McDonald's Review~ The Inside Stories

McDonalds Review



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McDonald's Franchise Review

Posted by Karl Keller (Business Owner & Editor)

In 1954, Ray Kroc, who was a multi-mixer salesman was surprised by a huge order for 8 multi-mixers from a restaurant in San Bernardino, California called ‘McDonald's' run by two brothers Dick and Mac McDonald, and was stunned by the effectiveness of their operation.

They ran their operation with surprising effectiveness by producing a limited menu, concentrating on just a few items, such as burgers, fries, and drinks, allowing them to focus on quality versus quantity. The food was good and the service was fast.

Sensing an opportunity knocking, Kroc pitched an idea to the two brothers of opening up several restaurants all across the United States. Both of them liked the idea of a chain and made Kroc their business partner.

So, the first McDonald’s came into being in 1955 in Des Plaines, Illinois. The next year, 1955, the McDonald’s Corporation was created, and 5 years later Kroc bought the exclusive rights to the McDonald’s name.

McDonald’s went public in 1965 and since then hasn’t looked back. They’ve become a symbol of quick-service hamburgers, breakfast items, salads, fries, chicken and milkshakes.
McDonald's is currently in 122 countries around the world. Over 33,000 locations serve 51 million customers each day.

             Number of Stores



Essential Investment Facts, Start-up Costs, Company Capital Requirements, Etc.

McDonald’s Franchise Facts

Quick-Service Restaurant
Company Website: www.McDonalds.com
2012 Rank (Entrepreneur.com): 6
2011/2010/2011 Rank (Entrepreneur.com): 3 / 2 / 2

Total Investment: $1,068,850 - $1,892,400

Franchising Website: McDonald's Franchising
Business Established: 1955
Franchising Since: 1955
Franchise fee: $45,000 (Renewal fee is $45,000)
Ongoing royalty fee: 12.5%

Advertising Fee: 4.0%
Term of agreement: 20 years, renewable
In-House Financing: No

Net Worth Required: $
Liquid Assets (Capital) Required: $500,000
Number of Employees Required: ~50 (varies based on store hours)
Absentee Ownership: NOT Allowed
Address: 2111 McDonald’s Drive, Oak Brook, IL 60523
Phone: (630) 623-6196

 What does a McDonalds owner earn?

What are McDonalds franchise owner profits? The franchise profit-earnings question is something most franchise companies normally don't answer, because usually they don’t paint the prettiest picture.


McDonalds, on the other hand, gives detailed financial information in its 373-page Franchise Disclosure Document (FDD) because it has a good story to share.

According to the McDonalds FDD Item 19, the average sales volume of traditional restaurants in the U.S. open at least one year was $2.4 million in 2010. The highest sales volume for a U.S. McDonalds in 2010 was $9.8 million (the "star" performer). The lowest performing restaurant clocked in at $387,000.

That’s a slight rise from their 2009 FDD, which reported that in 2008 the average sales volume per McDonalds Franchise was $2.3 million per year, per the 2009 FDD.  The highest performer that year was 9.5 million while the lowest had sales of $491,000.
Average profit margin per Franchise runs about 10% of sales.

Item 19 of the 2010 McDonalds FDD goes on to list proforma financial results for restaurants that hit three different sales levels - $2 million, $2.2 million and $2.4 million, showing cost of sales, gross profit and operating profit at each level. Operating profits were in the mid to high six figures at each sales level.

Store Owner Quotes

McDonald’s owner sees golden opportunities for newcomers

On April 19, McDonald’s will hire 50,000 workers across America. Each individual hired will be given not only the chance to earn a paycheck, but perhaps the opportunity of a lifetime.

Homewood resident Randy Conn can attest to the possibilities. He began working the fry baskets at a McDonald’s in Highland, Ind., at the age of 15. Forty years later he’s the owner of five of his own McDonald’s franchises throughout the Southland and northwest Indiana, and he wants to offer to others the same break he received. Conn stood in a line of 300 on the fateful day. He was one of three chosen for the coveted position.

“Socially, it was the place to work. So it was a great place to be for a 15-year-old,” he said.  Conn wanted the job so badly he was willing to stretch the rules a bit. “They wanted 16-year-olds and up. So I just pretended I was 16,” he said.

He quickly rose through the ranks, achieving shift manager by 19 and managing his own stores by the time he was 21.  “I just paid attention to those above me and remained hungry,” he said. “I would see the person in the position above me and think, ‘I can do that job even better,’ and I just kept working.”

