Burger King, to take an example, probably doesn't give a crap about the restaurant sales at all.
Most of their profit is from franchise fees, not restaurant sales.
Company restaurant revenues in 2011 were 1638.7 million, and company restaurant expenses in 2011 were 1447.4 million.
All told, profit from restaurant sales was 191 million.
Franchise fee revenue in 2011 was 697 million, franchise and property expenses 97.1 million.
All told, profit from franchise fee revenue was 599.9 million.
Basically, I can't imagine they care if they are franchising restaurants with people, restaurants with robots, or heck, franchising robot boxes themselves.
They only care that someone is paying them to call it burger king, and giving them a cut of sales
I find this comment a bit short sighted. First of all, it's obvious that the burger king org DOES care about restaurant sales, otherwise they would not be advertising constantly. Even if you ignore the contradiction between their actions and your suggestion about their priorities, applying a little logic to the situation will make it clear. If sales aren't good, how many people are going to be making new Burger King franchises? If sales aren't good, will franchises remain in business to pay them fees?
Bloomberg ran a nice piece on what it's like to own a McDonald's franchise here [1]. The raw numbers sound nice - $2.7 million gross, $1.8 million in gross profit. But after your various expenses come into play, the honeymoon ends - you end up taking home about $150k for a mountain of work that's required to keep a franchise running in good shape. You're buying a job.
The reason this matters is because those numbers are is pretty representative of many regular businesses; well outside 'our' world of VC driven mutual lotteries. You're taking home $150k yourself, but you're paying $540k in crew (non-managerial) payroll. And many of these guys are at or near minimum wage. Increase their wages just 30% (and going from $7.25 to $15 is a > 100% increase) would cost you $162k. And now you're losing money. And McDonalds are pretty primo in terms of profit. Life's often much harder for for the countless no-name businesses out there.
It's the really counter intuitive nature of business. A company can make millions, yet have owner(s) that are, out of necessity, living relatively modestly. So imagine your labor costs skyrocket. What do you do? You really don't have any options. You increase prices or you go out of business.
This seems likely to have a paradoxical effect. It means company with large profit margins are fine, but you squeeze the very low profit margin companies. And the low profit margins companies tend to have low profit margins because they're providing products at extremely cost to cost. E.g. company selling $50 steaks = no problem. Company selling $1 tacos = problem. So the very businesses who are doing to their most to cater to lower income people end up being the most negatively affected. Of course now their customers can afford to pay more, but that's precisely the definition of a reduction in a purchasing power per dollar.
Your assumption is in line with the underlying principle - money made from collecting licensing and franchisee fees actually is more profitable than money made from selling burgers. This implies that over time large fast food operators should tend to become more and more franchised, and we see this playing out in the market place right now [1].
The reason why fast food brands aren't 100% franchised already is because they need to constantly learn about their customers/products/operating environments/fast moving trends etc. The best way to do this is to actually operate your own stores where you can experiment and learn very quickly. The younger the brand, the few outlets it has, the more it still needs to learn, so corporate ownership will be higher. As the brand matures over time that number is expected to come down to e.g. 15-20%.
One of the core arguments of article is misleading, since it claims McDonald's is a real estate company based on the share of Net Income coming from owned versus franchised restaurants. The share of Net Income is a misleading comparison, because
(1)it fails to account for the cost of capital associated in owning real estate
(2) over 85% of McDonalds are franchised, the remaining 15% produce all of that income, so even on this misleading basis of just considering net income, the profits are more balanced than the article makes it appear.
- quote from article that is misleading"Of that $18.2 billion generated by company-operated stores in 2014, the corporation keeps just $2.9 billion. Of the $9.2 billion coming from franchisees, the corporation keeps $7.6 billion."
Right. Chains try to maintain at least some amount of stores run by the company to help guide and preserve the brand. Especially in new and high profile markets.
But 3G doesn't need to maintain the brand. The Burger King brand, both to the customer and the franchisee is still decent based upon its historical success. It will take quite a few years for that to trickle down to retail investors and potential franchisees. You have contractual 4.5% royalty of gross and 4.5% for advertising of gross. It does not matter if the franchises make any profit. The IPO paid for the original expenditure, so all BK is left with is debt. Debt which has very little teeth because the majority of assets have already been sold off with some more equity about to be drained out during a debt refinancing. Maybe this is just 3G getting in first on the feeding frenzy of the shrinking fast food, burger joint market, and didn't really change Burger King's path too much, but no one should pretend any of this has to do with running a traditional corporation looking out for its own best interest.
Revenue != Profit. You really have to control all your costs to just break even in fast food. Of course in the case of McDonald's a good bit of that revenue is also going to McDonald's Corp as franchise fees.
"Some of these businesses are small diners or independent grocery stores; others are franchisees that own a handful of stores affiliated with a recognizable brand. (For instance, over 80% of McDonald’s locations are owned by franchisees.) In either case, the profits and executive pay at the country’s largest businesses have nothing to do with the stark economics these small-business owners face: single-digit profit margins."
If over 80% of McDonald's locations are owned by franchisees, then it's likely that MANY of these are franchise-related (also, profits and executive pay at McDonald's would certainly have something to do with the related economics of franchise fees and the back-end of the supply chain).
