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Your assumption is in line with the underlying principle - money made from collecting licensing and franchisee fees actually is more profitable than money made

by e1g 12y ago

Your assumption is in line with the underlying principle - money made from collecting licensing and franchisee fees actually is more profitable than money made from selling burgers. This implies that over time large fast food operators should tend to become more and more franchised, and we see this playing out in the market place right now [1]. The reason why fast food brands aren't 100% franchised already is because they need to constantly learn about their customers/products/operating environments/fast moving trends etc. The best way to do this is to actually operate your own stores where you can experiment and learn very quickly. The younger the brand, the few outlets it has, the more it still needs to learn, so corporate ownership will be higher. As the brand matures over time that number is expected to come down to e.g. 15-20%. [1] http://online.wsj.com/news/articles/SB10001424052702304587704577333443052487330 http://online.wsj.com/news/articles/SB1000142405270230458770...

seanmcdirmid 12y ago
Its not really just that. McDonalds is pretty international, and some countries are franchise unfriendly, hostile even. So they do a joint venture in China as well many other countries. McDonalds is at 15% today, but much of the 85% is organized under JVs outside of the US. Also, while the costs and risks are higher to do a corporate store, they also make more money on it, and since they have capital, why not invest in the business they know rather than outsource in an otherwise finite-growth market? I would expect the opposite to happen: over time, the company collects capital and moves to own its brand rather than lend it out. In contrast, a young company that lacks capital will see franchising as much more appealing as it allows them to extend their brand and reach while sharing risk and investment. Starbucks was, is, and always be corporate. That they are forced into JVs and partnerships sometimes is completely political (China; Marriott won't let them run stores in some airports where they have exclusive contracts; etc...).
- e1g 12y ago
  You are right that some environments have draconian franchising rules, and force fast-food operators into alternative operating models (i.e. corporate/JV owned outlets). An important distinction for me is that those alternatives are forced onto brands, and if they had a choice they would swap to the franchise model. We see this playing out with McDonalds in China - as soon as franchising rules have been relaxed slightly, McDonalds went into high gear recruiting traditional franchisees to fuel growth in China [1]. Of course there are other places where operating directly makes a lot more money, but those are very very rare (e.g. Russia). In regards to McDonalds investing back into the business they know, you are right again. However, what they know best is not running restaurants but investing into property. The self-proclaimed description of McDonalds' business model is that they are in real estate, not hamburgers [2]. The latest available annual report shows that the 7,000 company stores generated ~$3B profits, but McDs made as much on royalties and twice as much on renting out properties to their franchisees [3]. Further, store margins are going down fast while royalty/property margins are going up. This year more than half of McDonald profits will be from collecting rent - flipping burgers and selling royalties is a nice side hobby. So to maximise their core business, they have to maximise how many renters they have, i.e. increase the number of franchisees. [1] http://www.worldcrunch.com/business-finance/supersize-the-franchise-mcdonald-039-s-new-china-strategy/kfc-fast-food-rivalry-catering-restaurant-franchisee/c2s15258/#.U7lYi2SJ-wE http://www.worldcrunch.com/business-finance/supersize-the-fr... [2] http://money.howstuffworks.com/mcdonalds2.htm http://money.howstuffworks.com/mcdonalds2.htm [3] http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDs2013AnnualReport.pdf http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Inv...

by e1g 12y ago

seanmcdirmid 12y ago

Its not really just that. McDonalds is pretty international, and some countries are franchise unfriendly, hostile even. So they do a joint venture in China as well many other countries. McDonalds is at 15% today, but much of the 85% is organized under JVs outside of the US. Also, while the costs and risks are higher to do a corporate store, they also make more money on it, and since they have capital, why not invest in the business they know rather than outsource in an otherwise finite-growth market? I would expect the opposite to happen: over time, the company collects capital and moves to own its brand rather than lend it out. In contrast, a young company that lacks capital will see franchising as much more appealing as it allows them to extend their brand and reach while sharing risk and investment. Starbucks was, is, and always be corporate. That they are forced into JVs and partnerships sometimes is completely political (China; Marriott won't let them run stores in some airports where they have exclusive contracts; etc...).

e1g 12y ago
You are right that some environments have draconian franchising rules, and force fast-food operators into alternative operating models (i.e. corporate/JV owned outlets). An important distinction for me is that those alternatives are forced onto brands, and if they had a choice they would swap to the franchise model. We see this playing out with McDonalds in China - as soon as franchising rules have been relaxed slightly, McDonalds went into high gear recruiting traditional franchisees to fuel growth in China [1]. Of course there are other places where operating directly makes a lot more money, but those are very very rare (e.g. Russia). In regards to McDonalds investing back into the business they know, you are right again. However, what they know best is not running restaurants but investing into property. The self-proclaimed description of McDonalds' business model is that they are in real estate, not hamburgers [2]. The latest available annual report shows that the 7,000 company stores generated ~$3B profits, but McDs made as much on royalties and twice as much on renting out properties to their franchisees [3]. Further, store margins are going down fast while royalty/property margins are going up. This year more than half of McDonald profits will be from collecting rent - flipping burgers and selling royalties is a nice side hobby. So to maximise their core business, they have to maximise how many renters they have, i.e. increase the number of franchisees. [1] http://www.worldcrunch.com/business-finance/supersize-the-franchise-mcdonald-039-s-new-china-strategy/kfc-fast-food-rivalry-catering-restaurant-franchisee/c2s15258/#.U7lYi2SJ-wE http://www.worldcrunch.com/business-finance/supersize-the-fr... [2] http://money.howstuffworks.com/mcdonalds2.htm http://money.howstuffworks.com/mcdonalds2.htm [3] http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDs2013AnnualReport.pdf http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Inv...