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.
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."
"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).
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.
That's the parent company's financial figures, which include profits from franchisee's. This inflates their earnings. A typical store (franchisee or McOpCo) clears about 10% net of their sales. For a McOpCo store (one owned directly by McDonalds), this is not bad at all, since they don't have to pay a franchise fee. This means they're clearing 5-8% more. But for a franchisee, they pay a franchise fee of around that amount. So take home is not as extravagant. 90% of McDonalds are franchised, so the parent company's earnings are largely composed of franchise fees, not sales margins.
McDonald’s is an interesting company to mention. McDonalds corporate isn’t even really in the fast food business, they’re a real estate company. Franchisees have to rent land from corporate, that’s how they make almost all their money.
Individual McDonald’s Restaurants are barely profitable, most stores bringing in less than $100k profit per year. For how widespread they are, the restaurants themselves really aren’t a great business to be in.
From the cited article. So after investing $1-$3 million dollars, a McDonalds franchise owner makes about the same as a software engineer in a major US city and the software engineer didn’t have to spend $1 to $3 million and has a lot less risk.
Most franchise owners aren’t “starting a business” they are “buying a job”.
But a 2013 report from Franchise Business Review dug down into the numbers and came up with a net profit of $66,000 per franchise. McDonald's did much better with an average of around $150,000 per restaurant. But when you consider that a McDonald's franchise costs more than $1 million and can easily run more than $2 million, even McDonald's doesn't generate excellent average returns on investment. The fast-food franchise business is tough, and success doesn't come easy.
McDonalds franchise owners make 3x that. The average is dragged down by low rent chains like Subway or Wendy’s
Keep in mind that the owners make that after leasing the building from McDonalds. It’s a turnkey business and there are many, many people who have gotten pretty rich on operating these places.
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.
I don't know your neighbors case, but there are plenty of wealthy McDonalds franchise owners. I got this off Google just now (from McDonalds)
An average McDonald's franchise makes between $500,000 and $1 million in profits per year as of 2013, according to McDonald's Franchise Disclosure Document. For restaurants open at least 1 year in the United States, average total revenues are $2.6 million.
McDonald's gives you the franchise, the machines, the contacts of suppliers. Then you run the restaurant, not the McDonald's corporate management. This is how it works, AFAIK.
That’s not how it works. Most fast food restaurants are franchised, not company owned. An average McDonald’s owner (franchisee) only makes about $150k per year off it [1]. And that’s after investing a rather large sum of money into the business in the first place. I’ll let you do the math on how much wages could go up for workers before that number turns into “I would make more money doing anything else with my capital”.
Aren't most fast food restaurants franchises, and the individual corporations running them own a handful in a fairly constrained geographic area? There are 3-4 companies that own the various McDonalds locations in my area and I don't think any of them own more than 3.
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.
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