111083 mcdonald casestudy

7/29/2019 111083 Mcdonald CaseStudy

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Financing a remo

ABSTRACT

This study requires studethe remodel of a McDonalds resstudents an opportunity to consi

franchise operators consideringframework to consider multiplespecialty product lines, employeand economies of scale for both

Key Words: Corporate Finance,

Journal of Case Research in Busines

Financing

el: The case of a McDonalds fra

Anne MacyWest Texas A&M University

Jean WalkerWest Texas A&M University

Neil TerryWest Texas A&M University

nts to analyze the investment and financial decitaurant in a small college town. Specifically, ter three different financing options offered by

remodel. The case also employs the restauranpplied issues, which includes facility upgrades,turnover, the impact of Federal Reserve intere

he franchisor and franchisee.

Federal Reserve, Franchisee, Investment, McD

s and Economics

remodel, Page 1

chisee

ions relating toe case offerscDonalds to

remodelintroduction oft rate policy,

onalds


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INTRODUCTION

Hassan Dana looked at hismall college town in Texas. Lowas good; however, the store wa

simply needed to be re-imaged oto explore his financing alternatiBACKGROUND

Hassan Dana thought bacstared at the Wall Street JournalPanicky Selling. Just days befojob as a commodity trader. Amaa plan to own his own business.available franchise opportunities

receive made McDonalds the gprocess with McDonalds, the Dseparate training experiences lasculminated with twelve days atfor six months.

It took over a year to getpurchased his first store in Derbexisting stores to retire the ownetransaction without a lawyer. Thfranchise owners feel an equal

Between 1995 and 2004,beyond that, there was no real abstores. Hassan met the Dallas Rmarket, Amarillo had been for sahis interest in Connecticut and bpurchased by the Danas in 2007the Danas their 12

threstaurant i

McDONALDS

The McDonalds story ismixer salesman, Ray Kroc trackBernardino, California. Dick anconcentrated on burgers, fries, alearning that the brothers were lrestaurants all over the country.later bought the exclusive right tspirit of his franchise owners woyourself, but not by yourself.McDonalds, the franchisees, an


Financing

s options. He owned the McDonalds franchiscated across the street from the local college cas beginning to show its age. Built in the 1970s

r replaced. Knowing he had to make that decisives.

k to the morning of October 20, 1987. On thatheadline, The Crash of 87: Stocks Plunge 50re, Dana had cashed out and walked away fromzed by the good fortune of his timing, he voweHassan and his wife Jill conducted extensive re, becoming convinced that the training and sup

ld standard for franchise owners. After an extenas were approved to own a franchise and coming twelve, eighteen, and twenty-four months.amburger University; then Hassan worked in a

an ownership opportunity; however, on March, Connecticut, where the company was buying

r. Hassan paid $987,000 for the store and conse Danas were pleased, feeling that McDonaldsartner in an operation where the brand was evHassan and Jill Dana added another store in Coility to grow. McDonalds sent them to other sgional Manager, who told him over the phonele for two years with no takers. In May 2004,ught into the Amarillo market. The Canyon re

. Adding the store in Canyon, 15 miles south othe Amarillo market.

initially the Ray Kroc story. In 1954, while wod a huge order for multi-mixers to a restaurantMac McDonald, brothers, ran a limited menu

d beverages. Impressed by the success of thisoking for a franchising agent, Kroc envisionedHe founded McDonalds Corporation in 1955 a

the McDonalds name. Kroc believed the entuld get them to buy into the philosophy In buse said his philosophy was based on a three-legthe suppliers being the legs. McDonalds exp

s and Economics

remodel, Page 2

in Canyon, apus, business

, the building

on, Dana began

morning he.32 Amidhis Wall Streetto proceed with

search onort they would

nsive interviewpleted threeTrainingcompany store

0, 1995, hegroup of

mmated themade therything.

nnecticut, butates to look athat in the Texase decided to selltaurant wasAmarillo, gave

rking as a multi-n Sanestaurant thatew concept and

McDonaldsnd five yearsepreneurialness fored stool withcted franchisees


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to follow the McDonalds princiefficient supply chain managem

