McDonald's Will Continue To Growth Through Reinventing Itself

Mar.19.12 | About: McDonald's Corporation (MCD)

McDonald's' (NYSE:MCD) operates 33,000 restaurants in 119 countries and serves nearly 70 million people each day. Less than 20% of the company's restaurants are operated by the corporation whereas rest of them are franchises. I believe that owning McDonald's is a great way to benefit from the growth in BRICS without having to buy shares from those companies as most of the company's growth will come from BRICS in the following years.

Business Model

The company operates 3 kinds of restaurants. In corporate operated restaurants, the company makes all the investments and receives all the revenue and profits from these restaurants. In conventional franchise restaurants, the individual restaurant owners pay for things like equipment, furniture, decor and signs of the restaurants. McDonald's usually owns land and/or the building of the franchises. In these restaurants the operators pay McDonald's rent, and loyalty payments. The loyalty payments are a percentage of the revenues of each restaurant. Also, each new restaurant has to pay a franchise license fee upon opening for the first time. McDonald's also gets in development license agreements where the restaurant operator pays for and owns for everything including the land and the building. In this case, McDonald's collects an initial start up fee and monthly loyalty fees that is a percentage of the restaurant's operating revenue.

The company and its franchises use independent sources for food and equipments. While the sources will vary from one geographical location to another, there are many quality standards that need to be met in order to ensure standardization. The company's restaurants usually offer a uniform menu all over the world in addition to some local food selections in many countries. For example, every McDonald's restaurant will have Big Mac sandwich, however only the restaurants in China will have certain Chinese foods.

Growth Opportunities

In 2011, McDonald's was able to post growth in almost every geographical region it operated. The country posted strong growth even in countries with slowing economies such as France, U.K., and Germany. The company's revenues are affected very little by the overall economic activities because it offers relatively affordable food. In fact, McDonald's might post even stronger growth when economy is doing badly as many people will not be able to afford more expensive alternatives.

Another source of growth for McDonald's is BRICS. The company has opened thousands of locations in BRICS in the last decade and it plans to more than double its locations in these countries in the next decade. There is very strong demand for McDonald's food in emerging nations because (thanks to great marketing strategies of the company) the image of McDonald's is associated with idea of western lifestyle just like Apple (NASDAQ:AAPL) and Coca Cola (NYSE:KO).

The company has a coffee brand named McCafe. This brand is a direct competitor of Starbucks (NASDAQ:SBUX). So far, the company opened 1,500 of these locations and they seem to be very popular particularly in Europe due to their much more affordable prices than Starbucks. In many countries including China, the company also offers dessert kiosks for those interested in some sweets after lunch or dinner. In China, the company is one of the largest sellers of ice-cream.

In many locations around the world McDonald's increased its hours and improved efficiency of its drive-through service. Now there are more McDonald's locations open 24 hours than ever. The simple act of increasing hours at a store can easily contribute to same-store revenue growth. McDonald's will continue to benefit from this move.

Another growth avenue for McDonald's is offering breakfast service. In U.S., most McDonald's locations already offer breakfast. In many countries, this is a new trend for the company. The company hopes to offer breakfast in every country it operates in by around 2015-2016.

Many McDonald's locations outside of U.S. offers delivery service. In total, close to 2,000 locations offer delivery services and a third of these locations are based in China.


I like the idea that McDonald's has exposure to almost every market in the world and the company is very successful at what it does. While it is a giant company, it is still able to adjust itself and adapt to multiple different countries and their cultures. For example, in countries where customers value deliveries so much, McDonald's offers delivery option. In countries where customers love desserts, McDonald's offers a larger variety of desserts. Because the company can adapt, change and reinvent itself, it will continue to grow and represent a western image in emerging markets. I also like the company's strong dividend growth history. McDonald's is one of my favorite companies among the ones in my portfolio.

Disclosure: I am long MCD, AAPL, KO.