Yea sure, but you ignore that Chipotle and McDs have magnitudes larger supply chain optimizations, cash reserves, and operate in high and low cost markets such that there is more margin to keep the business afloat when there is a squeeze.
> Yea sure, but you ignore that Chipotle and McDs have magnitudes larger supply chain optimizations, cash reserves, and operate in high and low cost markets such that there is more margin to keep the business afloat when there is a squeeze.
Aren't most McDonalds franchises? You definitely see individual owned stores going out of business.
Well, there are several factors at play here. Competing with McDonald's is only partially related to the problem of a single restaurant providing quality food on the cheap- there's also the supply chain to consider.
Not really, it's just simple economies of scale. Large chains have a natural advantage in the restaurant business just like they have a natural advantage in any other field. A small restaurant simply cannot have as high a margin as McDonalds because they don't have the same bargaining power with their suppliers - they need to pay more for everything.
Adding more weight to your point, I read that McDonald's divested their stake in the Chipotle chain, giving the reason that they wanted to focus on increasing revenue at their own restaurants.
McDonalds operates at a larger scale than any other restaurant in the world and by a very large margin. What works for McDonalds won't work for restaurants that must order supplies on a much smaller scale.
Also, in McDonalds' early days they didn't have the leverage over suppliers that they wield now, so its food costs have come down by orders of magnitude. This reminds me of something my cost accounting professor told me- to get to large scale businesses have to price items as if they are already at large scale. If you buy a stamping machine that cost $1 million capable of maximum output of 100,000 units, but currently only have sales of 5,000 units, do you price each unit at 1,000,000/5,000 or 1,000,000/100,000? If you opt for the former, you'll never get to maximum output because customers won't be able to afford your prices.
They have way better efficiency on goods and marketing. Your local mcdonalds isn’t advertising on TV. They pay franchise fees but its not a 1:1 cost to benefit. Depending on the size of the chain, they can also negotiate discounts by buying at predictable and high volumes.
Chipotle's former CEO (and I believe founder) often mentions that Chipotle's time under McD's ownership hammered home that the single most important element of the company's success was excellence in real estate. It's also why getting a McDonald's franchise is generally very expensive - they'll give you as de-risked a location as possible and a proven operational playbook. It's not easy to run a franchise at all (you have to be available on days your manager calls in sick, deal with vendors, inventory, etc), but you don't need to figure out the business model at all.
That's unrelated to the statement I addressed. If McDonald's could pass savings on to their customers and keep the same profit margin, thus selling more burgers, and generating a higher total profit, they would.
I think one thing that's missed, here, is that (e.g.) the company that owns "MacDonald's" doesn't actually operate fast food locations: they're franchises. Instead, the company (which has the high P/E spoken of) operates gigantic commercial kitchens-slash-factories and ships patties and other materials to the franchisees. Operating MacDonald's restaurants isn't a cost they bear. In this sense, these large franchises are already even more streamlined than Sprig, et al.
McDonald's is actually a very bad example; they're famous in the industry for their ridiculously high margins, on the order of 15-20% rather than the medium single digits for most fast food chains.
McDonald's did indeed help Chipotle get their logistical systems in order. CMG and MCD still share some common suppliers.
One area where Chipotle resisted McD's advice was in automating their kitchen systems. One example was the steak. CMG believed hand-marinating and grilling their steaks in-store was a core feature that couldn't be changed. It's also a highly risky procedure when it comes to food safety and cross-contamination.
Other things, like the carnitas and barbacoa, were changed to be prepared offsite and shipped to the stores for sous-vide rethermalizing and serving. The steak was also changed to this method after the outbreaks (and long after MCD divested).
No doubt. I am not saying that McDoanlds is unsuccessful, rather that by customer satisfaction surveys In and Out wins. They also have, perhaps, a less scalable model of business and so can never grow to McDonalds size while also maintaining that quality.
Interestingly, Chick-fil-a has learned to scale and maintain quality.
Is McDonald's really very profitable? I ask innocently, I don't live in America, I never eat in McDonald's, and I think you are probably right, but I'm seeking data to back up the assertion.
If McDonald's arbitrarily raised wages, could they do that without increasing the costs of their products? Would that then make them less competitive against the horde of other fast food shops, and therefore reduce their sales dramatically in what may (or may not, I really don't know) be a hyper-competitive industry.
These are the types of considerations I'm sure are important.
I would draw a further distinction. Some franchise operations (thinking Subway and Little Caesars) don’t really care if you make it: They get their money up front and you have to pay to get out.
McD is more strategic: They want a good business plan, location, etc. and are very picky at the cost of some false negatives.
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