In 1961, McDonalds creeventually became the envy of tper share. McDonalds became

Over the years, the original limitsandwiches, a breakfast menu, samenities have changed over timindoor seating, play lands, free

McDonalds is one of theseveral explanations for the succopportunity to be successful byshakes. Kroc wanted stable partof sales revenue. Second, McDorestaurant at a time after carefulwith companies like Starbucks a

importance of quality growth anfollow the McDonalds menu, suorder to provide consistency acrbecause the rules control the McMcDonalds approach has alwayand make money.

THE CANYON RESTAURA

Built in the 1970s, the

then the Student Union Buildingoptions in Canyon, the store wasservice to the 15,000 permanentpatrons.

Although the prior ownetime Hassan and Jill Dana purchtoo small and not convenient fora basement for storage, employeMoreover, the building did not han average lunch or dinner run.lot, requiring employees to exit tstairs into the basement a safetyconstantly be going downstairs ointensive than comparable stores

McDonalds is adamantmain driver of value. McDonaldagainst any one restaurant negati

The Canyon store neededonly had the one store, had not bof 90 days for a remodel. Unles


Financing

les of quality, service, cleanliness, and value.nt was a true innovation at the time.ated Hamburger University, and the training pre food industry. In 1965, McDonalds went putruly international company with Big Macs so

ed menu has expanded with the addition of salaack wraps, specialty coffee drinks, and berry se from the original carhop concept to include diFi, and TV screens.most successful franchises in history. Buchholss of McDonalds. First, Kroc offered franchiot making them overpay for the right to sell haers that would follow his vision but he only clenalds controlled the pace of expansion by alloinspection of both applicants and location. Unlid Krispy Kreme, McDonalds has always appr

not diluting its brand. Third, Kroc insisted thapply chain, architecture, and the precise layoutss restaurants. This consistency is beneficial tonalds experience for the customer. Althoug

s offered franchise owners an opportunity to in

T

cDonalds store in Canyon is across the streetat West Texas A&M University. With few otha success. Today, the Canyon McDonalds offresidents of the city and 7,500 college students

s had kept the restaurant in good repair over thsed the store, it was structurally out-of-date. Tthe new menu items such as smoothies and cofs had to leave the kitchen to retrieve replaceme

ave enough freezer space to contain the frozenAn additional freezer was in a small building ache building to retrieve food from the freezer. Nhazard and liability concern, but the need for er outside to retrieve food made the store much.bout protecting the brand. The brand is, in mas had learned to be quick in removing poor opvely affecting the entire chain.major remodeling or rebranding, but the previ

een in a financial position to close the businessan owner has another form of income or has s

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remodel, Page 3

cDonalds

gramsblic at $22.50d worldwide.

s, newoothies. Storeive-throughs,

z (2007) offersee owners anburgers and

ared 1.4 percentating just oneke recent trendsciated the

t franchisesof the kitchen ina franchiseerestrictive, the

est, work hard,

rom what wasr fast foodrs fast foods the primary

years, by thehe kitchen wasees. Built withnt items.ood needed forross the parkingot only were theployees toore labor-

y ways, therators to guard

us owner, whoor the minimumved funds for


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the construction and loss in incoBecause the McDonald's brand iwith only a few stores becomesenough stores or cash flow to m2010).

Hassan knew he needed trestaurants made a short-term clflow. He narrowed his options

FINANCING THE REMODE

McDonalds encourages

McDonald's has a national arranoperators, even small operators,with other franchises and was onMcDonald's franchise.

The ability to participatewho do not own many stores andnegotiated prices on many of thesimilar cost structure decreases tand reduces jealousy as the franc

Historically, the cost of a$500,000. In recent years, the rebecause of the new equipment asmoothies (Ziobro, 2010). Addimore caf-style interior (MSN, 2which includes a teardown and r

McDonalds anticipates tcoffees and smoothies. Many frMcDonalds has not proven theprefer more emphasis on the brepromotes product mix, volume iDecember 2010).

