FDD Talk 2021: McDonald’s Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk 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 2021 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a McDonald’s franchise, based on Items 5 and 6 of the company’s 2021 FDD

• Section IV – Number of franchised and company-owned McDonald’s outlets at the start of the year and the end of the year for 2018, 2019, and 2020, based on Item 20 of the company’s 2021 FDD

• Section V – Presentation and analysis of McDonald’s financial performance representations, based on Item 19 of the company’s 2021 FDD, including information on the:

• percentage of domestic traditional McDonald’s restaurants opened at least 1 year as of December 31, 2020 with 2020 annual sales in excess of $2,300,000, $2,500,000, and $2,700,000, respectively

• 2020 total cost of sales, gross profit, other operating expenses, and operating income before occupancy costs for 11,100 independent franchisee traditional restaurants open and operated by a franchisee for at least 1 year, with 2020 annual sales of $2,300,000, $2,500,000, and $2,700,000, respectively

• percentage of independent franchisee traditional restaurants open and operated by a franchisee for at least 1 year, with 2020 annual operating income before occupancy costs greater than $630,000, $713,000, and $788,000, respectively

Section I – Background Information

22 Things You Need to Know About the McDonald’s Franchise

Hires New VP and Global Diversity, Equity, and Inclusion Officer

1.  At the beginning of November 2020, McDonald’s announced the hiring of Reggie Miller as its new vice president and global diversity, equity, and inclusion officer. Miller brings knowledge and experience from his most recent role as vice president of global inclusion and diversity at VF Corporation, where he developed and implemented the 121-year-old organization’s first-ever formal diversity and inclusion strategy.

2.  Miller said, “I’m proud to be joining McDonald’s at a time where diverse voices and perspectives are not just celebrated, but engaged in accelerating meaningful change. As a global brand, McDonald’s has a strong foundation of creating opportunity throughout its value chain. I’m proud to be joining at this pivotal moment where the energy, resources and commitment to values-driven leadership is shared by all. I’m looking forward to getting to know the McDonald’s business through the lens of the people who impact it every day in countries and cultures around the world.”

3.  Throughout his career, Miller has worked in a variety of different disciplines including supply chain, merchandising, international project management, and multiple disciplines within human resources. Prior to working at VF Corporation, he was the director, diversity strategy and support, responsible for the D&I strategy, reporting, and consultation for all Walmart stores in the U.S. and was a recruiter and D&I leader at Tyson Foods. As a U.S. Army veteran, Miller served as a supply sergeant with deployments to Germany, Afghanistan, and Uzbekistan.

Announces New Growth Strategy

4.  In early November 2020, McDonald’s Corporation announced a new growth strategy, Accelerating the Arches, which encompasses all aspects of McDonald’s business as the leading global omni-channel restaurant brand. The strategy includes a refreshed purpose to feed and foster the communities McDonald’s and its franchisees serve around the world, updated values that guide actions and behaviors, and growth pillars that build on McDonald’s competitive advantages.

5.  The growth pillars, which are rooted in the company’s identity, MCD, build on historic strengths and articulate areas of further opportunity. Specifically, the company will animate the MCD in the following ways:

• Maximize our Marketing by investing in new, culturally-relevant approaches to effectively communicate the story of brand, food, and purpose.
• Commit to the Core by tapping into customer demand for the familiar and focusing on serving delicious burgers, chicken, and coffee.
• Double Down on the 3 D’s (Digital, Delivery, and Drive Thru) by leveraging competitive strengths and building a powerful digital experience growth engine that provides a fast, easy experience for McDonald’s customers.

6.  The company is prioritizing its role and commitments to the communities it has served for more than 65 years. In 2020, McDonald’s unveiled its refreshed purpose to feed and foster communities. Through both actions and communications, the company is looking to make an even greater impact by focusing on four areas that matter most to communities: responsibly sourcing quality ingredients, driving climate action to protect the planet, connecting with communities in times of need, and increasing focus on equity by providing opportunity for restaurant crew.

7.  Affordability is also crucial in today’s environment and remains a cornerstone of the McDonald’s brand. The company is committed to offering the right price and product combination so that customers realize value at every tier of the menu. McDonald’s will also introduce stunning new packaging globally with a modern, refreshing feel and playful touches to unify branding in markets all over the world.

