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Why McDonald’s Isn’t Aggressive on Unit Growth

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Unit growth

McDonald’s (MCD) is expected to add over 100 units in 1Q15, according to Wall Street analysts’ estimates. Earlier in this series, we learned that McDonald’s initiatives to grow same-store sales are facing severe headwinds. This is concerning because it tells investors that McDonald’s existing store sales are coming in lower YoY (year-over-year). It’s important to note that a company can also grow revenue by adding units.

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A restaurant can keep adding more restaurants and eventually capture newer markets. However, McDonald’s is a mature company. It has already penetrated well into the US markets. As you can see in the above chart, McDonald’s is expected to add about 100 units in the first quarter. This will take the total restaurant unit count to over 36,300 in its system. About one-fifth of McDonald’s restaurants are company-operated.

In the fast food industry, Yum! Brands (YUM) has been aggressively growing units—especially in China. It’s followed by McDonald’s, Burger King (QSR), Popeye’s (PLKI), and Wendy’s (WEN)—which is going to a full franchise model. Other restaurants formats, like those included in the Consumer Discretionary sector (RXI(XLY), also added several units in the US and abroad. XLY holds 10% of restaurant stocks.

Franchise to grow more units than company-owned

Most of the restaurant units in the system are expected to be added by conventional and developmental franchise. Together they added 372 restaurants in the fourth quarter alone. We’ll have to wait for the upcoming earnings release to see if McDonald’s adds or closes some of its company-operated stores. Regardless, over the past four quarters the company-operated net units were negative.

However, all of the efforts should lead to improving efficiencies in the system. This can be gauged by one measure—the EBITDA (earnings before interest, tax, depreciation, and amortization). We’ll discuss the EBITDA in more detail in the next part of this series.

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