Because of the structuraldown the building and build a nelocated on Interstate 40 on the eafootprint, and he had been able tgiving him the needed space.

McDonald's shares the cpercentage of store sales owed tthe option chosen, the franchiseemust consider the effect the diffeof the construction but in return,

Depreciation is another pdepreciation affects cash flow thitems of quick depreciation whil


Financing

e during the remodel, the likelihood of a remoso important and central to McDonald's value,

lmost a liability for McDonald's because he/shintain the stores let alone upgrade the stores (R

o remodel the Canyon restaurant. The portfoliosure of the Canyon location manageable with rn how to approach financing for the remodel.

periodic remodels and will share the cost of conement for financing, insurance, and distributioo pay the same marginal price. This is not alwe of the reasons the Danas had been so intereste

at the negotiated price is especially important twould not be able to negotiate lower costs on tmajor costs allow all stores to have similar pro

he advantage larger operators could have over shisees develop national restaurant policy.typical remodel for a McDonalds has been apodel cost for the typical restaurant has increas

d redesign of the drink area for the new premiuionally, McDonalds has updated the standard011). A complete remodel for a store that is exbuild, tends to cost twice as much as the basic

hat the changes will increase sales of the highernchisees balk at the increased cost of the remooffee shop concept (Boyle, 2009). Instead, sokfast and dollar menus. In essence, while Mcthe real driver of sales and profits for the franc

issues, Hassan had decided that he needed to cow one on the site. He had successfully done thst side of Amarillo. A new Canyon store needepurchase the house and clear the land behind t

st of construction through three financing optioMcDonalds varying based upon the option chpays the franchise fee once every twenty years.rent options have on cash flow. McDonalds wthe franchisee pays McDonalds a higher perceart of the financing decision. While a non-cashrough the reduction in taxes. Typically, the own

McDonald's keeps the long depreciation items

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remodel, Page 4

del diminishes.the franchiseedoes not haveeves, October

of 12 regionalspect to cash

struction.that allows allys the situationd in owning a

new franchiseesheir own. Theitability. Themaller operators

roximatelyd to $700,00m coffees andcor to reflect aessively dated,emodel.profit marginel becausee franchiseesonaldshisees (Reeves,

mpletely teart with a stored a biggerhe old store,

ns, with thesen. No matterA franchisee

ill pay for moret of sales.expense,er pays for the. Short-term


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depreciation items include plumdepreciation items include wallsof the remodels he had done on sterm depreciation.

The first option was that

franchise owner, who would thethe age of the store. The monthlthe Canyon store is older than avand prorates the depreciation wit

The second option was thowner would pay the remainingconstruction costs, the monthly rwould owe 9.5% of sales. McDfranchisee.

With the third option, thebuilding. In exchange for not be

monthly rent for a set period. Ffor six years, after which it woulall of the depreciation on the bui

Borrowing rates were atable to lock in at a low rate no moption was an adjustable rate loawas seven years, but the borrowafter one year with no penalty.

Because McDonalds harequirements for the stores and aCanyon stores cost would be $1days. Hassan timed it for the suUniversity.

UPGRADES

McDonalds has strict codemographics of the market. If tMcDonalds building proposal, tupgrades, which cost upfront but

Initially, the store had $2McDonalds has annual sales offollowing a remodel. The expecimproved. A newer, cleaner storand Jill knew that the remodel wadvertising would offset part of tadvertising and coupons in the fiadditional impact on food costsvolume. To sustain the increaseneeded to consider carefully any


Financing

ing and electrical with lives of five to ten yearsand the roof with lives between ten and twentyome of the Amarillo stores, Hassan already had

cDonalds would share construction costs 50/

pay McDonalds 8.5% of sales. The sales feey fee for new stores is closer to 14%-15% of salerage, the monthly fee is lower. McDonalds oh the franchisee. The owner absorbs the cost oat McDonalds would pay 2/3 of construction c

