Efficiently catering to the basic need to eat
Reviewed by JeFreda R. BrownFact checked by Suzanne KvilhaugReviewed by JeFreda R. BrownFact checked by Suzanne Kvilhaug
The story of McDonald’s (MCD) often begins with Ray Kroc, a native Chicago milkshake mixing machine salesperson who had the vision to see what the business model deployed by one of his clients, Speedee Service System, could become. Launched in 1948 by brothers Richard James (Dick) and Maurice James (Mac) McDonald, the Speedee Service System revolutionized the fast-food industry by implementing an efficient drive-in concept and laying the groundwork for franchising opportunities.
Impressed by what he saw and recognizing the system’s potential, Ray Kroc became the McDonald brothers’ franchise agent in 1954. He opened the first McDonald’s franchise in 1955 and, seeing even greater possibilities, bought out the McDonald brothers six years later for $2.7 million, worth $30.7 million today when adjusted for inflation. This marked the beginning of McDonald’s transformation into a global fast-food empire, and the rest is part of the entrepreneurial lore that’s the hallmark of iconic businesses.
Key Takeaways
- McDonald’s is the most valuable fast-food chain in the world, with a brand value of $222 billion in 2024.
- The company makes money by franchising its fast-food brand and leasing properties to franchisees, often at significant markups.
- Approximately 95% of all McDonald’s locations worldwide are franchises.
- Franchisees are attracted by the impressive profit margins, making McDonald’s franchises a highly profitable investment.
- McDonald’s remains committed to growth, continuing its aggressive deployment of the three growth accelerators—EOTF, delivery, and digital.
McDonald’s Today
Since its founding, the enterprise has about 38,000 restaurants globally, serving nearly 68 million customers in 118 countries daily. That represents about 1% of the world’s population who want burgers, fries, and/or chicken nuggets as quickly as possible. It has become the most popular family restaurant, appealing to children and adults, and has emerged as a dominant force in the quick-service restaurant market.
This restaurant model isn’t unique to McDonald’s. Other popular franchises in this category include KFC and Taco Bell (YUM), Wendy’s (WEN), and Burger King. McDonald’s is ruled as one of the most valuable fast-food chains in the world, with a brand value of $222 billion in 2024. The company is consistently among the leaders of this market segment in terms of brand recognition, overall sales, and the number of restaurants globally, along with Starbucks (SBUX), KFC, Domino’s, and Subway.
On its way to serving hundreds of billions of people, McDonald’s has pioneered multiple corporate strategies since its incorporation in 1955, including franchising and institutionalized training. The company even adopted a mission statement long before it was a common practice (“Quality, Service, Cleanliness and Value” is its mission statement).
Business Model
McDonald’s generates revenue by leveraging its fast food products through franchising. Franchisees lease properties owned by McDonald’s, often at significant markups. As reported in a May 2024 news release, approximately 95% of McDonald’s restaurants worldwide are owned and operated by independent local business owners.
The advantage of this model is that the revenue stream (rent and royalty income received from franchisees) is far more stable and predictable. The operating costs are also significantly lower, providing an easier path to profitability. McDonald’s can leverage its market position to negotiate favorable deals because it controls the land and long-term leases, similar to a subscription model where the franchisee pays a fixed monthly amount.
According to industry analysts, McDonald’s retains about 82% of the profit generated by franchisees, compared with only about 16% from its company-operated locations, which incur higher operating costs. While company-operated locations earn more revenue overall, the overhead expenses are higher, making the franchising model more profitable on a per-location basis.
Why McDonald’s Franchises Are in Demand
McDonald’s has notoriously strict criteria for its franchisees (including net worth and liquidity). Franchisees are also responsible for paying salaries, ordering supplies, and paying the rent or mortgage. So, why become a franchisee? The lure is that McDonald’s provides its franchisees with an almost guaranteed moneymaker due to the impressive profit margins.
The restaurant industry is infamous for its high turnover. As any restaurateur will tell you, one major reason is that the margins can be thinner than a slice of processed American cheese. However, McDonald’s boasts operating margins north of 40%, comparable to a Double Quarter Pounder in thickness. Operating margin, defined as operating income as a percent of total revenues, increased from 40% in 2022 to 46% in 2023.
How are these high profit margins possible in a business that aims to provide inexpensive food? The answer is that certain food and drink items, such as coffee, are inexpensive to prepare but can be sold at a significant markup, contributing to the overall profitability.
MCD Financial Picture
McDonald’s operates in the following global business segments: the U.S., internationally operated markets, and international developmental licensed markets and corporate. Each sector accounted for 38%, 53%, and 9% of revenues per the company’s most recent annual report.
Note
McDonald’s has a track record of paying dividends on its common stock. In fact, the company has raised its dividend every year since it paid its first one in 1976.
