McDonald’s Missed Opportunity

McDonalds (NYSE:MCD) has been in the national press of late with a truck load of franchise owner problems. Many understand that McDonald's is partially a real estate story, which is one of the three primary revenue streams for McDonald's Corp.

Being in real estate in the early years presented an intuitive tale for the lending community, which struggled to understand a restaurant model of cheap 15 cent hamburgers. It also was a way to control the franchise structure via a lease, and to take an ownership interest to smooth out early startup losses.

Over time, MCDonald's Corporate earnings have become increasingly reliant on fatter real estate margins. Early histories of McDonald's noted an 8.5% total restaurant rent goal and a McDonald's corporate real estate margin of 25-30%.

It has risen significantly since those days. Rent expense has generally increased worldwide, but McDonald's rent margin—its markup--has increased even more. See the following extracts taken from McDonald's last 10K filings below.

MCD Fiscal Year 2012 2011 2010 2009 2008 2007
Worldwide # of Restaurants 34,480 33,510 32,737 32,478 31,967 31,377
# Where MCD is lessee 14,429 14,139 13,957 13,858 13,620 13,322
# Where MCD is lessor 20,051 19,371 18,780 18,620 18,347 18,055
#Worldwide MCD franchisees 27,882 27,075 26,338 26,216 25,465 24,471
Franchisee rent revenue ($M) $5,864 $5,718 $5,198 $4,841 $4,613 $4,177
Franchisee rent expense ($M) $953 $935 $873 $825


Rent Margin, $ $4,911 $4,783 $4,325 $4,016 $3,829 $3,454
MCD Real Estate Margin % 83.8% 83.7% 83.2% 83.0% 83.0% 82.7%
MCD rent/lessor/unit ($000)




$260 $251 $231
Data: Annual MCD SEC 10K filings    

McDonald's rent margin is now almost 84 percent. This is the function of several factors, including higher store revenues over time, hitting a rent overage threshold that goes as high as 18% of revenue, as well as rent concessions that the landlord McDonald's realized that it didn't pass on to the franchisees.

McDonald's rent per franchise lessor site is calculated, as shown above, at over $292,000 per unit.That is up 26 percent from 2007. We don't have the exact breakout of McDonald's franchisee revenue for the lessor stores to rerun a rent percentage, but their rent has to be up. Rent revenue is up more than the number of franchisees, illustrating the issue.

McDonald's is 81 percent franchised. The franchise economic model has to work for McDonald's to expand. Restaurant economics were built on 6 to 8% rent. But the data above suggests actuals are higher. The missed opportunity of the McDonald model is that corporate could lower franchisees rents to offset the price discounting it does to hit the Street's same store sales goals—but to do so, it would have to find corporate General & Administrative savings elsewhere to offset the rent decline.

That is not on the corporate menu at this point.