1/3 cost. In return for McDonalds paying morent is increased 1% for the next eight years. Thnalds still owns the building and prorates depr

franchise owner pays all of the construction coaring any of the construction costs, McDonald

r the Canyon store, McDonalds would reduceincrease to the normal rate of 8.5%. Hassanlding.istoric lows in 2008, and Hassan determined thatter which option he chose. The most appealin at an initial rate of 3.75%. The original matur could increase it to ten years or pay off the lo

s specialized construction, the general contractore able to estimate the cost and construction tim,800,000, and the time for the teardown and reb

mer to coincide with the reduced student popu

nstruction standards, and what they will help buhe franchise owner wants additions or upgradeshe owner absorbs those costs. Hassan knew hecan increase sales and add value at resale.

,000,000 in annual sales. In comparison, the av$2,400,000. McDonalds expects sales to increed sales increase is high because the consumere has a better image and customers are more satould only be successful if sales increased and thhe increase in sales. The Danas planned to sperst few months following the remodel. Couponecause the couponed items will have higher thain sales, they needed repeat customers, whichupgrades to the standard plan.

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remodel, Page 5

. Long-termyears. Becausea lot of short-

50 with the

is a function ofes, but becausens the building

any upgrades.osts while theof the

us, Hassaneciation with the

sts and owns thereduces the

he rent to 4.25%ould also take

at he would beg financingity of the loann at any time

rs know thee easily. Theild would be 90

lation at the

ild is tied to theto the standard

wanted

ragese 30% to 50%

experience isisfied. Hassanat an increase ind $60,000 on

s have ann normaleant that they


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Hassan knew that he hadbusiness has low margins and a sprofits. Typically, food costs racondiments cost 3%-4%. LaborMore labor-intensive stores such

higher cost structure, and thus, aitems. The Canyon store had labremodel would lower employeedrains cash flow because each n

Hassan knew that the remany university towns, Canyonis directly across the street fromcampus can easily swing througclose to several classroom buildithe dormitories are located acrosdormitories are not located near

to a restaurant.Hassan considered addinlines. The additional drive-throuthe camera reduces errors. Theorder. Thus, as the employee haand not the red car had ordered tdrive-through lanes before constparking lot first to decrease the a

As a university town, theuniversity was in session and evfrom when the high school day eathletic events.

While burgers and fries amajor profit area, especially drivsmoothies, and other premium dbut the drinks require dedicated(Brush, 2011). Furthermore, theincrease efficiency and to allowand whether one wants whipped

Hassan knew he needed tand to accommodate the increasCanyon does not have a Starbucand a book/entertainment store.open in the evening or weekendsbut a drive-through. There is a lmorning. Hassan knew he needehad become big sellers at other s

Hassan considered freehe might lose customers if he dithe competition on WiFi because


Financing

to be watchful of the cost structure. The fast folight change in costs can have a major impact oge from about 25%-28% of sales, while cookincosts vary from 25% to over 30%, not includinas McDonalds that are inside Walmart stores

e less likely to be re-imaged or have the spaceor costs that were closer to 30%. Hassan had hurnover, and thus, labor costs. Turnover is an iw employee lower productivity for the first oneodeled store had to appeal to the university coas numerous fast food restaurants, but the Can

one of the main entrances. Students, staff, andthe drive through before parking. Additionall

ngs, making it an easy option for meals betwees campus and dorm students must buy a meal plny restaurants forcing dorm students to drive i

a second drive-through line and cameras to thgh line would allow for more traffic and fasteramera takes a picture of the car and places it onds the food out the window, he/she can verifye nuggets. Hassan knew he needed to make auction started. He had learned from prior remomount of dust, which keeps the kitchen equipmstore had a predictable sales pattern that matchn times during the day when classes met. Thernded, and even patterns associated with high sc

re the main products of McDonalds, breakfaste-through breakfast items from the dollar menu.inks have higher profit margins in terms of theipace to store ingredients and to produce the drispace must be near the drive-through window aor nuances to the coffee orders such as low fatcream or not.o increase storage space in order to offer all thein volume post remodel, especially during higs, but there are competitor coffee shops inside

