McDonald’s makes money by leveraging its product, fast food, to franchisees who have to lease properties, often at large markups, that are owned by McDonald’s.
Franchises account for roughly 93% of McDonald’s locations worldwide.
Franchisees are drawn in by the high profit margins, which make McDonald’s businesses practically certain to be profitable.
McDonald’s is still committed to growth and is continuing its aggressive use of the three growth accelerators—EOTF, delivery, and digital.
yet again, how does McDonald’s generate revenue? Here is a thorough breakdown of McDonald’s three revenue streams, as well as the various goods and services they provide, their business and revenue model, their annual revenue, and how they operate.
Table of Contents
How McDonald’s Makes Money
By making franchisee agreements available to its business partners, McDonald’s generates revenue. Although the business is a major force in the fast-food industry, renting out its locations to franchisees is where it gets the majority of its income. As a result, rather than just being a chain of fast food restaurants, we can consider McDonald’s to be an empire of real estate.
McDonald’s receives a consistent income stream from rent and royalties on food sales under this business model. Due to lower operating expenses, its franchisees enjoy profitable locations quickly after they open. Since McDonald’s owns the land where its sites are located, it makes financial market deals by leveraging the property’s value.
Approximately 82% of franchisee revenues go to McDonald’s, compared to 16% from company-operated locations, according to analysts. McDonald’s intends to raise its percentage of franchise locations from 93% to 95% in the future as a result.
The following international business divisions are run by McDonald’s. International Developmental Licensed Markets, Global Markets, US Operations, and Corporate. 54%, 37.2%, and 8.7% of the business’s revenues come from each of its divisions, respectively.
What Does McDonald’s Do?
McDonald’s is a fast-food franchise chain that uses a convenience food business model to serve burgers, chicken nuggets, fries, desserts, and other sandwiches. More than 70 million customers, or about 1% of the world’s population, are served by the company’s more than 38,000 locations worldwide.
McDonald’s is the dominant force in the “Quick Service Restaurant (QSR)” restaurant market. A share of the company initially traded for $22.50 on the NYSE in April 1965. To help franchisees set up and run their businesses, the company provides institutionalized training.
How Does McDonald’s Work?
Many people mistakenly believe that McDonald’s is a fast-food chain, but that is untrue. Despite the fact that the company owns restaurants that serve food, real estate is where the majority of its profits are made. Franchise agreements and leasing its restaurants to owners at significant markups over the real estate market value for the property are how it generates revenue.
With a goal of reaching 95% ownership, McDonald’s currently owns 93% of all franchise locations. Franchisees join the industry because of the promise of substantial profit margins on food sales. Franchisees reach profitability very quickly after opening their store because the margins are so good. The company’s product profit margin is an astounding 40%.
McDonald’s has a commendable growth strategy, adding a new location every 14.5 hours somewhere in the world. Delivery, EOTF, and Digital are the three growth accelerators on which the company focuses.
McDonald’s has stringent requirements for new franchisees in terms of their financial standing, liquidity, and net worth. Additionally, franchisees make purchases for supplies, pay rent on their properties, and pay employee salaries.
Why McDonald’s Franchises Are in Demand?
McDonald’s has notoriously strict criteria for its franchisees (including net worth and liquidity). Additionally, franchisees are accountable for making supply orders, paying the rent or mortgage, and paying employees’ salaries. Therefore, why open a franchise? The allure is that thanks to the impressive margins, McDonald’s offers its franchisees a virtually guaranteed profit.
For its high turnover, the restaurant business is notorious. As any restaurateur will tell you, one major reason for this is that the margins can be thinner than a slice of processed However, McDonald’s operating margins are double quarter pound thick—north of 40%.
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Growth Strategy
McDonald’s long-term objective is to franchise about 95% of its locations. McDonald’s will continue to make progress toward this long-term goal primarily by re-franchising restaurants to conventional licensees. The company’s efforts to effectively drive growth as a better McDonald’s through the Velocity Growth Plan were continued, and as a result, several organizational changes to its global business structure were implemented.
McDonald’s customer-centric Velocity Growth Plan, first introduced in 2017, focuses on the three main drivers of the company: food, value, and customer experience. Here’s its main focus:
- Retaining Existing Customers:concentrating on topics like family gatherings and food-focused breakfasts where it already has a solid presence in the informal eating out category.
