Formerly founded as a café, McDonald’s has climbed the ladder to claim authority as one of the world’s most renowned fast-food restaurants. In fact, McDonald’s currently operates in several countries around the world.
The colossal success witnessed in the company over the years is attributed to a well-designed and sustainable business model. Therefore, a common question people ask is, what’s McDonald’s business model? Well, I looked into it and here’s what I found out!
What Is The McDonald’s Business Model In 2022?
McDonald’s runs numerous fast food restaurant chains utilizing an efficient franchise business model as of 2022. With outlets in over 100 countries, McDonald’s provides licenses and leases to franchisees who want to operate under the McDonald’s brand name. In return, the franchises pay royalties and leases to the parent company and assume all operating strategies stipulated by the parent company.
If you want more insight into the strategies of the McDonald’s business model, why the McDonald’s franchising system is so popular, and much more, keep reading!
How Does The McDonald’s Business Model Work?
McDonald’s franchised business model serves fast foods and beverages in more than 100 countries spread worldwide.
That said, the parent company supports all the franchises under the brand name while the franchisee acts as the employer, with significant control over the restaurant’s sales, pricing, and operations.
So, to successfully run the business using the franchise model, McDonald’s utilizes a three-structured franchise model, which includes:
In conventional franchising, McDonald’s obtains a lease or owns the land and the restaurant.
In this case, the franchisee has to sign an agreement to pay for décor, seating, equipment, and signs.
Upon signing the franchise agreement, the parent company requires a deposit amount before the franchisee opens the restaurant.
Also, a 20-year term is set for the franchised agreement, during which the franchisee is supposed to pay rent and royalties.
In return, the parent company must support the franchisee in terms of operational assistance and the implementation of innovative ideas.
In developmental licensing, the parent company doesn’t make any investments. Instead, the franchisee is responsible for the entire capital needed to set up a McDonald’s restaurant.
Additionally, the franchisee has to pay for the real estate charges and the operational costs.
However, the McDonald’s parent company receives royalties from the percentage of sales made by the franchisees.
Also, developmental licensing means that the parent company receives a certain amount for every license issued to a new franchisee.
Currently, McDonald’s uses this structure in approximately 6,900 restaurants spread across 80 countries.
The affiliation agreement accounts for equity investments. In this system, McDonald’s receives a percentage of sales in royalties.
Currently, McDonald’s has approximately 5,800 affiliated markets, with China (2,600 restaurants) and Japan (2,900 restaurants) leading as the largest affiliated markets.
Moreover, McDonald’s focuses on food quality and innovation, excellent customer service, and franchisee relationships through its franchisees, developmental licensees, and affiliates.
What Strategies Does The McDonald’s Business Model Use?
McDonald’s uses the cost leadership strategy to maintain its business models across all existing and new markets.
For example, here’s how McDonald’s manages to sustain the cost leadership strategy in its operations:
The Franchising Model
The franchising business model by McDonald’s has been one of the company’s greatest strengths.
That said, the model allows entrepreneurs venturing into the fast-food industry to open up a restaurant under the McDonald’s brand name and consequently earn huge profits due to its popularity.
However, the franchisees are responsible for running the restaurants while strictly adhering to corporate standards about purchasing, corporate identity, and product offering.
Simplicity Of Operations
All McDonald’s operations, including supply chain, products, and restaurant design, are simple and standardized.
With that, this allows for efficient sourcing, food preparation, and low prices across all restaurants.
To further maintain the low prices of items at McDonald’s, the restaurant operates in a self-service system instead of the table service systems witnessed in standard restaurants.
For example, customers have to order their food at the counter and carry it to their selected table in this system.
As a result, there are decreased labor costs in the service departments, allowing McDonald’s to sell food at competitive prices.
Wide Target Market
The competitive prices at McDonald’s make the products attainable to a large market.
In addition to this, the high degree of standardization coupled with the brand popularity has made the company deliver a high quality of foods at affordable prices.
Improved Quality Control And Health Protocols
Over the years, McDonald’s has maintained a standard quality of the foods sold at the restaurant.
That said, the company abides by complete food safety and protocols before purchasing any ingredients sold by third parties and guarantees quality control in the entire product life cycle.
For instance, McDonald’s recently restricted the use of high-value human antibiotics, a vastly appreciated policy by several public health and consumer groups, due to efforts to prevent superbugs.
Thus, more customers prefer to purchase healthier options at relatively low prices.
Why Is Being A McDonald’s Franchisee So Popular?
With that, McDonald’s primary business model licenses its brand name, commodities, and fast food to a franchisee who leases McDonald’s properties at significant markups.
According to recent 10-K filings, the company has franchised approximately 36,059 restaurants, with McDonald’s parent company running about 2,636 restaurants.
Ideally, McDonald’s earns most of its profits by renting out outlets locations to a franchisee who wants to operate under McDonald’s brand name.
So, instead of opening up a McDonald’s store independently, it can license its infrastructure from the parent company and operate as McDonald’s.
The franchisees, however, are tasked with the duty of paying rent or owning the property, ordering materials, and paying the employees’ wages.
As a result of the franchising system, McDonald’s owns a revenue stream that is consistent and reliable.
To work under the McDonald’s trademark, the company requires the franchisee to:
- Pay a franchise fee of $45,000
- Charge a rental expense equivalent to 10.7% of the restaurant’s revenue on rental deals with a 20-year term.
- Pay a monthly royalty fee amounting to a percentage of the restaurant’s gross revenue
Also, the figures above are unique to McDonald’s franchises in the United States and may vary according to markets.
However, the underlying system of pricing remains constant in different markets. Using this franchising system, McDonald’s earns a great deal through leases and returns from total sales.
Also, the parent company saves money by offloading some responsibilities since the franchisees assume duties of running the restaurant, payroll, and acquiring food supplies.
Who Are The Key Partners In The McDonald’s Business Model?
The key partners in McDonald’s business model include McDonald’s franchisees, employees, and vendors.
That said, the franchisee in the McDonald’s business model gives McDonald’s an avenue to expand its territories and maintain a global emphasis at the local level.
In addition to this, McDonald’s suppliers and vendors support the business model by sustaining the high capacity operation of the company.
Furthermore, McDonald’s employees undergo frequent training to ensure that McDonald’s maintains the maximum operating capacity in over 36,000 restaurants from across the world.
McDonald’s business model primarily relies on the franchising system where McDonald’s provides licenses to other restaurants to operate as McDonald’s outlets.
Additionally, McDonald’s employs a cost leadership strategy that helps the chain of restaurants sell its wide array of products at relatively low prices.