The McDonald’s Franchisee Business Model

McDonald’s earns insane profit margins for a company that operates in the fast food industry. Wendy’s executives, who are fairly bragging about the improved sales results stemming from their 4-for-$4 summer deal, have been able to improve the profit margins at Wendy’s from an all-time low of 1.8% in 2010 to 7.9% now. They deserve credit and praise for their accomplishments in a highly competitive area.

However, consider this: McDonald’s is going to make almost 20% profit margins this year, and it has never had profit margins below 13% in the past quarter-century. Most years, profit margins fall in the 16% to 20% range. It is worth posing the question: why is it that McDonald’s has delivered 16% annual returns for almost half-a-century, turning $1,500 invested in the IPO into over $1.3 million today? How come it has a record of paying out a higher and higher dividend each year for the past three decades while the rest of the industry shares that “rise and fall of empires” characteristic that is typical of retail?

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