6 ms·

Can someone explain why McD bothers to franchise their restaurants? Usually franchise contracts are set up in order to transfer most risk onto the franchisee.

Can someone explain why McD bothers to franchise their restaurants? Usually franchise contracts are set up in order to transfer most risk onto the franchisee. But the risk is marginal because of due diligence McD does before launching a new venue. Is this some sort of accounting/tax trick that enhances McD financial figures on paper? Does this allow them to raise more capital for expansion somehow?

lupire 4y ago
If you don't sell a franchise, you have to pay your workers. Better for workers to pay you.
- HWR_14 4y ago
  > If you don't sell a franchise, you have to pay your workers. Better for workers to pay you. I mean, trivially, I'll pay a lot of money to work someplaces if a good percentage of that profit goes to me. How much would you pay Google upfront to manage the adwords on websites in the .uk space if you got to keep 95% of the profits?
bozhark 4y ago
McD is the largest property owner, at least it was for a minute. It’s actually how they make their money, rent. https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burger/ https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burg...
skrtskrt 4y ago
So the workers can't unionize across locations because they all technically work for different companies
- justinclift 4y ago
  Some franchisees own multiple locations, so that's not at all clear.
philliphaydon 4y ago
Didn’t McDonald’s do it by buying the plot of land and using that as leverage on the franchisee? As a way of controlling them.
nemo44x 4y ago
Same reason banks sell mortgages instead of buying homes and renting them. It’s not their business model to operate thousands of stores. Having many different people operate many different stores to their standard is.
kylecordes 4y ago
Recruiting, managing, and paying people to run those restaurants with the level of dedication that an invested franchise owner has would be challenging. There are a lot of great managers out there to hire, but probably at a higher rate than McDonald's (or any competitor) would want to pay.
- eurasiantiger 4y ago
  Why aren’t there any franchising IT companies?
  - moralestapia 4y ago
    Like in "I sell software for franchisors/franchisees"? or like in "I sell this IT thing through partners who behave like franchisees"?
    - eurasiantiger 4y ago
      More like ”we have this development flow and tooling that just works and everyone knows it so we have a strong brand, let’s lease it to others and avoid taxes by making them pay back appropriate interest on corporate loans to the parent company”, i.e. the McDonalds model.
  - FinnKuhn 4y ago
    Franchise stores and restaurants like McDonalds don't compete with each other as they have a physical attribute to them insuring this. IT Franchises however would be free to compete with each other making this business model pretty much impossible. The only way I see this working is with Franchises limited to one per country/state, who are specialised in regards to language, customer preferences and local laws.
  - raxxorraxor 4y ago
    I think the advantage for a restaurant is the contracts with large scale suppliers. You could do the same with hardware and software perhaps, but the advantages and disadvantages would look different.
argonaut 4y ago
Probably mostly historical reasons. When McD was a small company, franchising was the best way to expand as rapidly as possible.
- chii 4y ago
  i see franchising as a form of specialization. The corporate head specializes in branding, sourcing of suppliers and logistics and menus, etc. The franchisee specializes in operations day to day.
philwelch 4y ago
These days it's probably not necessary. Starbucks doesn't franchise and this allows them to do things that make more sense for Starbucks as a whole as it would make for any single location, for instance, the notorious Starbucks across the street from another Starbucks that Lewis Black ranted about. However, it made a lot more sense in the early days of McDonalds because of the sheer organizational complexity of employing people in every medium-sized-and-up town in the United States, and now, franchise holders are an established and vested interest that the company needs to keep happy.
- cavisne 4y ago
  The margins on starbucks are a lot higher though, and the staff needs a lot lower. Franchising is basically Uber before Uber, when someone is an "owner/operator" they will work a lot harder/do things for free that a salaried manager never would. Starbucks also does franchise I believe (inside places like safeway and target).
- samwillis 4y ago
  Interestingly, in the US and Canada Starbucks don’t franchise, but elsewhere in the world they do. Here in the UK the majority of Starbucks are franchised.
asdff 4y ago
I think it would lead to some antitrust issues to be honest. McDonalds sells you the cups, the bags, the beef, etc. They are really a business-to-business business and you the franchisee are the business that is actually consumer facing. McDonalds owning the store at that point would be like movie studios owning the theaters.
- moonchrome 4y ago
  >McDonalds owning the store at that point would be like movie studios owning the theaters. Why would that ever be an issue ?
  - carbonguy 4y ago
    Historically, because it hindered the ability of independent movie productions to get access to audiences: https://constitutioncenter.org/blog/the-day-the-supreme-court-killed-hollywoods-studio-system https://constitutioncenter.org/blog/the-day-the-supreme-cour...
    - dotancohen 4y ago
      Which is not an issue for independent beef or paper suppliers.
Aloha 4y ago
Largely legacy reasons related to capital access during founding, because of this McDonald's is mostly a property company that also sells burgers and burger store franchises.
bluGill 4y ago
State laws in some places make franchises a better worse deal. I invest in one[unnamed] company that has a few franchises, but they are regional and the state laws where they are makes running franchises not a good deal so they are no longer doing that and looking to buy bake the existing ones. They are looking to expand to new states though where the laws are different and so they may start selling franchises there. I left McDonalds 25 years ago and I have no idea what is current. Back then about 25% of all stores were owned by the company with the other 75% franchises. The corporate owned stores were for sale if you wanted a franchise (assuming you qualify), and were in a known location so fairly low risk. The company would also buy out your franchise a good deal when you were ready to retire.

lupire 4y ago

If you don't sell a franchise, you have to pay your workers. Better for workers to pay you.

