McDonald's (MCD +0.83%) will soon test a concept for a small-format beverage concept called CosMc's. It has opened a test location in Bolingbrook, Illinois, soon followed by other test locations in the San Antonio and Dallas/Fort Worth areas.
Admittedly, since the company plans to test the format for now, it will likely not affect the stock immediately. But if it launches the concept nationwide, it could breathe new life into the restaurant stock. Here's why.
NYSE: MCD
Key Data Points
The possible importance of CosMc's to shareholders
A possible CosMc's franchise is more evident if one understands the McDonald's business model. The company relies heavily on franchise-related fees and rents, as it owns the buildings operated by franchise holders. It also collects a 4% fee on all restaurant sales, mitigating the impact of weak sales if business conditions worsen.
In the third quarter of 2023, franchise revenue made up about 60% of the company's $6.7 billion in revenue for the quarter. Most of the remainder came from the 5% of restaurants the company operates.
Conversely, company-owned restaurants accounted for 61% of operating expenses, leaving that part of the business with modest operating margins. For this reason, most of McDonald's $2.3 billion in net income in Q3 came from franchises.
Since comparable sales rose 9% yearly across the globe, the company is deriving meaningful revenue growth. However, with McDonald's saturating the U.S. and much of the world, the room to add stores is limited for now.
But if franchisers want to add CosMc's locations, McDonald's would collect a new round of initial franchising fees and have an incentive to buy additional locations that could bring new sources of rental income. Combine that with the aforementioned 4% fee of gross sales, and growth in the company could accelerate for years to come.
CosMc's strategy and why it could succeed
Still, for this scenario to become a reality, CosMc's has to succeed to the point that McDonald's would decide to franchise the concept. As a beverage shop, CosMc's would base much of its success on its coffee beverages. This places it in competition with Starbucks, Dutch Bros, Dunkin', and other beverage-oriented stores.
Despite competitive concerns, Grand View Research forecasts a compound annual growth rate of 11% for the specialty coffee industry through 2030, indicating that McDonald's could have an opportunity in one key area.
Moreover, coffee will not be the store's only beverage. It plans to make CosMc's "rooted in beverage exploration." Among the other drinks it plans to offer are the Sour Cherry Energy Slush and Tropical Spiceade. It also sells foods such as Spicy Queso sandwiches, Pretzel Bites, and Caramel Fudge Brownies.
Fortunately for investors, CosMc's has shown signs of early success, with customers waiting in hours-long lines at the Bolingbrook location. If it can sustain popularity and repeat this success elsewhere, it could bode very well for McDonald's and its shareholders.
CosMc's and McDonald's stock
CosMc's is unlikely to have a material effect on McDonald's stock immediately. It is in the testing phase, and if the company does not move forward with it, expect no significant changes to the case for or against McDonald's stock.
However, that could change if McDonald's franchises the CosMc's business model. That could spawn a franchising and real estate boom for McDonald's stock, dramatically increasing high-margin revenue. With the game-changing effect that could have on the franchise stock, McDonald's investors need to watch CosMc's for continuing signs of its success.
