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Understanding McDonald's: Comprehensive company primer and profitability analysis

Part 3
Understanding McDonald's: Comprehensive company primer and profitability analysis (Part 3 of 21)

How important are franchise revenues to McDonald’s?

Overall, franchising is very important to McDonald’s profitability, although the growth of this business is coming under pressure, given market saturation in key developed markets. Below, you can see the margins McDonald’s receives from this part of its business.

Franchise marginsEnlarge Graph

In the table above, franchised margin dollars represent revenues from franchised restaurants less the company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about two-thirds of the combined restaurant margins in 2012, 2011, and 2010. Franchised margin dollars increased $205 million or 3% (6% in constant currencies) in 2012 and $768 million or 12% (9% in constant currencies) in 2011. Positive comparable sales were the primary driver of the constant currency growth in franchised margin dollars in both years.

U.S. franchise margins

In the U.S., the franchised margin percent was flat in 2012, as comparable sales performance was offset by higher depreciation related to reimaging. The increase in 2011 was primarily due to positive comparable sales, partly offset by higher occupancy expenses.

European franchise margins

In Europe, the franchised margin percent decrease in 2012 reflected positive comparable sales and higher occupancy costs. The increase in 2011 was primarily due to positive comparable sales, partly offset by higher occupancy expenses.

APMEA franchise margins

In APMEA (Asia Pacific, the Middle East, and Africa), the franchised margin percent decrease in 2012 was primarily due to Australia, which was partly impacted by the 2012 change in classification of certain amounts from revenues to restaurant occupancy expenses. Although the change in classification resulted in a decrease to the franchised margin percentage, there was no impact on the reported franchised margin dollars. The increase in 2011 was primarily due to a contractual escalation in the royalty rate for Japan in addition to positive comparable sales in most markets, partly offset by a negative impact from the strengthening Australian dollar.

The franchised margin percent in APMEA and Other Countries & Corporate is higher relative to the U.S. and Europe due to a larger proportion of developmental licensed or affiliated restaurants from which the company receives royalty income with no corresponding occupancy costs.

Below, you can see a more detailed breakdown of franchised versus owned store margins.

Margins of franchised vs. owned storesEnlarge Graph

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