My Rationale for More Franchise on JFC Store Ownership Mix

JFC and McDonald’s Corporation (MCD) are similar in many ways but in an investor’s point of view what set MCD apart from JFC is its efficient operation. Below are the gross profit margins of MCD and JFC:JR1

Geographic advantages may explain the variance between the gross profit margins of the two Companies but what JFC can imitate from the business of MCD is MCD’s ability to generate high profit margin.JR2

MCD was able to achieve high profit margin operations through more franchise owned stores which historically contributes more than 25% of MCD’s total revenues through franchise fees.

JR3 JR4

MCD’s franchise owned stores increased in the past six years to above 80% while JFC’s franchise owned stores are only 50% and 48% in 2011 and 2012 respectively. Another difference is the minimal contribution of franchise fees to the total revenues of JFC contrast to MCD where franchise fees contribute more than 25% of total revenues.

MCD has two types of franchise arrangements, conventional franchise arrangement and developmental licensee arrangement. Under MCD’s conventional franchise arrangement, franchisees provide portion of the required capital by initially investing in the equipment, signs, seating and decorations and by reinvesting over time while the Company owns the land and building or secures long-term leases to ensure long-term occupancy rights. Under the developmental licensee arrangement, licensees provide ongoing capital for the entire business while MCD generally has no capital invested. McDonald’s franchise operating here in the Philippines is under developmental license arrangement.

JFC may imitate MCD’s developmental licensee arrangement. Since JFC’s international presence may not be as strong, JFC may use a “developmental licensee arrangement” to locally owned stores. Conversion of local company-owned stores to franchisee owned will have the following benefits:

  1. Generate one-time cash inflow
  2. Will free JFC from future capital expenditures needed for store renovation
  3. JFC will then be able to focus most of their resources on international expansion
  4. Increase the contribution of franchise fees in the revenues of JFC
  5. Commissaries will benefit from the sale of raw materials to franchise owned stores.
  6. Increase the margins of the Company. Franchise fees directly reflect in the profits of JFC increasing the profit margins of the company. To have a simplified illustration:

JR5

A P5 franchise fees goes straight to profit while a P100 pesos sales is reflected as P5 in profit due to costs related to generating the sale.

Sources:

  1. JFC SEC 17A Filings
  2. MCD 10-K filings, http://www.sec.gov/Archives/edgar/data/63908/000006390813000010/mcd-12312012x10k.htm

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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