In September of 1999 he bought his first franchise in Olympia Fields, eventually accumulating nine stores in the region before scaling back to the five he owns now in Crete; Olympia Fields; Merrillville, Ind.; Highland, Ind.; and one at the Chicago Southland Lincoln Oasis in South Holland, off Interstates 80 and 294.

Conns’ story is by no means exceptions, as 50 percent of McDonald’s franchisees and 75 percent of store managers began as crew members.
 “It’s all about opportunity,” said Conn, “and we give that to every employee that walks through the door.” (April 2011)

Local McDonald's owners boast flourishing franchises
While many businesses buzzed with the words "cutbacks" and "layoffs" during the past two years, Knoxville-area McDonald's franchisees planned for expansion and upgrades.

"We've been doing a lot of renovations," Tom Cochran, an early local franchisee, said. "We're doing one right now in Oak Ridge."

Cochran and his family, who were the first McDonald's franchisees in the Knoxville area, own 26 stores and recently celebrated their first store's 50th anniversary. "I think we're part of Americana," Cochran said. "We're the every-man's place to eat. Everybody likes to eat McDonald's hamburgers and when times aren't good, they look to us for value."

The Cochran family joined the chain from almost the beginning, opening its first restaurant on Magnolia Avenue in August 1960. The company now has 26 restaurants and 1,400 employees.

Despite fierce competition in nearly every U.S. market, McDonald's has weathered trends, changing tastes and mercurial economies.

In addition to customer loyalty, Tom Cochran said employee allegiance also is important and continued to improve during the recession.

"We're very fortunate that the McDonald's brand is so well received by our customers, even in off periods, so we're able to keep a lot of jobs," the franchise executive added. "In my 50 years of experience I've never had to lay anyone off."

In addition to maintaining jobs, McDonald's has expanded the job market through the construction of additional stores like the recently-opened Hardin Valley restaurant.

"We think this location will be very successful," said John Faris, also a Knoxville-area McDonald's franchisee and owner of the Hardin Valley restaurant. "This store has a new look. It's a little more elegant and upscale. We're modernizing with the time."
Cochran and Faris agreed that the Hardin Valley site, Faris' 18th store, is a strong example of McDonald's new direction as a brand.  "It's an expensive property to keep up with, but we feel it's the right decision to create a friendly environment," Faris said. "People come in and they feel like they are in a living room."

Cochran also plans to experiment with the modernized look by remodeling his chain's Oak Ridge location.  "We're anxious to do a few of them and see what we can do," Cochran said. "Oak Ridge will be the first one like that, and there are a few more on the drawing board."  (November 2010)

 A Lesson from a McDonalds Franchise Owner

During a recent business trip, I stopped by a local McDonalds to grab a quick bite to eat.  My stomach was on east coast time even though the restaurant was operating on a west coast clock.  The place was almost deserted and I couldn't help but notice the stacks of official looking documents in front of three sharply dressed individuals.

I glanced up at a plaque hanging by the door of the establishment and read that the franchise owner and operator was Debbie (name purposely changed).  From the conversation I overheard I assumed that Debbie was the outspoken female at the other table.

With nothing to do as I ate my Big Mac, I decided to give in to my curiosity and eavesdrop.  The conversation was boring at first, simple sales data for various local McDonalds.  I could tell Debbie was happy about her sales increasing due to an Interstate sign she paid for announcing her various locations.  Then the conversation turned to whether or not the restaurant should be opened on Thanksgiving Day, Christmas Eve, or Christmas Day.

The official looking McDonalds guy insisted that McDonald’s locations which were open on those days were able to make gains in sales that they would have otherwise lost.  Debbie seemed unsure whether this would be a good thing for her employees.  The McDonalds man asked if she would like the profits.  She answered that she would, but she doubted she’d have enough people to volunteer.

At first I thought I was listening to a woman waffling in her desire to give her employees a day off and make a little extra cash at the end of the year. Then I realized I was listening to a master politician. 
Debbie asked the man if he thought people would want to work on Christmas.  He answered that he would work if he needed the money.  Debbie seemed to consider this answer thoughtfully and then responded by wondering aloud if she would be able to find enough managers willing to work the shifts away from home on the holidays. The man replied that she could relax the rule of having more than one manager present all the time if she needed to.