The student union coffee shop had limited hour. The music/video store coffee shop had limiterge senior crowd in Canyon that goes for coffed to upgrade the icemaker for the smoothies antores, and to compete with the other coffee shoiFi. While not a huge impact in Canyon, Hassnot offer WiFi. McDonald's had been four orof security concerns, and thus, liability and bra

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remodel, Page 6

od restaurantn cash flow andg oil andmanagement.

ace a hurdle of a

or the new foodped that thenvisible cost thatto two months.munity. Likeon McDonaldsaculty driving to, the store isclasses. While

an, thethey want to go

drive-throughervice, whiletop of the menuhat the blue carecision on the

dels to pave thent cleaner.d the times thewere bumpsool and college

as become aCoffee,

r variable cost,nks on demandnd the counter toversus skim milk

new menu items-traffic times.he student unions and was not

seating spaceduring thefrappes, which

s.n worried thative years behindnd impacts.


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McDonalds did not want an inciof the restaurants. WiFi did fitseemed to want it. If there was awhile the kids played. The mornWiFi.

Hassan considered the dstandard colors, the Danas couldfiberglass etching of local sites aand unique to that particular rest

The general contractor esspace, icemaker, dcor upgrades,

One upgrade Hassan conplay place near a university, becare many families in Canyon, anupgrade. The play place wouldbecause of the size of the lot. T

growth. The $200,000 expense iplace a few years after the initialextra $600,000. None of the restto Amarillo for play dates and bioption for families in Canyon.

MAKING THE DECISIONS

Hassan was vying with tthe opportunity to build a new stMcDonalds pushes franchise oHassan knew he needed to maketo get the new store in a high-gr

CASE QUESTIONS

1. Which of the three financing2. Which upgrades should Hass3. Is McDonalds push into the4. What role does employee tur5. How did the Federal Reserve6. Why is it important that all f

insurance, and distribution?7. Are there an optimal numberCASE QUESTIONS AND AN

1. Which of the three financing


Financing

dence of a customer committing an Internet criith the new coffee menu. The college and highplay area, parents could bring children and doing senior crowd also indicated that they liked t

cor with input from his son, Osman. Instead ofcreate a cushioned sitting area for WiFi users and an upgraded stone floor. The look would beurant.

timated that the additional drive-through lane, cand WiFi would cost $14,000.idered adding is a play place for children. It isuse play places are for children under age nine.the school district is growing. McDonald's ad

ost $200,000 extra and would have to be smalle immediate return would not be there, but it w

s somewhat tempered by the observation that aremodel is cost prohibitive, with an estimatedaurants in Canyon has a play place. Families tarthday parties. A play place in the McDonalds

e operator who owned three stores in the northore in northern Amarillo, a growing section of tners to re-image or remodel when a building bthe decisions on financing and upgrades, especwth area of Amarillo.

options should Hassan Dana choose?an Dana choose? Is adding the play place a gospecialty coffee and smoothie area wise?nover play in the decision to remodel?affect the decision on financing the remodel?anchisees have access to the same pricing in ter

of stores for a franchisee to own?

LYSES

options should the Danas choose?

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remodel, Page 7

e while in oneschool studentslittle work

he idea of free

going with theong withmore modern

ameras, storage

unusual to add aHowever, there

vised against ther than normal

ould allow for

ding a playrice tag of anke their childrenwould create an

rn Panhandle fore city. Becausecomes dated,ally if he wanted

d decision?

ms of financing,


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Without the upgrades, thother eleven stores and was a larthree months. Hassan indicatedthus, prefer long-term depreciablper month.

Loan

A 3.75% loan for seven years ono 50/50 split: $900,000 loao 2/3 1/3 split: $600,000o Owner-pays-all: $1,800,

Option 1: 50/50 split

The payment of $12,199McDonalds the 8.5% sales fee.8% to pay both the sales fee and

o$12,199/$166,667 = 7.32

o 0.0732/0.915 = 0.08 = 8

Option 2: 2/3 1/3 split

The payment of $8,133 iMcDonalds the 9.5% sales fee,90.5%. Thus, sales need to incre

o $8,133/$166,667= 4.9%o 0.049/0.905= 0.0541 = 5.