8.  McDonald’s heritage is in burgers, and committing that customers get the best version of their popular burgers every time they visit is a priority. To improve upon the great taste of its burgers and to serve them hot and deliciously juicy, markets around the world are implementing a series of operational, process, and formulation changes. These include using new buns toasted to golden brown and an enhanced grilling approach to unlock more flavor.

9.  McDonald’s also has significant opportunity to expand its chicken offerings, a category that is growing faster than beef. This includes leveraging the extraordinary global strength of Chicken McNuggets and the McChicken sandwich, and investing in new line extensions and flavors. It also means continuing to offer food that aligns with current consumer trends and taste profiles, like spicy. To continue building on its chicken portfolio, the company plans to introduce a new Crispy Chicken Sandwich in the U.S. in 2021.

10.  The shift in customer behavior during COVID-19 has illustrated the competitive advantages of McDonald’s. Delivery is booming and the use of the McDonald’s app has surged as more and more customers are ordering and paying for their food on mobile devices. McDonald’s 25,000 drive-thru lanes worldwide have become an oasis for customers around the world.

11.  To transform its digital offerings across drive thru, takeaway, delivery, curbside pick-up, and dine-in, the company announced a new digital experience growth engine, “MyMcDonald’s”. Through the digital tools across this platform, McDonald’s will offer customers the fast and easy experiences they love and provide them with many reasons to keep coming back. Customers will receive tailored offers, be able to participate in a new loyalty program, and easily order and receive McDonald’s food through the channel of their choice.

12.  The company expected digital sales to exceed $10 billion or nearly 20% of systemwide sales across its top six markets in 2020. To further expand on its already significant digital presence and bring more speed and convenience, more personalization, and even better value for its customers, the company expects to launch “MyMcDonald’s” across those top six markets by the end of 2021.

13.  Nearly 75% of the population across the company’s top markets lives within three miles of a McDonald’s, and this advantage allows the company to meet customers’ evolving needs for speed and convenience. In the past three years, McDonald’s has expanded the number of restaurants that offer delivery nine-fold, to about 28,000 restaurants. Building on this progress means enhancing the delivery experience for customers. This includes the ability to order on the McDonald’s app, which is already available in several markets around the world, and optimizing operations with a focus on speed and accuracy.

14.  McDonald’s drive-thru presence and experience with operating high-performing drive thrus for over 45 years is unrivaled. McDonald’s has a drive thru in approximately 65% of its restaurants around the world and, in the U.S., nearly 95% of the approximately 14,000 locations have a drive thru. During COVID-19, this channel has heightened importance and will be even more critical in the future to meet demand for flexibility and choice.

15.  McDonald’s will maximize the advantages of its strong drive-thru presence by testing new concepts and technology to make the customer experience even faster. This includes innovations to provide a faster, more convenient experience such as automated order taking; a new drive-thru express pick-up lane for customers with a digital order; and a restaurant concept that offers drive thru, delivery, and takeaway only. In addition, the company will build on its drive-thru advantage as the vast majority of new restaurants in the U.S. and International Operated Markets will include a drive thru.

Company History

16.  McDonald’s was founded in 1940 by Richard and Maurice McDonald in San Bernardino, California. The McDonald brothers converted their father’s food stand into McDonald’s Bar-B-Que and served hot dogs, hamburgers, and all-you-can-drink orange juice. They also served other traditional BBQ items. After a few years, the McDonald brothers realized that most of their profits came from hamburgers and in 1948, they decided to streamline the business.

17.  The new menu consisted of only hamburgers, cheeseburgers, potato chips, coffee, soft drinks, and apple pie. To make things even more efficient, the McDonald brothers set up the kitchen like an assembly line, which is now standard practice in the fast-food industry. A year after launching the new menu, potato chips were replaced by french fries.

18.  In April 1952, the McDonald brothers decided they needed an entirely new building in order to achieve two goals: further efficiency improvements, and a more eye-catching appearance. They chose architect Stanley Clark Meston to help them achieve their new vision. Meston and the McDonald brothers came up with the brand’s iconic Golden Arches as well as its signature red, white, and yellow color scheme.

19.  The following year, armed with only Meston’s sketches, the McDonald brothers began looking for franchisees. The first franchisee was Neil Fox, who opened the first franchised McDonald’s restaurant, featuring the Golden Arches, in Phoenix, Arizona.

20.  After selling a handful of franchises, Ray Kroc, a seller of Prince Castle brand Multimixer milkshake machines, entered the picture in 1954. Sensing the huge potential that the McDonald’s concept had, Kroc convinced the McDonald brothers to start a national franchising program. Kroc offered to take the major responsibility for setting up the new franchises. Kroc quickly set up an aggressive growth plan.

