Thread by @investing_city

McDonald's doesn't sell burgers, it sells franchises.

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.

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

3/ The company has 37,855 restaurants, 35,085 of which are franchised.

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.

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%

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

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

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

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

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.

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.

Fin/

Fun fact to end: McDonald's has 3.7% market share of the entire restaurant industry.

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