Option 3: Owner-pays-all

The payment for the own14.64% is after paying McDonalThus, sales need to increase 15.2

o $24,398/$166,667= 14.6o 0.1464/0.9575= 0.1529 =

If sales increase by morebecause the Danas pay the lowesDanas also have all the long-terleast 30% following a remodel.

Because the expected incwonder under what circumstanccost. The Danas are different frprovide cash flow during the dointerest rates make the cost of thappealing for those franchisees tconfident on how much sales wil

2. Which upgrades should Hass


Financing

cost is $1,800,000. The Danas already had inge enough operator to withstand no cash flow frhat they have enough short-term depreciation fe items. The current annual sales are $2,000,00

the three options results in the following montn results in a monthly payment of $12,199loan results in a monthly payment of $8,13300 loan results in a monthly payment of 24,398

is 7.32% of currently monthly sales. The 7.32The Danas get to keep 91.5%. Thus, sales neethe loan payment.

%

4.9% of currently monthly sales. The 4.9% ishe original 8.5%, plus an additional 1%. Thease by 5.41% to pay both the sales fee and the l

41%

er pays all option is 14.64% of currently monthds the 4.25% sales fee. The Danas get to keep9% to pay both the sales fee and the loan paym%%15.29%

than 15.29%, the owner-pays-all option is the bt sales fee and owns the building. By owning t

depreciable items. McDonalds expects saleshus, the remodeled store should meet the 15.2

rease in sales is greater than the 15% threshold,s would an owner choose to have McDonaldsm some other franchisees in that they have othn months and to fund the remodel. Additionallarger loan very affordable. The 50/50 and 2/at are not able to afford the higher payment anl increase following a remodel.

an Dana choose? Is adding the play place a go

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remodel, Page 8

ome from theom the store forr their taxes and0 or $166,667

ly payments.

is after payingto increase by

after payinganas get to keepoan payment.

y sales. The95.75% of sales.nt.

est optione building, theto increase by at% threshold.one coulday part of ther restaurants thaty, the low-1/3 options arewho are not

d decision?


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There are two decisions c

drive-through, cameras at the driupgraded dcor. Because the totshould clearly choose to do thes

The play place is not as osubstantially less than $600,000thinks the city of Canyon will cofamilies with children. In additithat they are older and may have

Numerically, the questioplay place? Is it better to build tpopulation and spend $600,000 i

The $200,000 cost adds 1current sales. If Hassan expectsplay place will pay for itself in t

will increase sales, it is unlikelyo $2,000,000 in sales *o $2,000,000 in sales *o The $200,000 increasAn additional point is tha

$200,000 play place is just $2,71$166,667 per month. As long aspays for itself. If the average panine more visits per day to generthan $10 reduces the number of

o $2,711/$166,667 = 1.3. Is McDonalds push into the

McDonalds reputation imenu. The dollar menu works osoda. The margin is higher on frsoda is more profitable than a cu

Premium coffees and smequipment, storage, inventory, ahigher on the drinks, volume is sdrinks.

It is unlikely that McDonthe caf-style dcor along with fonline and has a penchant for co

For the Canyon store, theMcDonalds offers a price-conscAmarillo while on the way to Calow enough to maybe convince s


Financing

oncerning upgrades. For $14,000, Hassan canve-though, increased storage space, icemaker,al of $14,000 is so small, less than 1% of annuaupgrades.

bvious of a decision. Clearly, $200,000 in thein a later remodel. Thus, Hassan needs to decidntinue to grow as a city and with the growth, thn, more and more college students are nontradichildren.is two-fold. Will sales increase enough to offse play place in the rebuild for $200,000 or wai

n a remodel?1.1% to the cost of the remodel. The $200,000sales to increase by 30% and sales increase inste first year. While we do not know what perce

hat sales will decrease because of the play plac30% increase = $600,000 additional sales40% increase = $800,000 additional salese in sales offsets the $200,000 cost of the play

t at a low interest rate of 3.75% over seven yea1 per month. The old sales of $2,000,000 corresales rise more than 2% per month because of tent-child user of the play place spends just $10,ate the $2,711 payment. Obviously, any averagew daily visits needed.

