After what seemed to be a decade of defeat for McDonald’s (MCD), Jim Skinner took over as Chief Executive Officer in November 2004 and implemented the new Plan to Win strategy that made the “Golden Arches” golden once again. As part of this strategy, McDonald’s began to focus on quality, rather than overextension through uncontrollable growth.
To achieve this and a more localized brand, McDonald’s began to franchise more of their new restaurants and rapidly refranchise existing company-operated ones. McDonald’s operated 32,478 restaurants in 117 countries at year-end 2009 employing 385,000 employees; 26,216 of those restaurants were operated by franchisees. In their 2009 Form 10-K annual filing management states,
We view ourselves primarily as a franchisor and believe franchising is important to deliver great, locally-relevant customer experiences and driving profitability.
By bringing local entrepreneurs into the franchise, McDonald’s became not just a global brand but a locally-relevant one as well. In business lingo, “glocalization” is the term used to describe efforts to reformulate a global brand into one that matches both local consumers and their tastes. To glocalize their brand, McDonald’s refranchised about 1,100 restaurants in 2008 and 2009, combined.
Refranchising McDonald’s restaurants also has implications toward their consolidated financial statements, which include but are not limited to the following:
- Consolidated revenues are initially reduced because McDonald’s now collects rent and royalty as a percent of net sales from refranchised restaurants instead of 100% of its sales.
- Combined operating margin percent improves.
- Return on average assets increases primarily due to a decrease in average asset balances.
- Margin percentages are affected depending on the sales and cost structures of the restaurants refranchised.
- Other operating income/expense fluctuates as McDonald’s recognizes gains and/or losses resulting from sales to restaurants.
McDonald’s cash flows from operations totaled $5.8 billion in 2009, and about $2.0 billion of that cash was reinvested in the business primarily to open 868 restaurants (511 net, after 357 closings) and reimage nearly 1,850 existing locations. Management communicated to shareholders in their annual report,
Cash from operations continues to benefit from our evolution toward a more heavily franchised business model as rent and royalty income received from owners/operators is a very stable revenue stream that has relatively low costs, and is less capital intensive.
However, McDonald’s still directly owns and operates 6,262 restaurants, which is important to being a credible franchisor and critical to providing company personnel with operational experience. As a result, McDonald’s management must continue to review their mix of company-owned and franchised restaurants in order to consistently maximize overall performance. Long-term rewards for shareowners will certainly manifest if McDonald’s can effectively engage their five Plan to Win core drivers of people, products, place, price, and promotion.
Disclosure: The author has no positions in MCD at the time of writing.