Executive Summary
McDonald's generates revenue primarily through franchising and company-operated restaurants. The business model emphasizes real estate ownership and brand management, securing long-term predictable cash flows through rent and royalties. Its economic quality hinges on its globally recognized brand, standardized operations, and prime real estate portfolio. McDonald's edge lies in its scale, established supply chain, and marketing prowess, which sustains its competitive advantages. Key risks include shifting consumer preferences, macroeconomic downturns affecting discretionary spending, and operational challenges in maintaining consistency across its vast franchise network. McDonald’s is a real estate and brand management company masquerading as a fast-food chain.
1. What They Sell and Who Buys
McDonald’s primarily sells prepared food and beverages. Its customer base is broad, ranging from budget-conscious consumers to families seeking convenience.
2. How They Make Money
Revenue is generated through franchise royalties and rent payments, as well as sales at company-operated restaurants. Franchises pay a percentage of their sales as royalties and rent.
3. Revenue Quality
The revenue is relatively stable due to the franchise model, which provides recurring income streams. However, sales are susceptible to economic conditions and consumer trends.
4. Cost Structure
The main costs are food and beverage expenses, labor, occupancy costs, and marketing expenses. For franchised locations, costs are primarily borne by franchisees.
5. Capital Intensity
The business is moderately capital intensive, primarily due to the real estate holdings. Franchisees invest in restaurant build-outs and equipment, while McDonald's often owns the land and building.
6. Growth Drivers
Growth is driven by new restaurant openings, same-store sales increases, menu innovation, and digital initiatives, including mobile ordering and delivery.
7. Competitive Edge
McDonald's competitive edge is its brand recognition, real estate portfolio, standardized operating procedures, and extensive supply chain network. Its scale allows for cost efficiencies and marketing advantages.
8. Industry Structure and Position
The fast-food industry is competitive, with numerous national and regional players. McDonald's holds a leading market share due to its global presence and brand strength.
9. Unit Economics and Key KPIs
Key performance indicators include same-store sales growth, franchise margins, return on invested capital (ROIC), and restaurant-level profitability. Unit economics are driven by location, operational efficiency, and menu pricing.
10. Capital Allocation and Balance Sheet
McDonald's allocates capital through dividends, share repurchases, and investments in technology and restaurant development. The balance sheet carries significant debt, reflecting its strategy of leveraging real estate assets.
11. Risks and Failure Modes
Risks include changing consumer preferences towards healthier options, increased competition, food safety incidents, and macroeconomic downturns impacting consumer spending. Failure could arise from poor execution of strategic initiatives or a sustained decline in brand perception.
12. Valuation and Expected Return Profile
Valuation metrics such as price-to-earnings (P/E) and price-to-cash flow are commonly used. The expected return profile is driven by earnings growth, dividend yield, and potential multiple expansion, balanced against the risks outlined above.
13. Catalysts and Time Horizon
Potential catalysts include successful menu innovations, expansion into new markets, or significant improvements in digital ordering and delivery capabilities. The time horizon for realizing these catalysts is medium to long term, reflecting the steady, incremental nature of the business.