FDD Talk 2016: The McDonald’s Franchise Opportunity (Financial Performance Analysis, Estimated Costs, and Other Important Stuff You Need to Know)

In this FDD Talk 2016 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 2016 FDD

• Section III – Presentation and analysis of McDonald’s financial performance representations, based on Item 19 of the company’s 2016 FDD, including information on the:

• 2015 average, high, and low annual sales volume for the 12,594 domestic traditional McDonald’s restaurants; 11,330 domestic traditional franchised McDonald’s restaurants; and 1,264 domestic traditional McOpCo McDonald’s restaurants opened at least 1 year as of December 31, 2015 (separately stated)

• percentage of domestic traditional McDonald’s restaurants opened at least 1 year as of December 31, 2015 with 2015 annual sales in excess of $2,200,000, $2,400,000, and $2,600,000, respectively

• 2015 total cost of sales, gross profit, other operating expenses, and operating income before occupancy costs for 10,544 independent franchisee traditional restaurants open and operated by a franchisee for at least 1 year, with 2015 annual sales of $2,200,000, $2,400,000, and $2,600,000, respectively

• percentage of independent franchisee traditional restaurants open and operated by a franchisee for at least 1 year, with 2015 annual operating income before occupancy costs greater than $561,000, $633,000, and $706,000, respectively

Section I – Background Information

Everyone knows the name of Ray Kroc and how he took a little burger stand in California and turned it into the global juggernaut it is today – but McDonald’s didn’t start with him. The concept actually dates back to 1940 and started out as a BBQ joint founded by brothers Richard (Dick) and Maurice (Mac) McDonald. It wasn’t until 1948 that the brothers re-tooled the eatery into a hamburger stand using the production line technique for quicker service.

Ray Kroc came on the scene in 1954, just to check the stand out. You see, he was a milkshake mixer salesman and had heard about a hamburger stand running no fewer than eight mixers at the same time. Needless to say, he was impressed with McDonald’s. He saw not only their eight mixers and new techniques – he also saw dollar signs. He became the franchise agent and soon purchased the whole company. The rest, as they say, is history.

The number of McDonald’s restaurants currently stands at 12,912 U.S. franchised locations, 17,285 franchised locations internationally, and another 6,270 locations that are company-owned. That’s a grand total of 36,467.

Here’s how McDonald’s keeps people “lovin’ it” in the competitive fast-food burger market:

Fitting In

In the U.S., most McDonald’s locations have plenty of room to build a store that offers not only both counter service and drive-through service, but also outdoor seating and sometimes even an indoor or outdoor playground area for children.

But there are lots of places in the world where McDonald’s literally has to squeeze itself into whatever tiny space it can find. That’s why in some places you’ll find drive-through only McDonald’s stores along highways (often called McDrive), as well as small locations in very dense urban areas that offer no drive-through service, although you will occasionally come across “walk-through” locations in some cities.

Tinkering with the Format

Although its standard approach is tried and true, McDonald’s has also shown an interest in experimentation. The McCafé format got its start in Australia and has since expanded to hundreds of locations around the world. It essentially adds in a coffeehouse feel to a McDonald’s, and this approach has seen increased sales above standard McDonald’s restaurants by as much as 15%.

There is also the “Create Your Taste” approach, started in 2014, that takes a more gourmet approach to build on the success of other “better burger” chains.

Starting in 2006, many new locations sport an overhauled design that tones down the colors and goes for more of a Starbucks look.

A Tough Turnaround in Process

The chain reached a point in 2015 where it had experienced seven straight quarters of same-store sales declines, triggering something of a panic in the company. It launched a turnaround effort that has seen many changes to the menu, the idea of offering breakfast all day, phasing out antibiotics from its chicken, and expanding the “Create Your Taste” concept to more locations.

Its biggest challenge, however, is the growing perception in the consuming public that its food is highly processed and unhealthy.

Section II – Estimated Costs

• Please click here for detailed estimates of McDonald’s franchise costs, based on Item 7 of the company’s 2016 FDD (updated).

Section III – Financial Performance Representations (Item 19, 2016 FDD) and Analysis