Debbie seemed to consider it for a few more moments and then with the practiced smile that I've seen a thousand times from good negotiations, she answered, “That’s certainly worth considering.  I’ll have to give that some more thought and get back to you.”

I’ve never met Debbie or the McDonalds man before but I knew that tone.  The man sensed victory and move onto a new subject.  I lost interest and dumped my trashed, refilled my drink, and smiled at Debbie as I walked out.  There was no way she was going to open that store on Christmas.  Sometimes there are more important things in life than a dollar (or a dollar menu item). (February 2011)
(Footnote #3)

 McDonald’s offers four types of franchises:

Traditional restaurant – franchise offered is located in freestanding buildings, storefronts, food courts, and other locations. The franchisee operates a full-menu restaurant, offering the public a high standard of quality and uniformity in food and service. Franchise terms are generally 20 years.
Satellite locations – The franchisee is granted rights to operate the franchise in a retail store, strip center, airport, universities, and other diverse locations. These serve a scaled-down menu of a traditional McDonald’s Restaurant and in some cases serve non-McDonald’s trademarked products. Franchise terms depends on the location.
Small Town Oil (STO) locations – STO’s are located in fuel stations/convenience stores, and operate a full-menu McDonald’s restaurant within the shared space. STO franchise terms are 10 years.
Business Facility Leases (BFL) franchises – BFL franchises grant franchises with leases that include the business facilities. A BFL franchisee has a conditional option to purchase certain restaurant assets after the first year and extend up to 20 years after the beginning of the term.


We give McDonald’s a positive score as a business risk (it would be very positive if it
         weren’t for the high total investment cost).

Is a safe opportunity, especially considering capital requirement.

Is consistently ranked in the top ten franchises.

The franchisee will not receive an exclusive territory with the franchise.
         Franchisees may face competition from other franchisees, from outlets
         that McDonald’s owns, or from other channels of distribution or competitive
         brands that McDonald’s controls.  

 Is considered to have one of the best, if not the best, training programs for Franchisees
 Is about as recession-proof a franchise as there is… even during the recession of
          2007, McDonald’s still served over 27 million people daily.
 No absentee ownership allowed

Training occurs both on-site and at Hamburger University, McDonald’s international
          training center. Training takes place on a part-time basis and spans 9 to 24 months,
          but a 36-month training time is not uncommon.

Franchisees will not receive any financing or assistance (minority Franchisees may
         receive special incentives)

 According to the McDonald’s FDD, the Franchisee is given no right to renew or extend
         the franchise after the term of the contract.

Must pay a Service Fee of 4% of Monthly Gross Sales

 Must pay recurring maintenance fee on things such as “Point-Of-Service

          (POS) Software”, “POS Integration fee”, and “Next Gen Cashless fee”


~Depending on your personal preference: McDonald’s usually owns the property and acts as the landlord meaning the Franchisee pays McDonald’s rent


 Unfortunately McDonald’s rank in moderate to moderately high in the red for The Headache Index.
 The franchisee will not receive an exclusive territory with the franchise so your primary market area will always be at risk.
 You will have minimum wage employees = minimum wage employee issues.  Although the work is graying due to the economy a large number of employees will be teenagers and there will be issues with turnover and dependability
 There will be issues with Perishables, Spoilage, Sanitation, and High Maintenance
 You will need a minimum of $300,000 in non-borrowed, personal resources to be considered for a franchise.
Most Owner/Operators purchase an existing restaurant directly from McDonald’s or from a McDonald's Owner/Operator. A small number of new operators choose to purchase a new facility, but that requires an initial down payment of 40% as opposed to 25% for an existing restaurant.
May take more than one store to have enough profit potential to be better than just buying an expensive job (over 80% of owners own more than one store).

Business Summary:

Our reports and analysis show that McDonald’s is one of the best franchise businesses available to the new investor.


There are however some serious questions to ask yourself.
 What is this business is going to do for you? Perhaps the better wording is... what are you going to have to really invest to make this business actually meet your financial expectations? Will 10% of sales be enough? How much capital and how many stores are required to make a substantial income. It takes more than one store (80% of owners have more than one), which increases your time, money and risk.

Your territory isn’t protected so future revenue is always at risk. How many hours per week above 40 in store is required to make it profitable?
How many years until you begin to clear profits? Is a long-term capital commitment the best idea for the rapidly changing conditions of today's economy?

Perhaps there is a much safer option for you requiring a far lower start up cost. Be sure and look at the businesses specifically designed for today's new economy.

 


 

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