The secret behind the McDonald’s and Subway franchise

The secret behind the McDonald’s and Subway franchise



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In this video you will discover the secret behind two of the most important American franchises in the world, McDonald’s and Subway.

McDonald’s Franchise
So real quick, just wanted to go through… Franchisors have emulated their business model. It was founded in 1955. It’s based in Illinois, headquartered in Chicago. We’re going off data from their FDD released in May of this year, May 1st, 2020. They have 659 corporate locations. That means McDonald’s themselves own and operate those 659 locations, but compared to the number of franchise units that they have across the U.S., at nearly 13,000, the corporately owned and managed locations is very small. One thing I wanted to bring before going into how much it costs to open a McDonald’s and then how much McDonald’s make is the data on units opened and closed. So going back to 2016, you could see basically for every two locations they open, they close one, which is not a great ratio. But when you look at to 2019, for every one location they opened, they closed one and a half. This is not a good ratio. You don’t want to necessarily be investing in a franchise system that is closing more units than they’re opening. And if that is the case, you want to have a very clear idea of why they are closing these locations. Is it due to the poor performance of the operator? Were those locations not sufficient and they should never have been opened? It’s really important to understand why these units are closing before investing in a McDonald’s franchise, Subway franchise, or any franchise for that matter.

How much does a McDonald’s cost?
So how much does a McDonald’s franchise cost? The total investment to establish a McDonald’s franchise is as high as $2.2 million. This includes the franchise fee that is $45,000 this excludes any land or lease costs. There are many McDonald’s franchisees that also own the property. So the initial investment amount can range anywhere from $464,000 to around $2.3 million. And with that, it includes the franchise fee, working capital needs generally for the first few months. And all of that is detailed in the FDD, which from McDonald’s is a 500 plus page document. And then once the store has been built out and operations begin, that’s when you have to start paying the royalty fee, which is 4% on monthly sales, and then the marketing fee of 4%. The marketing fee is a little high compared to other food and beverage franchises. This includes data from 523 food and beverage concepts. That’s how we calculated the average marketing fee at 2.3% as well as royalty. So McDonald’s royalty at 4% is a little lower than industry average for food and beverage franchises, although the marketing fee at 4% is significantly higher. So it’s very important to understand how they’re using those marketing expenditures to help improve your store operations principally through increased sales.

McDonald’s FDD: Franchise Disclosure Document
I’m gonna pause for a moment and go through the McDonald’s FDD. Okay. So here you can see the FDD from 2020. One of the key areas of the franchise disclosure document for any franchise, whether it’s McDonald’s or not, is item 19. Roughly 50% of franchisors, especially the large franchise systems will disclose their financial performance. In addition to the item 19, it’s important to talk to franchisees to better understand the profit and loss and reasonable expectations for the point to break-even, ability to open up multiple locations, and then have shared costs throughout those locations. Those are all important factors to consider before investing in a franchise. So you can see here of the approximately 12,000 U.S. McDonald’s restaurants opened at least 1 year, as of December 31st, 2019 approximately 79% had annual sales volumes in excess of $2.3 million. That’s pretty substantial. And you can see 70% had annual volumes in excess of $2.5 million and 60% over $2.7. The average annual sales volume of a U.S. traditional McDonald’s restaurant opened at least one year was right around $3 million during the reporting year of 2019. The highest and lowest annual sales volume in 2019, for those domestic traditional McDonald’s restaurants, was $12.6 million and $654,000 respectively. I like to also see the median. So the median sales volume of the U.S. McDonald’s restaurants opened at least one year, again, as of December 31st, 2019 was $2.9 million, which is way above average for a food and beverage franchise.

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