McDonald’s Business Model: How the Company Makes Money

UTC by Adedamola Bada · 8 min read
McDonald’s Business Model: How the Company Makes Money

McDonald’s that has grown to a network of well over 38,000 locations in more than 120 countries, has become the premier example of an effective business model.

McDonald’s Corp. (NYSE: MCD), a multinational firm founded in 1940 in the U.S., was started by the McDonald brothers, Maurice and Richard, who were born in Manchester, UK, and died in 1971 and 1998 respectively. They relocated with their parents and siblings to America at very young ages.

The first restaurant did not begin to be known as a fast-food chain until 8 years after, borrowing the idea from White Castle Co. Over the years, McDonald’s Corp. has used many logos, starting from “McDonald’s FAMOUS BARBECUE”, up until the “M”, with McDonald’s written across the “M”. In 1963, a mascot representing the brand was launched, appearing on electronic, and paper advertising services.

The mascot is known as ‘Ronald McDonald’ and has been portrayed by over 12 different men over various periods. The firm started as a barbecue restaurant but is now famously known for its Hamburgers, Fries, and Cheeseburgers. Other than that, the restaurant chain also makes available for consumption soft drinks, milkshakes, desserts, along with salads, fruits, and smoothies for the eating healthy section.

Partnerships and Acquisitions

Although the McDonald’s food chain is the major brand, the firm also acquired stakes in several other establishments over the years. The firm owned Donatos Pizza and had a stake in Aroma Café until 2001 when both stakes were sold. In America, over 65% of all sales arise from drive-throughs. By 2015, McDonald’s Corp. had planned to open 125 new restaurant sites around the U.S but instead ended up closing 184 existing restaurants due to the decline in earnings the firm recorded the previous year.

Two years later, the delivery service was launched, resulting in a partnership with UberEats, and another with DoorDash Inc. last year given the earlier success with UberEats.

The establishment is currently spearheaded by Chris Kempczinski, who was formerly President over the USA restaurants but is now President and CEO over the whole enterprise. He is currently valued somewhere around $15 million.

McDonald’s Franchises

As per the company’s business model, the establishment itself does not own the majority of the restaurant shops set up all around the globe. They grant individuals or other companies permission to operate under the firm name for a particular percentage of their profits.

McDonald’s Corp. is the second biggest private employing firm in the world, after Walmart Inc., having over 200,000 staff with almost 38,000 locations. The firm itself owns a bare minimum of 3,000 of those locations, with the other 35,000 locations owned by a franchise. However, the franchise business was not started until 1955, following a partnership with Ray Kroc, who later bought the brothers out of the firm for almost $3million, following several disputes.

All franchisees make a down payment in sum ranging between $1 million and $2 million, along with almost $50,000 fee, not including the percentage commission off profits and rent fee which will be calculated using sales per month. This is excluding the initial restaurant the potential franchisee must own before applying.

Regardless, franchise owners can make as high as $100,000 a year off one restaurant, given the huge consumer base, McDonald’s Corp. possesses. The franchise system allows for a more stable and efficient income for the firm while incurring little management fees.

McDonald’s Corp.’s biggest franchise owner is Arcos Dorados Holdings Inc., having a chain of restaurants across 20 nations, generating the highest income for the firm due to sales and commission off restaurants.

Major Business Segments

The business operates in three different markets sectors: in International Developmental Licensed Markets & Corporate, in the United States of America, and International Operated Markets.

International Developmental Licensed Markets & Corporate

This is McDonald’s smallest Market, made up of Corporate, and affiliate markets. This sector has only 9% of the total McDonald’s business, raking in about $2 billion over the 2019 market year.

The United States of America

Despite being McDonald’s Corp.’s biggest sector, it does not provide as many profits as the IOM. This sector provides over one-third of the business’ earnings, generating income of almost $8 billion last year.

