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McDonald's doesn't sell burgers, it sells franchises.

It's a real estate company, not a fast-food restaurant.

The company's goal is to have 95% of its restaurants franchised. It's at 93% now.


There are four ways McDonald's does business.

  1. Company-owned and operated (7% of restaurants)

  2. Conventional Franchise

  3. Developmental License

  4. Affiliate


The company has 37,855 restaurants, 35,085 of which are franchised. So that means 2,770 are company-owned and operated.


Let's look at the margins on franchised locations vs. company-owned.

  • Company-owned gross margins: 16%

  • Franchise gross margins: 81%

It's no wonder the company is aiming for a 95% franchise model.


And here is sales breakdown for franchise vs. company-owned.

  • Franchise revenue as % of overall sales: 55%

  • Company-owned revenue as % of overall sales: 45%


Here is how this has trended over the past few years. You can clearly see the emphasis on franchising.


These two segments culminate in some very strong overall EBIT margins.


Compare these 44% EBIT margins with Chipotle, which owns and operates all of its restaurants.


So what gives? Why would Chipotle not do any franchising?

There are a bunch of reasons, but at the end of the day, the absolute dollar amount of profit matters more than margins.

Here are the TOTAL revenue per store numbers for both restaurants.

Chipotle has 2,546 restaurants compared to 37,855 for McDonald's. Clearly, the franchise model is obviously much more scalable. Another interesting data point is that McDonald’s and Chipotle have a similar number of company-operated stores (2,770 vs. 2,546).

Further, the 35,085 franchised locations did $86 billion in sales last year, and McDonald's made $11 billion from that.


Here is the "take-rate" from franchisees.


To put the expenses in another light, we'll take company-owned expenses per store and the same for franchises.

  • Company-owned: 2,770

  • Franchise: 35,085

  • Company-Owned Expenses: $1.96 billion

  • Franchise Expenses: $510 million


So here is McDonald's business model in a nutshell.

  1. Take out debt to buy land

  2. Find a franchisee from the waitlist

  3. In exchange for the brand and operational know-how, franchisees pay royalties and start-up costs.

  4. Enjoy nice margins

  5. Repeat


Finally, this is what property, plant and equipment (PPE) looks like.

For reference, Amazon's PPE as a percentage of sales is around 26%.

See, McDonald's IS a real estate company after all.


The real competency of McDonald's is real estate, not burgers.

Even with $31 billion in debt on the balance sheet, the company's $5 billion of annual free cash flow is way more than enough to cover the $1 billion in interest expense.

Fun fact to end: McDonald's has 3.7% market share of the entire restaurant industry.


As a paying subscriber, this is an example of what you’ll get bi-monthly.