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McDonald's Side of Franchise

After the impressive run McDonald's (NYSE: MCD  ) has had, what could be its second act? Apparently, at least part of it is turning more of its restaurants over to franchisees so it can focus more attention on significant international markets.

McDonald's said it plans to sell about 21% of its company-owned restaurants to current franchisees. As it stands, only about 7,000 of the company's 31,000 stores are company-owned. And if you recall, this isn't exactly a new strategy; earlier this year, McDonald's turned over its restaurants in Latin America and the Caribbean to franchisees.

Selling another chunk of restaurants to franchisees will help it redirect funds to expansion in hot markets like India, China, and Russia. And of course, franchises tend to be lucrative, because franchisees pay royalties to the parent company. Companies like Rocky Mountain Chocolate Factory (Nasdaq: RMCF  ) use that model, but while it can be lucrative, Krispy Kreme Doughnuts (NYSE: KKD  ) and Boston Market are good examples of how it can go terribly awry. No worries, though, for McDonald's, because it has traditionally done well with the franchise model.

It's interesting to recall that Pershing Capital, which persuaded Wendy's (NYSE: WEN  ) to spin off Tim Hortons (NYSE: THI  ) , agitated for change at McDonald's for a while; longtime Fool Bill Mann wrote an article in 2005 highlighting the ways McDonald's value is about so much more than simply slinging burgers (and also highlighting the ways it could unlock that value). Although McDonald's didn't end up spinning off most of its company-owned stores, as was suggested in that article, it has been gradually shifting more stores to franchisees (and improving stores' performance, to boot). It's a far cry from several years ago, when the company was in great need of a turnaround.

On the other hand, a recent article from Reuters highlighted an interesting angle to the franchising focus, illustrating that while McDonald's wants to heighten its coffee profile by getting into espresso drinks, many franchisees are balking at the expenditures for the new equipment. A franchisee revolt over lattes at McDonald's might bring Starbucks (Nasdaq: SBUX  ) a small sigh of relief.

McDonald's management has done a great job of operating its business here lately and has been delivering value to shareholders through dividends and share buybacks, not to mention the stock's appreciation. I'd say McDonald's shareholders are served well by the idea. Why mess with success? 

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10/21/2016 4:01 PM
MCD $113.93 Up +3.36 +3.04%
McDonald's CAPS Rating: ***
KKD $0.00 Down +0.00 +0.00%
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RMCF $10.15 Down -0.04 -0.36%
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