I feel like I have to disagree, on the grounds that many companies mistakenly label indirect profit centers as 'cost centers' and end up cutting off their noses to spite their faces. They strangle R&D and get outclassed in the market. They strangle infrastructure and get nasty surprises that tarnish their reputation.
And then there's mistaking users for customers. If you're a McDonald's customer you might think their money comes from trading hamburgers for cash, and you'd be wrong on any number of fronts. If you're a McDonald's competitor, you would know that they make more money from fries, and way more money from selling soda (hence the discount for a meal). But if you're the McDonald's corporation, you know that you make most of your money from franchisees, who happen to sell burgers and fries and oceans of soda. You're providing logistics and real estate acumen for most of your money. The general public is their customer's customer.
I don't know if they still do but Burger King used to 'steal' McDonald's real estate acumen by building Burger Kings as close to the nearest McDonald's as they could manage. Let them get 10% or whatever higher profits by getting the correct corner lot in the right neighborhood instead of the incorrect lot in the right neighborhood, meanwhile we save tons of money on market research.
What about franchise fees? Independent fast food restaurants basically don’t exist in the U.S. anymore. An individual McDonalds may be scraping the boundary of profitability, but corporate had a net income of $1.5B last quarter[0], or about $7,500 per employee per quarter[1]. That’s net income, not revenue.
Right, but in McDonalds case, the parent company isn't the one operating the franchises most of the time, and the franchises are almost always small companies privately held.
So you don't get an accurate look at how the average McDonalds franchise operates.
Other businesses have their earnings obscured by different sources of retail, or inexact expense breakdown.
Yes, McDonalds is a large owner of real estate. Does this mean that's where they get their profits? Not so much.
Most franchisees pay roughly 10% of gross sales to McDonalds as "rent" (this is in addition to the 4% they pay as a monthly service fee for other aspects of the relationship).
Since this "rent" is based on gross sales, the primary incentive on McDonalds part to increase the franchisee's sales.
Your argument also ignores that roughly 30% of McDonalds profits comes from stores it operates itself.
I'm not sure that's quite accurate. Yes, they are a landlord to franchisees, and their profits show up as rent. But those franchisees are all earning money to pay rent the same way: selling hamburgers the McDonald's way. They don't have a lot of leeway to change practices or sell something different, because if they do, the landlord will literally kick them out.
It's basically a REIT for tax purposes, but that doesn't mean they don't profit from selling hamburgers.
While your comment might be a little bit too cynical, I don't think it's far off from reality.
Over time, it'd be very surprising if Burger King's lack of company stores didn't catch up with it. These stores are the best channel for taking the pulse of the market. It's very hard to see a company maintaining its brand and evolving with the market with what basically amounts to a franchise-only play.
It's worth noting that Chipotle, which does not currently franchise, is absolutely killing it from both a financial standpoint[1] and a customer experience standpoint[2]. Burger King's model has an attractive financial profile (for now) but according to the same recent Consumer Reports survey that gave Chipotle top marks in its category, Burger King received one of the worst marks for burgers.
More interestingly, based on a quick glance at the Consumer Reports rankings, it appears there may be a correlation between customer perception of product quality and the percentage of company stores. In Burger King's category (burgers), the number two chain, In-N-Out, doesn't franchise, and the number one chain, The Habit, just started franchising last year and is still relatively small. Food for thought, no pun intended.
> Note that given the franchise model, that's 50k profit on basically no expenses
Profit is already past expenses.
> That's just the tax they are charging the franchises for the privilege of calling themselves a McDonalds store.
McDonalds does plenty for the franchise restaurants:
1. Brand recognition and marketing which bring in tons of customers, without the franchise owner having to spend a cent.
2. Recipes that will sell. Franchise owners does not have to know anything about cooking, people's tastes etc. It's all covered by McDonald's R&D.
3. Efficient operations. Similar to the above, franchise owner's does not need to know anything about running an efficient restaurant. All equipment design as well as day-to-day operational procedures are standardized, highly efficient, and provided by McDonalds.
4. Employee training.
5. Restaurant interior design. Again, provided by McDonald - no need to think about it, no area to make costly mistakes by inexperienced owner.
6. Supplies. No need to worry about managing supplies and suppliers - it's all provided by McDonalds.
In fact, McDonalds does so much for a franchise owner that he's somewhat closer to a glorified manager with a profit sharing agreement, that to a real business owner.
That's at the corporate level though. They are largely making their money from selling food or renting space to franchisees. The individual store's margins (the ones paying the actual burger flippers) would be quite a bit lower I assume.
Burger King, to take an example, probably doesn't give a crap about the restaurant sales at all.
Most of their profit is from franchise fees, not restaurant sales.
Company restaurant revenues in 2011 were 1638.7 million, and company restaurant expenses in 2011 were 1447.4 million. All told, profit from restaurant sales was 191 million.
Franchise fee revenue in 2011 was 697 million, franchise and property expenses 97.1 million. All told, profit from franchise fee revenue was 599.9 million.
Basically, I can't imagine they care if they are franchising restaurants with people, restaurants with robots, or heck, franchising robot boxes themselves.
They only care that someone is paying them to call it burger king, and giving them a cut of sales
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