McDonald's (MCD -0.61%) and Domino's Pizza (DPZ 0.15%) are interesting to compare because they both operate on a franchise business model and both are quick-service restaurants. Since the pandemic's onset, they have taken different paths with Domino's thriving right from the get-go while McDonald's initially suffered and is thriving since the economy's reopening gained momentum.
Overall, they have benefited from a newly rising consumer trend of ordering food for delivery. Domino's has always offered that feature while McDonald's has capitalized on the rise of food-delivery aggregators to develop that part of its business. Recent trends aside, McDonald's has long outperformed Domino's in one crucial metric. Yet, interestingly the market has preferred Domino's stock over McDonald's by a wide margin. Let's find out why that's the case.
McDonald's has a much greater operating profit margin
Over the past decade, McDonald's has soundly outperformed Domino's Pizza on operating profit margin -- and that disparity is widening. In fact, most recently McDonald's boasted an operating profit margin of 42.5% contrasted with 18.3% for Domino's (see chart below). Considering that both restaurant businesses operate on a similar franchise business model, why might this be?
Undoubtedly, one reason for the disparity could be efficiencies in scale. Over the latest 12 months, revenue totaled $22.9 billion for McDonald's but just $4.4 billion for Domino's. A greater revenue base can increase profit margins if a company is able to keep costs relatively fixed while revenue expands. And as a matter of fact, McDonald's has done an excellent job of raising operating profit margins. From 2012 to 2021, its operating margin increased from 30.3% to 42.5%. In that period, revenue decreased by a compound annual rate of 1.5%.
By comparison, over the same time frame, Domino's has increased revenue at a compound annual rate of 10.1% while its operating margin grew from 15.7% to 17.6%. Judging by these two metrics, a difference of priority emerges. McDonald's prioritizes operating profit margin expansion while Domino's emphasizes revenue growth.
Which one is better?
To answer this question, let's look at what the market thinks. Over the past decade, McDonald's stock is up a respectable 161%. Considering the dramatic outperformance in margins, McDonald's stock outperformed Domino's in the previous decade, right? Wrong. Domino's stock in that same time is up a whopping 1,300%.
To understand this vast gap, let's look to operating profit again, but this time in sum totals, not margins. Operating profit at McDonald's grew from $8.4 billion in 2012 to $9.9 billion in 2021, an increase of 17.8%. In its most recent decade, Domino's grew operating profit from $259 million to $726 million, an increase of 180%.
Overall, yes, McDonald's is crushing Domino's concerning operating profit margin, but Domino's is growing overall profits more rapidly. The market prefers to take the latter over the former.