.
Here is the "take-rate" from franchisees
11/ To put the expenses in another light, we'll take company-owned expenses per store and the same for franchises.
Company-owned: 2,770
Franchise: 35,085
Company-Owned Expenses: $1.96 billion
Franchise Expenses: $510 million
Company-owned: 2,770
Franchise: 35,085
Company-Owned Expenses: $1.96 billion
Franchise Expenses: $510 million
12/ So here is McDonald's business model in a nutshell.
1) Take out debt to buy land
2) Find a franchisee from the waitlist
3) In exchange for the brand and operational know-how, franchisees pay royalties and start-up costs.
4) Enjoy nice margins
5) Repeat
1) Take out debt to buy land
2) Find a franchisee from the waitlist
3) In exchange for the brand and operational know-how, franchisees pay royalties and start-up costs.
4) Enjoy nice margins
5) Repeat
13/ Finally, this is what property, plant and equipment looks like.
For reference, Amazon's PPE as a % of sales is around 26%.
See, McDonald's IS a real estate company after all.
For reference, Amazon's PPE as a % of sales is around 26%.
See, McDonald's IS a real estate company after all.
14/ The real competency of McDonald's is real estate, not burgers.
Even with $31 billion in debt on the balance sheet, the company's $5 billion of annual free cash flow is way more than enough to cover the $1 billion in interest expense.
Even with $31 billion in debt on the balance sheet, the company's $5 billion of annual free cash flow is way more than enough to cover the $1 billion in interest expense.
Fin/
Fun fact to end: McDonald's has 3.7% market share of the entire restaurant industry.
Fun fact to end: McDonald's has 3.7% market share of the entire restaurant industry.
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