However, if we have a look at their balance sheet we begin to uncover the truth… Other than that though their Income statement is surprisingly good for what is normally thought of as a “restaurant” business. This is indicative of a highly leveraged operation with a lot of debt, which is generally a very bad thing. The one thing to note though, is a high interest costs, which are taking on 16% of Operating Income to pay off. Overall the income statement is looking very good, with strong margins all around. In fact, McDonalds has increased their dividend every year since they first paid one! McDonalds is a dividend aristocrat with 45 consecutive years of dividend increases. This severely increases the predictability of their revenues, and turns what would otherwise be a pure restaurant business (with the corresponding shortfalls) into a what is partly a Real-Estate business, which stabilizes and improves their restaurant business.Įffectively they have fairly stable revenues coming in under normal circumstances, and this stability has allowed them to do a number of things, including consistently raising their dividend. This “landlord” position is no small market, and indeed from their 10-K:Īs of Decemand December 31, 2019, the Company owned approximately 55% of the land and 80% of the buildings for restaurants in its consolidated markets Overall, the wide geographical diversification of McDonalds, and the stability of the revenues that comes with it, as well as the specific franchising model under which they operate, which effectively makes them the landlord of many of their franchisees, means that they have a steady business. Overall the distribution in revenue between these segments have remained fairly steady, with the U.S segment growing slightly in 2020: The segment is 98% franchised as of December 31, 2020 Corporate activities are also reported in this segment. International Developmental Licensed Markets & Corporate - comprised primarily of developmental licensee and affiliate markets in the McDonald’s system. The segment is 84% franchised as of December 31, 2020. International Operated Markets - comprised of markets, or countries in which the Company operates and franchises restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K. The segment is 95% franchised as of December 31, 2020. Since January 2019 McDonalds has operated under an organizational structure with the following global business segments: This combination of franchising alongside corporate restaurants allows McDonalds the flexibility to expand in a way that is inline with the target markets tastes, while keeping the overall know-how within the company. The franchise revenues themselves come from either franchising fees they charge, or by providing goods and services to their franchisees, including the real estate that the franchisees operate out of. If this all seems very confusing to you, don’t worry, it’s really not.Įssentially McDonalds is a fast-food chain that makes its money from either directly operating its restaurants, or through franchise revenues. The Company’s Other revenues are comprised of technology fees paid by franchisees, revenues from brand licensing arrangements, and third party revenues for the Dynamic Yield business. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms. Fees vary by type of site, amount of Company investment, if any, and local business conditions. The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. What exactly does this mean? How do they get revenue coming in? Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources. The Company is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences and driving profitability.
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McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. Of the 39,198 restaurants at year-end 2020, 36,521 were franchised, which is 93% of McDonald's restaurants. The Company franchises and operates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. As per their latest 10-K report, McDonalds is: