McDonalds Franchisee Income Statement Survey Detail

February 8th, 2012

Janney Montgomery Restaurant Analyst Mark Kalinowski surveys McDonald's (MCD) closely, and has recently published a full "average typical traditional store" McDonalds franchisee income statement. It is attached below via PDF Given the heavy "numbers culture" that is present in the restaurant space, this is interesting to many of us.

Some key statistics from the survey:

AUV: $2.7M
Operating P/L: 5.7%
Operating Cash Flow, $275K or 10.2%
Customers Year: 575,000
Average check: $4.75

Credit to www.burgerbusiness.com.

These numbers show again that franchisee restaurant margins must cover debt service, G&A and CAPEX/remodels and can be a challenge even for a McDonalds model. The average check number is a bit lower than other MCD data I've seen over the years, and there is a variance between company reported and survey franchisee cash flow, which I'll research and comment back here later.

John Gordon

John A. Gordon is Principal and founder of Pacific Management Consulting Group, which provides chain restaurant sales, profitability, earnings and economics research and special analytical projects to those in, or who need to know about the restaurant sector. Among others, we support franchisees and those supporting franchisees.

Gordon has a long background in chain restaurant operations and financial management roles, such as cost analyst, financial analyst, manager of planning and analysis and CFO, and has been consulting since 2000.

He is passionate in providing independent, creative, detailed and useful perspective, with no conflicts of interest. Email him or call (619) 379-5561.

Comments

February 9, 2012 - 07:30am

Leader of The Pack

McD continues to be the leader of the pack. $2.7M AUV leaves the competition in the dust.

Thanks for posting the information.

February 12, 2012 - 09:55am

Leader or not?

Gee, 2.7 million AUV and only 2.75 million cost of sales?

Do you make it up on volume? LOL

Granville_Bean

February 12, 2012 - 20:38pm

Huh?

This Guest says: "Gee, 2.7 million AUV and only 2.75 million cost of sales?"

The Cost of Sales line is $918,000. What are you talking about?

February 9, 2012 - 12:07pm

MCD cash flow

When MCD management comments on franchisee cash flow they are
talking pre-debt so their numbers don't consider principal, interest, or
D&A. Franchisee cash flow can said to up but debt is also up because
franchisees are busy remodeling or rebuilding their landlord's buildings.

The average check has flattened out or declined because A) efforts to
build share by concentrating on traffic, B) McCafe and other promoted
products are snacks or items bought separately from the main meal,
C) as franchisees attempt to raise prices on the core menu more
customers turn to the Dollar Menu where they can buy a full meal for
less than the price of one Big Mac.

February 9, 2012 - 14:21pm

MCD cash flow, store level EBITDA

Thanks, exactly right. Store level "ROI" in some surveys is pre debt service/CAPEX/franchisee G&A and is not representative of store economic owners return. In the Janney survey here, depreciation is noted but the reality is depreciation is never enough to rebuild/rescrape.renew/remodel buy new equipment.

February 9, 2012 - 15:09pm

Operating P/L

at 5.7%. Do we have any history on this figure? Up, down, steady?

February 9, 2012 - 17:51pm

5:7% Operating Cash Flow

John, to clarify is the 5.7% operating cash flow figure EBITDA? Seems to be very tight for a powerhouse franchise such as McD.

February 9, 2012 - 21:04pm

Definitions count

As we know from the political world (and company earnings calls) definitions count.

The 5.7% in this sample has 3.5% of depreciation expense in it, so to get to "apparent store level EBITDA" one would add the 3.5% back, or 9.2%, here.

But you are right, that level of EBITDA is pretty low for a $2.7M AUV powerhouse. This must be reconciled against comments MCD has made in Investor Day presentations, a much higher number.

February 9, 2012 - 17:21pm

MCD cash flow - Part Deux

Yes, I should have made CAPEX my "D)" in my above list. In the McDonald's
franchise model McDonald's Corp controls 100% of the buildings and land
and the franchisees buy/own the equipment and fixtures.

Richard Adams
Franchise Equity Group

February 12, 2012 - 09:31am

Royalities

I did not see a line item for the Royalities, where are they?

Granville_Bean

February 12, 2012 - 20:34pm

Royalties:

Guest is perplexed that: "I did not see a line item for the Royalities, where are they?"

McD doesn't charge a "Royalty" per se. They charge "Rent & Service Fee" and there is a Rent & Fees line.

Service Fee is "always" 4.0%. Rent is real estate dependant and is all over the place site by site. It can also be influenced by the deal that the F'see makes on a rebuild or reimage: put up more cash and get a lower "rent". In the US, McD F'sees "rent" their site from McD Corp.

Granville_Bean

February 12, 2012 - 21:12pm

D&A

Guest notes: "When MCD management comments on franchisee cash flow they are talking pre-debt so their numbers don't consider principal, interest, or D&A."

This sample P&L does include D&A and Interest lines. A question would be what was being financed in the sample P&L. A McD F'see who buys an existing store (the vast majority of US units) can (but of course doesn't always) pay in the vicinity of 1/2 of Sales. Thus a ballpark price for a $2.7 sales volume store could be as much as $1.35M.

Typical financing term is 7 years; think of what the principal payments are on that! (There goes that $154k SOI.) That won't be in the P&L. Even after Original Acquistion Debt is paid off there is always Reinvestment which many F'Sees will finance. The problem with buying a "sure thing" in a "powerhouse brand" is that it will be a very expensive purchase.

Indeed, I knew someone who bought a $3M+ store who could (for a time) not pay their bills due to the massive payments on the acquisition debt. There are people out there whose stores are doing what you might consider huge volume, but who are not taking home much money due to how much they paid for their stores.