Bloomberg recently reported that the state of McDonald’s (NYSE: MCD) franchises has changed. To put its analysis, along with one of the company’s structure, into perspective, 24/7 Wall St. has collected the list McDonald’s per capita by state measured against the national average of 5 locations per hundred thousand. At the top of the list, Ohio at 7 and Michigan at 6.4.
The Bloomberg analysis of the franchise system:
Decades ago, McDonald’s franchised single locations, whereas other chains sold off entire regions to one operator. “The incentive to the McDonald’s franchisee was to run a great store, because that will help you get another store,” says Mark Kalinowski, an analyst at Nomura Securities. Now, as the U.S. nears saturation, with more than 14,000 McDonald’s restaurants, the chain is trying to draw more sales out of each store and closing underperforming locations. “How do you get more stores in the hands of your better operators?” Kalinowski asks. “What they’re doing today is to achieve that.”
The guy with one location has lost out.
McDonald’s current model based on the company’s formula
Under McDonald’s conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant business, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees enabling restaurant performance levels that are among the highest in the industry. In certain circumstances, the Company participates in the reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives.
Under McDonald’s developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market.
McDonald’s is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally-relevant customer experiences and driving profitability. Franchising enables an individual to own a restaurant business and maintain control over staffing, purchasing, marketing and pricing decisions, while also benefiting from the financial strength and global experience of McDonald’s. However, directly operating restaurants is important to being a credible franchisor and provides Company personnel with restaurant operations experience. In Company-operated restaurants, and in collaboration with franchisees, McDonald’s further develops and refines operating standards, marketing concepts and product and pricing strategies, so that only those that the Company believes are most beneficial are introduced in the restaurants. McDonald’s continually reviews its mix of Company-operated and franchised restaurants to help optimize overall performance, with a goal to be 95% franchised over the long term.
In 2015, McDonald’s had revenue of $25.4 billion, and net income of $4.5 billion.