The Story Behind McDonald's Declining Revenue
At first glance, this chart doesn’t paint a pretty picture for McDonald’s. Revenue continues to fall each year even as the company adds more and more restaurants.
The real story involves how McDonald’s classifies its revenue between its company-owned restaurants and franchised restaurants.
The Franchise Model
93% of all McDonald’s restaurants worldwide are franchised. This chart highlights how McDonald’s has sold a large chunk of their company-owned restaurants to franchisees since the early 2000’s.
This chart is important because of how McDonald’s classifies revenue and costs on their financial statements depending on if the restaurant is company-owned vs franchised.
For restaurants that McDonald’s owns, they record sales and revenue 1:1. Meaning if you buy a $5 Big Mac at one of McDonald’s 2,000 company-owned restaurants, the purchase would show up as $5 in revenue on McDonald’s income statement.
For franchised restaurants, the formula is different. McDonald’s does not record sales from franchised locations as their own. Instead, they only record the amount that franchisees pay to McDonald’s as revenue.
For the majority of franchised locations, the franchisee pays McDonald’s in two ways: rent and royalties. McDonald’s generally owns the land and building that a McDonald’s restaurant occupies. The franchisee pays McDonald’s rent every month based on the restaurant’s location and other factors.
Secondly, franchisees pay McDonald’s a monthly royalty based on the restaurant’s gross sales. The royalty fee is generally 4%, meaning if a franchised restaurant has $200,000 in sales per month, they must give McDonald’s $8,000 as a royalty fee.
In 2021, the average franchised McDonald’s restaurant paid about $225k in rent and $125k in royalties to headquarters. These payments are what McDonald’s records as revenue on their financial statements. So for a franchised restaurant that does $3 million in sales, McDonald’s may only record about $300-$400k in revenue.
Here is the breakdown for the past three years:
An Important Milestone
In 2018, McDonald’s recorded more revenue from franchised locations than its company-operated restaurants. This was a significant milestone because we now know that McDonald’s makes 10x more revenue per restaurant with its company-owned restaurants than franchised ones.
Record Profits
Of course we couldn’t forget to talk about the company’s profitability. As the company has transferred restaurants to franchisees, the company’s profit margin has skyrocketed. It now boasts a very impressive 32% profit margin as a company, higher than both Google and Amazon.