Financial Statements
According to the company’s 10-K, 2023 free cash flow was $7.3 billion, a 32% increase over 2022, and 2,000 new stores were opened worldwide.
| 2023(Dec. 31) | 2022 (Dec. 31) | |
| Total Revenue | $25,494 | $23,183 |
| Operating expenses | ($13,847) | ($13,812) |
| Operating Income (EBIT) | $11,647 | $9,371 |
| Net Income | $8,469 | $6,177 |
| EPS (Diluted) | $11.56 | $8.33 |
| Dividends per Share | $6.68 | $6.23 |
| 2023 (Dec. 31) | 2022 (Dec. 31) | |
| Assets | ||
| Total Current Assets | $7,986 | $5,424 |
| Total Other Assets | $9,738 | $8,672 |
| Net Property & Equipment | $24,907 | $23,774 |
| Total Assets | $56,147 | $50,436 |
| Liabilities & Shareholders’ Equity | ||
| Total Current Liabilities | $6,859 | $3,802 |
| Total Shareholders’ Equity | ($4,707) | ($6,003) |
| Total Liabilities & Shareholders’ Equity | $56,147 | $50,436 |
| 2021 (Dec. 31) | 2020 (Dec. 31) | |
| Operating Activities | ||
| Cash Provided by Operations | $9,142 | $6,265 |
| Investing Activities | ||
| Cash from (used for) Investing | ($2,166) | ($1,546) |
| Financing Activities | ||
| Cash Used for Financing | ($5,596) | ($2,249) |
| Free Cash Flows (FCF) | $7,102 | $4,624 |
Growth Strategy
McDonald’s has a long-term goal of franchising approximately 95% of its locations. McDonald’s will continue to make progress toward this long-term goal primarily by re-franchising restaurants to conventional licensees. As a result of the continued evolution of its business model, several organizational changes to its global business structure were implemented that are designed to continue the company’s efforts toward efficiently driving growth as a better McDonald’s through the Velocity Growth Plan.
The Velocity Growth Plan, which was first introduced in 2017, is McDonald’s customer-centric strategy that focuses on the key drivers of the business, namely food, value, and customer experience. Here’s its main focus:
- Retaining Existing Customers: Focusing on areas where it already has a strong foothold in the Informal Eating Out category, including family occasions and food-led breakfast.
- Regaining Customers Who Visit Less Often: Recommitting to areas of historic strength, namely quality, taste, quality, and convenience of its product: food.
- Converting Casual to Committed Customers: Building stronger relationships with customers so they visit more often, by elevating and leveraging the McCafé coffee brand and enhancing snack and treat offerings.
McDonald’s remains committed to continuing 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: By evolving the technology platform, McDonald’s is expanding choices for how customers order, how they pay, and how they’re served through additional functionality on its global mobile app, self-order kiosks, and technologies that enable conveniences such as table service and curbside pick-up.
- Delivery: McDonald’s expanded the number of restaurants offering delivery. It is now available in over half of the global system. McDonald’s was and intends to be quite proactive in keeping up with the current trends when it comes to expanding its brand and business. The company announced a partnership with Uber Eats for home delivery for the first time in the U.S. and followed that up by adding Doordash and GrubHub. These partnerships are part of a strategy to keep up with the newer generations who prefer home delivery over pick-up.
Key Challenges
McDonald’s has managed to stay comfortably ahead of its main competitors in the fast food arena, such as Burger King, Wendy’s, and KFC, but its key challenge might just be consumers demanding healthier, organic menu choices coupled with fast-food convenience.
Over the past few years, another restaurant model, one that offers consumers freshly prepared, higher-quality food in an informal setting and with efficient counter service, has been making a bid to garner the attention of the consumer, or more appropriately, their palates. 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.
This didn’t go unnoticed by McDonald’s. In 2018, it announced that it was removing all preservatives, fake colors, and other artificial ingredients from seven of its burger selections. Its menu features a Southwest Grilled Chicken Salad, and you can get apple slices with a kid’s Happy Meal.
What’s Included in a McDonald’s Franchise Agreement?
According to the company, McDonald’s provides franchisees with a long-term lease for the location and the owner is then responsible for all equipment, seating, décor, and signage. Franchisees are also responsible for reinvesting capital back into their businesses over time to make improvements and modernize.
How Much do McDonald’s Franchise Owners Make?
McDonald’s franchise owners in the U.S. 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
Fast food should be as stable an industry as any. People need to eat and want their food fresh and fast without spending unnecessarily. That said, the industry does face challenges relating to a shift in demand toward healthy eating. A restaurant chain that sells familiarity and consistency must recognize that those qualities are enormous assets. Even when McDonald’s has an under-performing year, it’s still profitable. 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).
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