21.  The McDonald brothers did not agree with Kroc’s methods, but Kroc eventually wrested control of the company after asking the brothers how much they wanted to let him take over. The McDonald brothers asked for $2.7 million and Kroc managed to raise the money. In 1955, Kroc established McDonald’s System, Inc., a predecessor of the McDonald’s Corporation, and he is credited with turning McDonald’s into the powerhouse that the company is today. Since then, McDonald’s has become the largest restaurant chain by revenue and has locations in more than 100 countries.

Entrepreneur’s Franchise 500

22.  McDonald’s ranked No. 11 on Entrepreneur’s 2021 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of McDonald’s franchise costs, based on Item 7 of the company’s 2021 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on McDonald’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2021 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2018

• Outlets at the Start of the Year:  13,145
• Outlets at the End of the Year:  13,229
• Net Change:  +84

2019

• Outlets at the Start of the Year:  13,229
• Outlets at the End of the Year:  13,185
• Net Change:  -44

2020

• Outlets at the Start of the Year:  13,185
• Outlets at the End of the Year:  13,022
• Net Change:  -163

Company-Owned

2018

• Outlets at the Start of the Year:  884
• Outlets at the End of the Year:  683
• Net Change:  -201

2019

• Outlets at the Start of the Year:  683
• Outlets at the End of the Year:  659
• Net Change:  -24

2020

• Outlets at the Start of the Year:  659
• Outlets at the End of the Year:  657
• Net Change:  -2

Section V – Financial Performance Representations (Item 19, 2021 FDD) and Analysis

Part 1 – Average Gross Sales for Domestic Traditional Restaurants

Domestic Traditional (Franchised and McOpCo) Restaurants

• Of the approximately 12,431 domestic traditional McDonald’s restaurants opened at least 1 year as of December 31, 2020:

• approximately 78% had annual sales volumes in excess of $2,300,000;
• approximately 70% had annual sales volumes in excess of $2,500,000; and
• approximately 61% had annual sales volumes in excess of $2,700,000.

• The average annual sales volume of domestic traditional McDonald’s restaurants open at least 1 year as of December 31, 2020 was $3,037,000 during 2020.

• The highest and lowest annual sales volume in 2020 for these domestic traditional McDonald’s restaurants was $9,238,000 and $272,000, respectively.

• The median annual sales volume of domestic traditional McDonald’s restaurants open at least 1 year as of December 31, 2020 was $2,946,000 during 2020.

Domestic Traditional (Franchised Only) Restaurants

• Of the approximately 11,821 domestic traditional franchised McDonald’s restaurants opened at least 1 year as of December 31, 2020:

• approximately 77% had annual sales volumes in excess of $2,300,000;
• approximately 69% had annual sales volumes in excess of $2,500,000; and
• approximately 60% had annual sales volumes in excess of $2,700,000.

• The average annual sales volume of domestic traditional franchised McDonald’s restaurants open at least 1 year as of December 31, 2020 was $3,003,000 during 2020.

• The highest and lowest annual sales volume in 2020 for these domestic traditional franchised McDonald’s restaurants was $9,238,000 and $272,000, respectively.

• The median annual sales volume of domestic traditional McDonald’s restaurants open at least 1 year as of December 31, 2020 was $2,908,000 during 2020.

Domestic Traditional (McOpCo Only) Restaurants

• Of the approximately 610 domestic traditional McOpCo McDonald’s restaurants opened at least 1 year as of December 31, 2020:

• approximately 98% had annual sales volumes in excess of $2,300,000;
• approximately 95% had annual sales volumes in excess of $2,500,000; and
• approximately 91% had annual sales volumes in excess of $2,700,000.

• The average annual sales volume of domestic traditional McOpCo McDonald’s restaurants open at least 1 year as of December 31, 2020 was $3,696,000 during 2020.

• The highest and lowest annual sales volume in 2020 for these domestic traditional McOpCo McDonald’s restaurants was $8,251,000 and $1,577,000, respectively.

• The median annual sales volume of domestic traditional McOpCo McDonald’s restaurants open at least 1 year as of December 31, 2020 was $3,595,000 during 2020.

Part 2 – Pro Forma Statements for Franchised Traditional Restaurants

• The pro forma statements included below show annual sales volumes of $2,300,000, $2,500,000, and $2,700,000. These pro forma statements have been derived from independent franchisee traditional restaurant financial statements to provide information relevant to a prospective franchisee.

