McDonald's Refranchising Means Long Term Profitability
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McDonald’s (NYSE: MCD) has made a noticeable move over the last few years moving away from corporate store ownership to adopting a more franchise-ownership approach. It has lowered its corporate ownership from 23% to 19%, today operating 6,435 of its 33,510 restaurants world-wide. This is a good long term approach for the company as it continues to grow.
Why is the Move to Franchising good for McDonald’s?
There are a couple of reasons that this is a good move for the corporation. It all boils down to saving money and reducing operating expenses.
Generally speaking, the franchisee will provide the capital to operate the unit. McDonald’s can use other’s resources to continue to grow and this also frees up more capital for the parent corporation.
Since the franchisee has his/her own money invested in the company, they are highly motivated. McDonald’s makes money on royalties—the success of the company, not by failure. The highly motivated franchisee would see the profitability of its store and this should make McDonald’s more money in the long run. Thus, there should be fewer problems managing growth as a franchisee would be prepared for it.
When another person has an investment in ownership, they also work for the parent company without the costs associated thereof. Dealing with things like sight locations, lease negotiating, and other start up or general operating expenses are dealt with by the franchisee. McDonald’s is free to use their internal resources somewhere else.
McDonald’s is not the only company that is moving in this direction as “Quick Food Service” companies understand the need to operate leaner in a tighter economy. Yum Brand (NYSE: YUM) operates Pizza Hut, KFC, and Taco Bell restaurants around the world. Presently it is refranchising many of its restaurants in the United States for the same reason. Last year it sold 404 of its company owned stores in the United States.
Presently McDonald’s is in a consolidating phase. This refranchising strategy that it has been moving into will help the company remain profitable long term. Look for a continued move up in the stock before the year is out.
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