63%

specialty coffee and smoothie area wise?

for burgers and fries along with Happy Mealsn volume. A buyer of the dollar burger may buies and soda. Thus, a customer who buys a burstomer who buys just five dollar-menu burgersothies have higher margins; however, they reqd more space in the kitchen. Even though the

till important because of the increased fixed cos

alds can compete for the loyal Starbucks custee WiFi fits with the Gen Y generation, whichfees and smoothies over sodas.re is no strong competition from a national coffience student a viable alternative from buying cnyon for classes. Additionally, the premium drome customers to buy a smoothie over a soda.

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remodel, Page 9

dd a secondiFi, and

l sales, Hassan

ebuild ise whether henumber of

tional, meaning

et the cost of afor a larger

cost is 10% ofad by 40%, thet the play place

.

lace

s, the cost of thespond tohe play place, itthe store needs

e amount greater

nd the dollarfries and aer, fries, and as.ire moreargins are

t to produce the

mer. However,s constantly

e chain.offee innk prices are


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4. What role does employee tur

Hassan Dana says that neas the employee is learning the p

mistakes, which costs the store eupset customers and tarnished reallows the employees to be more

For the Canyon store, emconstantly go downstairs for replwasted obtaining product frustra

Employee turnover affecemployees working the shift. Amistakes, and help with custome

Numerically, turnover caoutput. Since we do not have thi

of $7.25, a forty-hour week costthe cost because it only looks atother employees, of incorrect or

The $1,160 is 4.75% of tturnover, each full-time employeconsider just a customer that specustomers.

Clearly, any decrease inable to easily calculate the nume

5. How did the Federal ReserveAt the incredibility low i

without any of McDonalds helprecession. McDonalds is a defeOperators who have the cash toare able to get very favorable loainexpensive compared to histori

The Federal Reserve polimuch easier. For those firms whbecome more affordable than du

6. Why is it important that all finsurance, and distribution?

By buying financing, insreduced prices due to the volumbasis for a franchise-wide cost stsmall price variations can make-


Financing a

nover play in the decision to remodel?

w employees are not productive for the first onrocess. Additionally, new employees are more

xplicitly in slower service and wasted product aputation. Employees prefer newer, cleaner storefficient.ployees tired of going outside to the freezer oracement product. Customers expect fast serviced employees.s not just the productivity of that employee butseasoned employee must train the new employers, all things that lower the seasoned employeen be calculated by a detailed study of employees information, we can only estimate a cost. At

$290, or $1,160 per month. The $1,160 is anhe wage of the unproductive employee and igners, and of upset customers.e loan payment $24,398. Thus, if the remodel

e kept is worth more than 4.75% of the monthlnds $10, as we did with the play place, the $1,1

mployee turnover is a benefit of the remodel, erical benefit.

affect the decision on financing the remodel?

terest rate of 3.75%, it made sense to finance t. The Federal Reserve lowered rates in responsnsive firm, which is able to survive recessionar

ithstand no income from a store and have the an conditions. The 3.75% interest rate makes thal rates.cy of low interest rates makes the decision to ao are able to borrow during a recession upgradering normal interest rate environments.

anchisees have access to the same pricing in ter

rance, and distribution costs in bulk, McDonal, which it passes to the franchisees. The commructure. Labor and food costs still differ acrossp those differences.

