McDonald's Corporation (NYSE:MCD) once ruled the fast-food world. Today, instead of sitting at the top of a mountain enjoying the view of all the lowly, peasant-like companies attempting to compete, this quick-service restaurant has been forced to make room for others at the peak. McDonald's Corporation (NYSE:MCD) is none too pleased about this turn of events, but it's also not the type of company to sit back and allow new trends to eat into its business.
McDonald's Corporation (NYSE:MCD) has battled against the likes of Burger King Worldwide Inc (NYSE:BKW) and The Wendy's Co (NASDAQ:WEN) for decades. Meanwhile other companies, such as Yum! Brands, Chipotle Mexican Grill, Subway, and Panera Bread have been around for long periods of time, their growth has led to stolen market share from McDonald's Corporation (NYSE:MCD). Most people don't want to eat burgers and fries every time they want an affordable meal out--they want variety. This is why McDonald's Corporation (NYSE:MCD) has put such a large emphasis on menu innovation and variety.
In addition to increased competition, McDonald's Corporation (NYSE:MCD) must contend with a weak macroeconomic environment, where consumers are eating at home as opposed to dining out -- even if it only saves a few dollars. Though more jobs are being added throughout the United States, lower wage growth is a big concern, and payroll taxes and gas prices haven't helped the situation.
These trends have prevented McDonald's from raising prices, which impedes the company's top-line potential. McDonald's likely just wants to maintain its traffic at this point. Unfortunately, comp-guest counts declined 1.2% in the second quarter. But not all news is bad news.
Simple yet impressive strategy
McDonald's has its name on a total of 34,734 restaurants, 28,107 of which are franchised. With so many franchisee locations, McDonald's costs remain low, which greatly helps profitability. Franchisees also purchase equipment, marketing tools, and are basically responsible for the entire business. Most people don't think of McDonald's as a franchiser, but that's essentially what McDonald's is and how the company views itself.
McDonald's has 6,627 company-owned restaurants, and it wants to keep the majority of these restaurants for franchiser-credibility purposes. These locations can also give new franchisees restaurant-operating experience, and assist with marketing concepts and materials. Franchisee deals are often made for a 20-year time frame, and McDonald's collects fees, rent, and royalties throughout that entire time frame.
Overall, this is what you would call a top-notch business model.
You might be surprised to learn that the majority of the company's revenue stems from Europe (40%). The United States is second (32%), while the Asia Pacific/Middle East/Africa region is third (23%). Therefore, a 0.1% decline in comps in Europe for the second quarter is a big negative. While the U.K. and Russia have performed well, France and Germany have been weak.