• Specific assumptions used in the presentation of these pro forma statements are indicated below the statements.

• The pro forma statements are based upon a total of 11,100 independent franchisee traditional restaurants open and operated by a franchisee for at least 1 year and do not include restaurants operated by McOpCo companies, Satellites, or the domestic traditional franchised restaurants that changed owners in 2020 and for which McDonald’s had complete financial statements.

Annual Sales Volume:  $2,300,000

Product Sales:  $2,300,000 (100.0%)

Total Cost of Sales:  $637,000 (27.7%)

Gross Profit:  $1,667,000 (72.5%)

Other Operating Expenses:  $1,037,000 (45.1%)

• excluding rent, service fees, depreciation and amortization, interest, and income taxes

Operating Income Before Occupancy Costs:  $630,000 (27.4%)

• excluding rent, service fees, depreciation and amortization, interest, and income taxes

Annual Sales Volume:  $2,500,000

Product Sales:  $2,500,000 (100.0%)

Total Cost of Sales:  $687,000 (27.5%)

Gross Profit:  $1,814,000 (72.6%)

Other Operating Expenses:  $1,101,000 (44.0%)

• excluding rent, service fees, depreciation and amortization, interest, and income taxes

Operating Income Before Occupancy Costs:  $713,000 (28.5%)

• excluding rent, service fees, depreciation and amortization, interest, and income taxes

Annual Sales Volume:  $2,700,000

Product Sales:  $2,700,000 (100.0%)

Total Cost of Sales:  $738,000 (27.3%)

Gross Profit:  $1,962,000 (72.7%)

Other Operating Expenses:  $1,173,000 (43.4%)

• excluding rent, service fees, depreciation and amortization, interest, and income taxes

Operating Income Before Occupancy Costs:  $788,000 (29.2%)

• excluding rent, service fees, depreciation and amortization, interest, and income taxes

• Of the 11,100 independent franchisee traditional restaurants included in the pro forma statements above:

• approximately 77% had operating income before occupancy costs greater than $630,000;
• approximately 67% had operating income before occupancy costs greater than $713,000; and
• approximately 58% had operating income before occupancy costs greater than $788,000.

• Other Operating Expenses – includes, but is not limited to, the following costs: labor, franchisee’s salary as manager, payroll taxes, advertising fee, promotion, outside services, linen, operating supplies, small equipment, maintenance and repair, utilities, office supplies, legal and accounting fees, insurance, real estate and personal property taxes, business operating licenses, and non-product income or expense. This is a combination of the Total Controllable Expenses and Other Operating Expenses excluding rent, service fees, depreciation and amortization, and interest included in the typical store’s financial statements.

• Operating Income Before Occupancy Costs – represents Operating Income excluding rent, service fees, depreciation and amortization, interest, and income taxes. The rent paid to McDonald’s will vary based upon sales and McDonald’s investment in land, site improvements, and building costs.

• Additionally, organization overhead costs, such as salaries and benefits of non-restaurant personnel (if any), cost of an automobile used in the business (if any), and other discretionary expenditures may significantly affect profits realized in any given operation. The nature of these variables makes it difficult to estimate the performance for any particular restaurant with sales of any given volume.

• Note 1 – Data for McOpCo company restaurants is not included in the pro forma statements because of certain expenses that are typically incurred by a McOpCo-operated restaurant that are not incurred by restaurants franchised to individuals.

• If data for McOpCo-operated restaurants open for at least 1 year were included along with franchised restaurants, the percent of total restaurants in each category would not be statistically different and the range of Operating Income Before Occupancy Costs would be $633,000 to $790,000.

• Note 2 – The description of this line, “Product Sales,” is to clarify that only product sales are included. Non-product sales and associated costs are included in Other Operating Expenses.

• The Operating Income Before Occupancy Costs numbers were determined using restaurants with product sales between $2,200,000 to $2,400,000; $2,400,000 to $2,600,000; and $2,600,000 to $2,800,000, respectively.

• Note 3 – McDonald’s is not presenting average occupancy costs in the above calculation because a wide variety of rent charts and ownership options exist. In addition, the effective rent paid by a franchisee may be more in any particular month than the stated percent rent indicated in the franchisee’s lease because a portion of the rent may be fixed regardless of the sales level for a given month.

• The range of effective rent percentages in 2020 for franchised restaurants was 0.00% to 28.34%.

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