- That McDonald's operating margins exceed those of other
restaurant chains such as Chipotle, Panera Bread and Starbucks
are often highlighted.
- This can be misleading since more than 80% of McDonald's
stores are franchised. Franchised restaurants generally have
margins 3-4 times those of company-operated stores.
- Comparing the margins of McDonald's company-operated stores
against that of Chipotle paints a different picture
While comparing various restaurants, investors often highlight
how McDonald's juicy operating margins of over 30% are better than
Chipotle Mexican Grill
) or Panera Bread or even Starbucks (
). What they fail to mention is that more than 80% of
McDonald's restaurants worldwide are run by franchisees while the
rest are run by the company itself.
Since the franchisee model has very little fixed costs, its
margins are naturally higher. For McDonald's, the franchised
margins exceed 80% and are more than four times the
How To Go About It ?
While comparing two items, it is only fair that you compare
apples to apples. Therefore, for chains like Chipotle whose all
restaurants are company-owned, the more accurate way of comparing
margins would be to compare them against McDonald's
Now, suddenly the picture looks much different. McDonald's
company-operated EBITDA margin of 18% trail Chipotle's 23-24%
meaningfully. The result is not totally unexpected though. Given
McDonald's pricing, it is no wonder that the world's biggest fast
food chain survives on more frugal margins. However, the average
revenue of ~$3 million per store more than makes up for the thinner
margins. Chipotle's average revenue per store is less than $2
Note that McDonald's does not include selling, general and
administrative expenses while calculating its operating margins. We
have included these expenses while subtracting depreciation and
amortization costs while calculating EBITDA. That is why, the
figures mentioned here might differ from what the company
See full analysis for McDonald's Corporation
Similarly, while analyzing McDonald's own performance, it can so
happen that the overall margins expand even though the individual
margins of company-operated stores and franchised stores decline.
This will happen when a greater proportion of new additions are
franchised stores. The company-wide margin can even obfuscate any
weaknesses that the individual restaurants might be facing.
Therefore, you need to be careful about the headline margin since
an increment in the figure does not necessarily mean an improvement
We have a
$92.80 price estimate for McDonald's
, which is in-line with the current market price.
a Company's Products Impact its Stock Price at Trefis