Regardless, McDonald’s Corp. has begun to observe markets that it believes it can expand into and will generate bountiful income, markets like China, Korea, and Russia are amongst the potential markets for franchising.

International Operated Markets

This comprises all markets outside the American border, across Australia, Europe, and Asia, markets comprising the UK, Australia, France, Canada, and Germany. This sector is responsible for over half of McDonald’s Corp.’s yearly income, generating over $11 billion over the 2019 fiscal cycle.

McDonald’s Financial Details

The firm began initial stock sales at $22.5. Today, stock prices are up as high as $170 per share. The firm makes the majority of its income via franchises all over the world, although it is not at the target 95:5 ratio of the franchise to firm owned restaurants, McDonald’s Corp is doing exceptionally well, being the biggest private fast-food establishment in the world. The business serves over 65 million consumers on a daily basis. As of right now, McDonald’s Corp. is valued over $130 billion.

Speaking of consistency, McDonald’s Corp. was one of the most consistent firms in the world with regard to the growth rate in yearly income. Up until 2013, the firm continued to grow in annual revenue, but have seen a decline in the number of workers and revenue since the arrival of major contenders like KFC, Burger King, Domino’s, and Wendy’s; who offer most of the food options like McDonald’s, resulting in a decline in the number of regular consumers.

This decline in customers has seen this firm report decline in income, at a mean rate of $1.5 billion every year since 2014. As of 2018, the firm reported little over $21 billion in total yearly earnings, with almost $6 billion in profits only, which is an increment from the $5.1 billion from the previous year 2017.

As of 2019, the establishment gained an increase in total revenue for the first time in 5 years, with 500 million, making a total of $21.5 billion in total income for the year.

Key Challenges the Company Faces

Although by far the most valued fast-food establishment with an over $80 billion value gap, McDonald’s Corp. has begun to suffer in some ways. With the growing increase in the desire of people to consume healthier foods, Fast-casual food services have begun to pop out, serving healthy meals, with quick response times; causing services like McDonald’s to lose out on a couple of customers.

McDonald’s has responded to this current situation by eliminating all artificial spices and preservatives from its burger menu. Including meat salads and side dishes of fruits and vegetables to go with some meals.

Although things looked like they were going the firm’s way at the beginning of the year, the coronavirus has led to a dip in sales and income. Even though almost all restaurants in the U.S remain open, with only the drive-through and delivery services available, international restaurants in the UK, France, and Spain have all had to close down. Although it is impossible to fully know how much damage the quarantine has and will do to the business chain, the establishment hopes that things return to normalcy soon.

Plans for the Future

The life-long target of 95% of all restaurants as franchises is hoped to be realized soon, given that the number currently stands at 93%. Nevertheless, the organization made a couple of adjustments to its multinational business frame in a plan known as “the Velocity Growth Plan”.

This plan includes improving and adding better food options to the menu, whilst providing a discount on some packages; improving customer-waiter (waitress) relationship by communicating with consumers to ensure that they come by more often; employing the use of technology and technological services in bettering customer service, ensuring quick ordering and payments, and table orders & serving.

Following partnerships with UberEats and DoorDash Inc. in 2018 and 2019 respectively, McDonald’s Inc. continues to make the delivery option available in more restaurants, to keep up with millennials who prefer to have their meal brought over rather than going to the location to receive it by themselves.

Conclusion

The food service business is a very lucrative endeavor, given the fact that it provides the most basic human need, resulting in business stability; as long as the service constantly finds new ways to top or compete with other brands in the area of price, speed, and quality.

McDonald’s is the world-leading brand in fast-food services and hopes to keep the top spot. Despite the decline over 4 years, the establishment managed to stay above board, recording profits year in year out; and with technological advancement, it is highly expected to see such a big organization conform, given how much the service has made over this quarantine period via home deliveries.

Given that the establishment was beginning to return to income increase at the beginning of the year, it is expected that the firm continues to generate more revenue over the coming couple of years.

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