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FDD Talk 2015: The McDonald’s Franchise Opportunity (Financial Performance Analysis, Estimated Costs, and Other Important Stuff You Need to Know)

by Franchise Chatter on July 9, 2015

in FDD Talk 2017: Food Franchises, Franchise Earnings, Hamburger Franchise

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McDonald's Photo by Blueiscool

In this FDD Talk 2015 post, you’ll learn the following:

  • Section I – Background information on the McDonald’s franchise opportunity, including relevant news updates
  • Section II – Estimated initial investment for a McDonald’s franchise, based on Item 7 of the company’s 2015 FDD
  • Section III – Presentation and analysis of McDonald’s financial performance representations, based on Item 19 of the company’s 2015 FDD, including information on the:
  • 2014 average, high, and low annual sales volume for the 12,408 domestic traditional McDonald’s restaurants opened at least 1 year as of December 31, 2014
  • percentage of domestic traditional McDonald’s restaurants opened at least 1 year as of December 31, 2014 with 2014 annual sales in excess of $2,200,000, $2,400,000, and $2,600,000, respectively
  • 2014 total costs of sales, gross profit, other operating expenses, and operating income before occupancy costs for the 10,194 independent franchisee traditional restaurants opened at least 1 year as of December 31, 2014 with 2014 annual sales of $2,200,000, $2,400,000, and $2,600,000, respectively
  • percentage of independent franchisee traditional restaurants opened at least 1 year as of December 31, 2014 with 2014 annual operating income before occupancy costs greater than $552,000, $619,000, and $693,000, respectively

Section I – Background Information

The latest in a series of changes announced by McDonald’s is a turnaround plan that will restructure the company.

As of July 1, 2015, McDonald’s will have a new organizational structure with several segments:

  • U.S.: McDonald’s largest segment.
  • International Lead Markets: Established markets such as Canada, Australia and some Western European countries that have similar features and dynamics.
  • High-Growth Markets: Markets that have high potential for expansion and franchising.
  • Foundational Markets: The remaining markets.

McDonald’s plans to increase the rate of refranchising with 3,500 refranchised restaurants by 2019; increase net general and administrative savings; and increase the amounts of money returned to shareholders.

The fast-food giant started in 1940 as a barbecue restaurant owned by Richard and Maurice McDonald. The brothers switched to a burger restaurant in 1948. Ray Kroc came aboard as a franchise agent in 1955 and later bought the chain and led its monumental growth.

Thompson retires, Easterbrook new CEO

McDonald’s Corporation President/CEO Don Thompson retired March 1, 2015, after nearly 25 years with the company.

Steve Easterbrook, formerly senior executive vice president and chief brand officer, replaced Thompson, also filling his vacancy on the board of directors. Pete Benson, senior executive vice president and chief financial officer, was promoted to the new position of chief administrative officer. He was replaced by Kevin Ozan, former senior vice president and corporate controller.

Enhanced Benefits

McDonald’s USA announced enhanced benefits for staff at its corporate restaurants in April 2015. Starting wages at these locations will be $1 over minimum wage on July 1; all wages will be adjusted, up to the position of restaurant manager. McDonald’s expects the average hourly wage will be more than $10 at corporate restaurants by 2017.

Employees in corporate restaurants who have been in their positions for at least one year, will begin to accrue personal paid time off.

Drive-Through, Menu Tweaks

The Wall Street Journal reported May 11, 2015, that McDonald’s plans to display only top-selling menu items on drive-through menus to make orders more expedient and efficient.

The burger chain also plans to focus more attention on its midprice menu (between $1.50 and $3) as it continues efforts to streamline its menu (some versions of chicken sandwiches and snack wraps were recently dropped). McDonald’s will offer an upgraded McChicken sandwich and a double burger, both with lettuce and tomato, for about $1.50, while retaining the original sandwiches, according to the WSJ article.

Fresh and frozen lemonade drinks will hit the menu this summer. Customers will also see an expansion of all-day breakfast, which has been tested at some locations.

McDonald’s is testing a pair of breakfast bowls in Southern California; one of the recipes includes kale. In Canada, three salads are being introduced that feature the popular leafy green.

A Sirloin Third Pound Burger joined the menu in April 2015, with Steakhouse, Bacon & Cheese and Lettuce and Tomato varieties.

Menu Sourcing Initiatives

McDonald’s USA announced menu sourcing initiatives in March 2015 that include only sourcing chicken that are raised without antibiotics. The chain will also sell milk that comes from cows that are not treated with the artificial growth hormone rbST.

Combating Deforestation

McDonald’s in April 2015 announced a commitment to fight deforestation, building on its existing global sustainability framework. The company will work with a variety of partners to craft long-term solutions to deforestation around the world.

McDonald’s Recalls Hello Kitty Whistle

McDonald’s in November 2014 recalled a red whistle that came with the Hello Kitty Birthday Lollipop Toy in Happy Meals in the U.S. and Canada. Pieces of the whistle may detach and become a choking and aspiration hazard for young children. Customers were asked to return the whistles to a local McDonald’s and substitute it for another toy and a snack.

Section II – Estimated Costs

  • Please click here for detailed estimates of McDonald’s franchise costs, based on Item 7 of the company’s 2015 FDD.

Section III – Financial Performance Representations (Item 19, 2015 FDD) and Analysis

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