What is a company-operated restaurant model?

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Dec. 2 2014, Updated 8:10 a.m. ET

Two business models

In the last part of this series, we looked at systemwide unit growth, which includes company-operated and franchise restaurants. Let’s look at each of these business models, beginning with the company-operated restaurant model.

Chart Title 2014-12-02

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The company-operated model

In a company-owned restaurant, the company takes ownership of the operation at the restaurant location. The company uses its own financial resources to get the location ready for business, which includes purchasing or leasing the land or building, hiring the staff, and purchasing kitchen equipment, furniture, signs, inventory, and restaurant supplies. This means the company takes on the risk of litigation, which companies under the franchise model may not have to do.

With this model, the company requires a significant amount of capital upfront, but it also gives the company full control over the day-to-day management of the restaurant. This also entails swift implementation and execution of any strategic changes made at the restaurant company’s corporate headquarters.

The rewards of this model are that the company keeps all the profits, has full control over the operations, and protects its brand value. On the downside, however, a company may grow very slowly if it does not have easy access to the capital markets.

Exchange-traded fund (or ETF) Consumer Discretionary Select Sector Standard and Poors depositary receipt (or SPDR) (XLY) holds restaurants that use this business model.

Second business model

Chipotle Mexican Grill (CMG) exclusively operates under the company-operated restaurant model. If a restaurant is not company-operated, what other alternative does a restaurant have to grow?

A franchise and licence agreement is the answer. We will discuss it in more detail in the next part of this series. Restaurants that use this company-operated and franchise hybrid model include McDonald’s (MCD), Yum! Brands (YUM), and Panera Bread (PNRA), to name a few.

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