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McDonald’s generated $23.2 billion in revenues in 2021. McDonald’s makes money primarily from three revenue streams: sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees, and affiliates.
McDonald’s is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences, and driving profitability. Franchising enables an individual to be their employer and maintain control over all employment-related matters, marketing, and pricing decisions. It also benefits from the strength of McDonald’s global brand, operating system, and financial resources.
In this strategy story, we will understand the types of franchise business model of McDonald’s, how does McDonald’s make money under each franchise model, and what is the supply chain of McDonald’s.
Franchise Business Model of McDonald’s
One of the strengths of the franchise business model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants. At the same time, innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants.
Having Company-owned and operated restaurants provides McDonald’s personnel with a venue for restaurant operations training experience. In addition, in Company-owned and operated restaurants and in collaboration with franchisees, Mcdonald’s is able to develop further and refine operating standards, marketing concepts, and product and pricing strategies.
McDonald’s franchises and operates McDonald’s restaurants, which serve a locally relevant menu of quality food and beverages in communities across 119 countries. Of the 40,031 McDonald’s restaurants at year-end 2021, 37,295, or 93%, were franchised.
McDonald’s has long-term revenue and cash flow streams related to its franchise arrangements. Minimum rent payments under franchise arrangements are based on Mcdonald’s underlying investment in owned sites and parallel Mcdonald’s underlying lease obligations and escalations on leased properties. Mcdonald’s believes that control over the real estate enables it to achieve restaurant performance levels among the highest in the industry.
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McDonald’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees, and affiliates. McDonald’s franchised restaurants are owned and operated under one of the following structures – conventional franchise, developmental license, or affiliate.
|(in $ Mn)||2021||2020||2019|
|1. Sales by Company-operated restaurants||9,787||8,139||9,421|
|2.3 Initial Fees||59||50||48|
|2. Revenues from franchised restaurants||13,085||10,726||11,656|
|3. Other revenues||351||343||288|
Under a conventional franchise arrangement, Mcdonald’s generally owns or secures a long-term lease on the land and building for the restaurant location, and the franchisee pays for equipment, signs, seating, and décor. Mcdonald’s believes that ownership of the real estate, combined with the co-investment by franchisees, enables it to achieve restaurant performance levels among the highest in the industry.
Franchisees are responsible for reinvesting capital in their businesses over time. In addition, to accelerate the implementation of certain initiatives, McDonald’s may co-invest with franchisees to fund improvements to their restaurants or operating systems.
These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance and increase the value of the Mcdonald’s brand by developing modernized, more attractive, and higher revenue-generating restaurants.
Under the franchise arrangement, franchisees are granted the right to operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of 20 years.
At the end of the 20-year franchise arrangement, Mcdonald’s maintains control of the underlying real estate and building and can either enter into a new 20-year franchise arrangement with the existing franchisee or a different franchisee or close the restaurant. Franchisees generally pay related occupancy costs, including property taxes, insurance, and site maintenance.
McDonald’s makes money from conventional franchises through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon opening a new restaurant or grant of a new franchise. Mcdonald’s heavily franchised business model is designed to generate stable and predictable revenue, primarily a function of franchisee sales and resulting cash flow streams.
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Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing their businesses, providing capital (including the real estate interest), and developing and opening new restaurants.
Mcdonald’s generally does not invest any capital under a developmental license or affiliate arrangement, receives a royalty based on a percent of sales, and typically receives initial fees upon opening a new restaurant or grant of a new license.
Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percentage of sales, generally including initial fees.
Mcdonald’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by Mcdonald’s for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand, and third-party revenues for the Dynamic Yield business.
Supply Chain of McDonald’s
Mcdonald’s and its franchisees purchase food, packaging, equipment, and other goods from numerous independent suppliers. Mcdonald’s has established and enforced high food safety and quality standards and maintains quality centers around the world designed to promote consistency of these high standards.
The quality management systems and processes involve ongoing product reviews, virtual supplier visits, and third-party verifications. A Food Safety Advisory Council, comprised of Mcdonald’s internal food safety experts, suppliers, and outside academics, provides strategic global leadership for all aspects of food safety and quality.
Mcdonald’s also has ongoing programs to educate employees about food safety practices, including proper storage, handling, and food preparation for customers. It also conducts training for its suppliers and restaurant operators to share best practices on food safety and quality.
Mcdonald’s works closely with suppliers to encourage innovation and drive continuous improvement across its global supply chain. Leveraging its scale, supply chain infrastructure, and risk management strategies, Mcdonald’s collaborates with suppliers on contingency planning to achieve continuous supply and competitive, predictable costs over the long term.
Mcdonald’s also works closely with suppliers and other third-party experts to drive sustainable sourcing initiatives, including environmental matters and improving the health and welfare of the animals within its supply chain. Mcdonald’s has developed and implemented a comprehensive strategy that its global supply chain organization leverages to identify, assess and manage risk in its supply chain.
To reinforce the importance of its values, McDonald’s maintains a Supplier Code of Conduct that applies to all of its suppliers around the world. McDonald’s expects all of its suppliers to meet the rigorous standards outlined in the Code, which cover areas including human rights, workplace environment, business integrity, and environmental management.