- Regaining Customers Who Visit Less Often:Recommitting to its product’s historical strong points, such as food’s quality, taste, and convenience.
- Converting Casual to Committed Customers:By promoting and leveraging the McCafé coffee brand and improving snack and treat offerings, we can build stronger relationships with our customers and encourage them to come back more frequently.
McDonald’s is still steadfast in its commitment to carrying out its aggressive deployment of the three growth accelerators. The growth accelerators are:
- Experience of the Future:Restaurant modernization and technological upgrades to transform the restaurant service experience and enhance customer perceptions of the brand.
- Digital:Through improved self-order kiosks, table service, and curbside pick-up options, as well as additional functionality on its global mobile app, McDonald’s is giving customers more options for how they can order, pay, and receive service.
- Delivery: The number of McDonald’s restaurants that offer delivery has increased. More than 50% of the global system now has it available. When it comes to growing its brand and business, McDonald’s has been and will continue to be quite proactive in keeping up with the times. In order to compete with the younger generations, who prefer home delivery over pick-up, the company first announced a partnership with Uber Eats for home delivery in the U.S. It then added Doordash and GrubHub to the mix.
Key Challenges
McDonald’s has managed to maintain a comfortable lead over its primary rivals in the fast food industry, including Burger King, Wendy’s, and KFC. However, its main obstacle may just be a consumer who demands healthier, organic menu options along with fast-food convenience.
Another restaurant model has been trying to attract customers’ attention—or, more precisely, palates—for the past few years. This model offers diners freshly prepared, higher-quality food in a relaxed setting with effective counter service. Dubbed as fast-casual restaurants, these entities (Chipotle (CMG), Shake Shack(SHAK), and Cheesecake Factory (CAKE), among others) have been making inroads into the space long dominated by chains like McDonald’s.
Fast-casual differs from fast food in that its aim is to provide consumers with healthier selections but with fast food convenience at a slightly higher price point that consumers would be willing to pay. The growing consumption trends for food that is healthy, economical, and available with minimal wait times have begun to eat into the market share of leading fast food restaurants.
McDonald’s paid attention to this. In 2018, it made the announcement that all artificial preservatives, colors, and other ingredients would be eliminated from seven of its burger options. On the menu is a Southwest Grilled Chicken Salad, and a kid’s Happy Meal comes with apple slices.
Competitors
Franchisees of McDonald’s compete for market share with those of other fast-food chains.
Since the 1980s and 1990s, the company and Burger King have been at odds.
The business has such a significant influence on the global market that Pepsi would overtake Coca-Cola as the most popular soft drink brand if it began serving Pepsi to its customers in place of the latter.
The following businesses are some of its main rivals in the US market.
- Burger King
- Wendy’s
- Jollibee
- Taco Bell
- Five Guys
- Chipotle
- Kentucky Fried Chicken (KFC)
- In-N-Out Burger
- White Castle
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FAQs
What’s Included in a McDonald’s Franchise Agreement?
According to the business, McDonald’s gives franchisees a long-term lease for the location, and the owner is then in charge of all the furniture, seating, decorations, and signage. In order to make improvements and stay current, franchisees must continually reinvest money into their companies.
How Much Does a McDonald’s Franchise Cost?
In order to acquire a McDonald’s franchise, you will need quite a bit of start-up capital. Depending on the location, the initial franchise investment can be as high as $2 million. There is also a $45,000 franchise fee and ongoing 4% royalties. Franchisees frequently pay rent to McDonald’s for their locations as well.
How Much Do McDonald’s Franchise Owners Make?
Owners of American McDonald’s franchises can expect to make over $150,000 in profits in a year; however, industry research shows that many franchisees actually earn less than this projection.
The Bottom Line
The industry of fast food ought to be as stable as any other. People must eat, and they prefer their food to be fast and fresh without having to spend excessive amounts of money. Nevertheless, the shift in consumer demand toward healthy eating presents challenges for the industry. It is important for a restaurant chain to understand that its trademark qualities of familiarity and consistency are also very valuable. McDonald’s continues to turn a profit even when the year is a failure. When operating at its peak, it’s a must-have stock in any comprehensive portfolio, especially since it has similarities with real estate investment trusts (REITs) as well.