McDonald’s a Brief Analysis of the Company

McDonald’s which sells 75 hamburgers per second is the most dominant company in US fast food industry. Yes we are talking about none other than McDonald Corp – (MCD) which has been cheering us since our childhood by happy meals and toys along with good food. Company contributes a large portion of US fast food industry in terms of revenues and its outlets are spread in around 119 countries with 34900 outlets around the world. McDonalds distributes more than 1.5 billion toys per year with its happy meal. The major competitors of company are Yum!, Burger King and Wendy’s. 

Background

In 1940 a barbecue restaurant was opened by McDonald brothers who later transformed into a hamburger joint. Then Ray Kroc initiated the first franchise proposal and after some time he bought the whole company. McDonald’s high brand value is because of Kroc, who had put a lot of efforts to make McDonalds what it is today.

Industry Analysis

McDonalds belong to the financial sector of Consumer Discretionary with main industry and sub industry includes Hotels, Restaurants and Leisure and Restaurants, respectively. US restaurant industry can be classified into two categories, Full service restaurants for fine dining and casual dining such as chili’s, Applebee’s, the steak house and others. Other category is of Services restaurants for fast foods such as McDonalds, KFC, Subway and others. The contribution of US Restaurants to the overall US Food revenues has increased from 25% in 1995 to 50% in 2012 and in figures; the total spending on food in US is $1.14 trillion of which $600 billion is generated by US restaurants. This indicates the growing market for dining out.  Revenues from the US Restaurant industry have appreciated exponentially from $42.8 billion in 1970 to $635.8 billion in 2012. The Fast Food revenues share to the total US restaurant revenues is $120 billion out of $600 billion.

Competitors Analysis

McDonalds leads the US Fast Food industry by 26% shares to the overall market whereas its rivals Yum!, Wendy’s and Burger king stands on the market share of 13%, 2.4% and 1.9% respectively. Though Yum has the greater number of stores among all the major players in the industry, but in terms of earnings per shares and operating margin, McDonald’s leads the category. However the compounded annual growth rate of three years for McDonalds’ revenue is lower than Yum and Wendy’s with Burger King’s revenue growth to be in negatives.

Business Model

McDonalds’ has a franchised based business model and according to September, 2013 statistics, 81% of its outlets are franchised. These franchises contribute around 33% of McDonalds’ overall revenues. This franchising model is referred as ‘three-legged stool’ as it involves owner or operator, supplier and employees. The process for franchising normally includes the selection of the willing candidates pursuing franchise, 25% down payment by the nominated candidate while 75% is paid by the financial institutions and process ends on the continual fees payment in form of fixed monthly rent as well as service fee related to number of sales per month.

Financial Outlook

McDonald’s full year revenues for 2013 increased by 2% from $27.6 billion reported in 2012 whereas operating income also increased by 2%. Earnings per share have been up by 4% from $5.37 in FY12 to $5.55 in FY13. Company has increased the shareholder’s value by returning $4.9 billion in form dividend payouts and share buybacks.

Company targets to add up 1500 to 1600 number of outlets around the globe in year 2014 and this will involve the $2.9 to $3 billion of capital expenditure. McDonalds is also committed to returning value to its shareholders and for 2014 it has planned to return $5 billion in form of dividends and share repurchase.

Summary

McDonalds leads the fast food chain in America with the highest revenues and operating margins. Employee base is around 1.8 billion in all over the world, with 34,900 outlets in 119 countries. Its most revenue generating geographical region in APMEA and company generates large portion of revenues from company owned outlets instead of franchised one, though franchising outlets is company’s Business Model. 81% of McDonald’s outlets are franchised and yields 33% of total revenues. Company is ranked 111 in Fortune 500 Companies. It trades in the consumer discretionary sector with restaurant to be its sub-industry and trades under the Ticker MCD.