HWR_14 4y ago
> If you don't sell a franchise, you have to pay your workers. Better for workers to pay you. I mean, trivially, I'll pay a lot of money to work someplaces if a good percentage of that profit goes to me. How much would you pay Google upfront to manage the adwords on websites in the .uk space if you got to keep 95% of the profits?

bozhark 4y ago

McD is the largest property owner, at least it was for a minute. It’s actually how they make their money, rent. https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burger/ https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burg...

skrtskrt 4y ago

So the workers can't unionize across locations because they all technically work for different companies

justinclift 4y ago
Some franchisees own multiple locations, so that's not at all clear.

philliphaydon 4y ago

Didn’t McDonald’s do it by buying the plot of land and using that as leverage on the franchisee? As a way of controlling them.

nemo44x 4y ago

Same reason banks sell mortgages instead of buying homes and renting them. It’s not their business model to operate thousands of stores. Having many different people operate many different stores to their standard is.

kylecordes 4y ago

Recruiting, managing, and paying people to run those restaurants with the level of dedication that an invested franchise owner has would be challenging. There are a lot of great managers out there to hire, but probably at a higher rate than McDonald's (or any competitor) would want to pay.

eurasiantiger 4y ago
Why aren’t there any franchising IT companies?
- moralestapia 4y ago
  Like in "I sell software for franchisors/franchisees"? or like in "I sell this IT thing through partners who behave like franchisees"?
  - eurasiantiger 4y ago
    More like ”we have this development flow and tooling that just works and everyone knows it so we have a strong brand, let’s lease it to others and avoid taxes by making them pay back appropriate interest on corporate loans to the parent company”, i.e. the McDonalds model.
- FinnKuhn 4y ago
  Franchise stores and restaurants like McDonalds don't compete with each other as they have a physical attribute to them insuring this. IT Franchises however would be free to compete with each other making this business model pretty much impossible. The only way I see this working is with Franchises limited to one per country/state, who are specialised in regards to language, customer preferences and local laws.
- raxxorraxor 4y ago
  I think the advantage for a restaurant is the contracts with large scale suppliers. You could do the same with hardware and software perhaps, but the advantages and disadvantages would look different.

argonaut 4y ago

Probably mostly historical reasons. When McD was a small company, franchising was the best way to expand as rapidly as possible.

chii 4y ago
i see franchising as a form of specialization. The corporate head specializes in branding, sourcing of suppliers and logistics and menus, etc. The franchisee specializes in operations day to day.

philwelch 4y ago

These days it's probably not necessary. Starbucks doesn't franchise and this allows them to do things that make more sense for Starbucks as a whole as it would make for any single location, for instance, the notorious Starbucks across the street from another Starbucks that Lewis Black ranted about. However, it made a lot more sense in the early days of McDonalds because of the sheer organizational complexity of employing people in every medium-sized-and-up town in the United States, and now, franchise holders are an established and vested interest that the company needs to keep happy.

cavisne 4y ago
The margins on starbucks are a lot higher though, and the staff needs a lot lower. Franchising is basically Uber before Uber, when someone is an "owner/operator" they will work a lot harder/do things for free that a salaried manager never would. Starbucks also does franchise I believe (inside places like safeway and target).
samwillis 4y ago
Interestingly, in the US and Canada Starbucks don’t franchise, but elsewhere in the world they do. Here in the UK the majority of Starbucks are franchised.

asdff 4y ago

I think it would lead to some antitrust issues to be honest. McDonalds sells you the cups, the bags, the beef, etc. They are really a business-to-business business and you the franchisee are the business that is actually consumer facing. McDonalds owning the store at that point would be like movie studios owning the theaters.

moonchrome 4y ago
>McDonalds owning the store at that point would be like movie studios owning the theaters. Why would that ever be an issue ?
- carbonguy 4y ago
  Historically, because it hindered the ability of independent movie productions to get access to audiences: https://constitutioncenter.org/blog/the-day-the-supreme-court-killed-hollywoods-studio-system https://constitutioncenter.org/blog/the-day-the-supreme-cour...
  - dotancohen 4y ago
    Which is not an issue for independent beef or paper suppliers.

Aloha 4y ago

Largely legacy reasons related to capital access during founding, because of this McDonald's is mostly a property company that also sells burgers and burger store franchises.

bluGill 4y ago

State laws in some places make franchises a better worse deal. I invest in one[unnamed] company that has a few franchises, but they are regional and the state laws where they are makes running franchises not a good deal so they are no longer doing that and looking to buy bake the existing ones. They are looking to expand to new states though where the laws are different and so they may start selling franchises there. I left McDonalds 25 years ago and I have no idea what is current. Back then about 25% of all stores were owned by the company with the other 75% franchises. The corporate owned stores were for sale if you wanted a franchise (assuming you qualify), and were in a known location so fairly low risk. The company would also buy out your franchise a good deal when you were ready to retire.