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emodel, Page 10

to two monthslikely to make

nd implicitly ins, especially if it

aving toand the time

all of thee, cover forproductivity.

costs per unit ofminimum wage

nderestimate ofres the effect on

would reducepayment. If we0 is worth 116

en if one is not

e remodelto the 2008-09conditions.

bility to borrowremodel

d a play places and additions

ms of financing,

s negotiateson costs create athe country, but


11/12

Common costs allow forhelps small franchisees and fransuch discounts. Additionally, thgeographic region an advantagefranchisees. The common profit

isolated areas because the owner

7. Are there an optimal numberMcDonalds wants it fra

with just a few stores present a dflow to maintain the stores, let alespecially those near retirement,and are just looking to take as m

McDonald's wants to conhave the cash flow from other st

stores do not have the size to masmall franchisee owned one to thThis shows McDonald's is a matexpand. Instead, it wants to pick

EPILOGUE

Hassan Dana chose the ocombined with the cash flow frochose to add the play place, notpotential. These decisions requistore became the first one to use

The remodel was finisheThe sales increase after remodeldays it was open in August 2009record increases.

McDonalds was pleasedbought the small operator that hanorthern Amarillo. The Danasremodel entirely, requiring no lofollowing the success in Canyon,operated 18 McDonalds in the

REFERENCES

Boyle, Matthew (2009, Novembhttp://www.businesswee

Buchholz, Todd (2007). New idBrush, Michael (2011, July 5).

http://money.msn.com/in


Financing a

similar profitability of stores across the countryhisees in high-cost areas that would not be ablelevel profitability does not give a franchisee i

over another franchisee, which helps to reduce jability also encourages franchisees to expand in

s know that their income will not suffer.

of stores for a franchisee to own?

chisees to be large enough to maintain the brananger to McDonalds because they may not havone upgrade the stores. Older operators with aare not interested in remodeling. They know thch cash flow as possible before selling.

solidate the number of franchisees. A few, largres to remodel or build new stores. Franchisee

intain the brand by remodeling or rebuilding.ree stores. Today, a small operator owns six tore franchise because it is no longer trying to seand support the franchisees that will strengthe

ption of paying for the entire rebuild. The low ithe other stores allowed him to fund the rebui

ecause it would pay for itself immediately, buted modifying the standard building model, andModel 38101, which other operators have usedAugust 14, 2009, in only 86 days, 4 days less

was closer to the 50%. The store did more busiversus all of August 2008. The first few mont

with the Canyon and other Amarillo stores sucd stores in Dumas and Dalhart and built the neany stores had such good cash flow that they f

an. In 2011, the Danas remodeled the Dumas s, added a play place. By 2011, the Dana Familmarillo region.

r 12). Whats eating McDonalds? Retrieved.com/magazine/content/09_47/b415603271427as from dead CEOs. New York, NY: HarpercDonalds or Starbucks: Who wins? Retrieve

vestment-advice/mcdonalds-or-starbucks-who-

s and Economics

emodel, Page 11

. This processto negotiatea particular

ealousy betweento new, more

. Franchiseese enough cashew stores,ey will sell soon

er franchiseess with just a few

istorically, aseven stores.ll franchises tothe brand.

nterest ratesld. He alsofor the growththe Canyonnow.han planned.ness in the 16s also had

ess. The Danasstore in

unded the nextore andowned and

rom8.htmollins.fromins-bush.aspx


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MSN Money (2011, May10). M

http://money.msn.com/tode449674b7e1&post=e6

Reeves, Jeff (2010, October 13).

http://money.msn.com/to1b0000000000&_blg=85Reeves, Jeff (2010, December 2

http://money.msn.com/todd1a27bff10f

Ziobro, Paul (2010, July 16). M


Financing a

cDonalds goes upscale with Starbucks flair. Rp-stocks/post.aspx?_p=fa449ac0-d060-4711-b2d71f3-914d-4a2d-b595-b5e09901eb1e&ref=bfBurger King to overhaul store image. Retriev

p-stocks/post.aspx?post=00000065-0000-0000-). Will McDonalds kill the Dollar Menu? Ret

p-stocks/post.aspx?post=e6dff7a6-ea4c-46c2-a

Donalds Revamps. Wall Street Journal, 256 (

s and Economics

emodel, Page 12

etrieved fromaf-vd from

9b3-

rieved from67-

15), B5.

111083 mcdonald casestudy

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