Stock in Focus: The world's most profitable restaurant group

Head of Content
Megan Boxall
Head of Content

I love a biographical business film. One that adds colour (and sometimes a bit of fiction) to the history of a company or major market event. The Big Short is winner in this category and Saving Mr Banks (a window in the business dealings of Walt Disney in the company’s heyday) arguably falls into that bracket as well. I even have a bit of a soft spot for The Social Network - it’s hard not to respect the business empire Mark Zuckerberg has created and led since its inception in 2004, even though the film documents the slightly shady way he got Facebook started.

And then there is The Founder - the biopic based on Ray Kroc and the McDonald brothers. It’s an excellent film which I would highly recommend to those interested in the history of the business, but it is also surprisingly sad.

Kroc - a travelling milkshake machine salesman - stumbled across the McDonald brothers’ restaurant in San Bernadino, California, in 1954. He was impressed by the speed of delivery of the burgers which allowed the restaurant to serve huge volumes of customers every day without compromising on quality. Kroc saw the potential in scaling the business because the process for cooking and delivering the food was easy replicable. Within five years, Kroc had overseen the opening of more than 200 franchise stores along Route 66. A year later he’d squeezed the McDonald brothers out of their own business. They never received a penny of the promised payout.

Today the McDonald’s Corporation still credits Kroc as its founder, with his first franchise restaurant (in Des Plaines, Illinois) described as the first McDonald’s store (the San Bernadino enterprise went out of business in the 1970s after Kroc opened a competing McDonald’s just across the road). It’s a corporate history that feels a bit disingenuous. Unless you consider the McDonald’s Corporation not as a restaurant business, but as a property company.

A recipe for profitability

As of 31 December 2022 (the last published annual report), McDonald’s was sitting on $6.7bn worth of land and $31.8bn worth of property ($18.9bn of which was located on land it owned). Compare that to British Land (one of the largest property companies in the UK), whose total portfolio valuation currently hovers just under the £10bn mark.

This property portfolio is the foundation on which the franchise side of the business has grown. In 2022, the company owned 57% of the land and 80% of the buildings in which its restaurants operate. And renting out those properties earned McDonald’s $9bn of sales that year, or 40% of its total.

Rental income is extremely reliable. Most franchisees are granted the right to operate a restaurant in a McDonald’s property for a period of 20 years. In that time, they are responsible for related occupancy costs (taxes, insurance and site maintenance) and are also required to hand over royalties calculated as a percentage of sales. Overall revenue from franchised restaurants (including rents, royalties and initial franchise fees) was $15.5bn in 2023, compared to $14.1bn last year and $9.5bn a decade ago.

In the meantime, McDonald’s itself has to spend very little on its property. In fact the only costs that come out of the franchise side of the business are the depreciation on the properties and the lease expenses. In 2023, McDonald’s made $12.9bn of operating profits from its franchise business - an operating margin of 84%.

Compare that to the company-operated side of the business which is responsible for all the costs associated with running a restaurant. In 2023, sales here were $9.7bn and operating incomes just $1.5bn - an operating margin of 15%.

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Recent financial results

The continued impressive figures from the McDonald’s property empire have been clouded in recent months by the impact of the war in the Middle East. Customers in countries with large Muslim populations have been boycotting McDonald’s, with sales in the international franchise business pretty much flat in the three months to December. The company missed analyst expectations in the final quarter, sparking a decline in the share price which has lagged the wider market by about 10% in the last year.

But McDonald’s is one of those high quality US giants which has flown under the radar as investors clamour for tech-sector shares and could be ripe for another surge with improving liquidity conditions in the broader US stock market.

The company makes about 40% of its sales in US (where two thirds of revenues come from franchise restaurants) and just under half from its own operated stores internationally. The underperforming international franchise business accounts for less than 10% of the company’s top line.

And so the company has scope to improve profits from its international business by expanding its overseas property empire. It also occupies a sweet spot in the hospitality sector by catering for lower income populations - an opportunity which is partly aided by its property portfolio. McDonald’s can sell cheap burgers and offer broad discounts without too much fear that low prices will hurt margins as most of the profits come from rent, rather than food.