McDonald's Says Critical to Have Corporate Stores in Franchising

In a just released 10-K annual report, McDonald's explains to shareholders and frankly to the franchise industry, why it is critical for franchisors to have corporate stores - even though its returns from franchises are higher.

"We view ourselves primarily as a franchisor and continually review our mix of Company-operated and franchised (conventional franchised, developmental licensed and affiliated) restaurants to deliver a great customer experience and drive profitability. In most cases, franchising is the best way to achieve both goals. Although direct restaurant operation is more capital-intensive relative to franchising and results in lower restaurant margins as a percent of revenues, Company-operated restaurants are important to our success in both mature and developing markets. In our Company-operated restaurants, and in collaboration with our franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced Systemwide. In addition, we firmly believe that owning restaurants is paramount to being a credible franchisor and essential to providing Company personnel with restaurant operations experience. Our Company-operated business also helps to facilitate strategic changes in restaurant ownership." - MCDONALDS CORP 10-K, MarketWatch

Of the 31,967 McDonald's restaurants in 118 countries at year-end 2008, 25,465 were operated by franchisees (including 18,402 operated by conventional franchisees, 2,926 operated by developmental licensees and 4,137 operated by foreign affiliated markets [affiliates]—primarily in Japan) and 6,502 were operated by the Company.

McDonald's in 2008 continued to see some of the highest profit growth among major franchising firms. In the middle of the meltdown on Wall Street, its stock is currently only 1% lower than last year.