Business Description
McDonald's Corporation (NYSE: MCD) is the undisputed leader of the global Quick Service Restaurant (QSR) industry, a position solidified by decades of operational refinement, real estate accumulation, and brand ubiquity.
On the surface, it's a restaurant chain that sells burgers and fries. Underneath, it's a conglomerate comprising a global franchising operation, a massive commercial real estate portfolio, and a supply chain logistics power. The genius of the business model lies in the "Three-Legged Stool" philosophy advocated by founder Ray Kroc: the interdependence of franchisees, suppliers, and corporate employees. This structure aligns incentives across the value chain, ensuring that the system prioritizes long-term brand health over short-term profit extraction.
The Franchise Model and Real Estate Engine
The defining characteristic of McDonald's profitability is its heavy reliance on franchising. As of the end of 2025, approximately 95% of the company's 44,000+ restaurants worldwide are owned and operated by independent franchisees. This is not merely an operational choice but a financial strategy that drives the company's high Return on Invested Capital (ROIC). By offloading the capital-intensive responsibilities of restaurant operations—equipment, labor, food costs—to franchisees, the corporate entity maintains a lean cost structure while collecting high-margin revenue streams.
The revenue model for McDonald's is distinct from many of its peers. The company generates revenue from franchisees through three primary channels:
Rent: McDonald's typically owns the land and the building shell for its locations, securing long-term control over prime real estate. Franchisees pay rent to the corporation, which is often calculated as a percentage of monthly gross sales with a minimum base rent. This effectively makes McDonald's one of the world's largest commercial landlords, providing a stable, inflation-adjusted income stream that is superior to standard fixed-rent commercial leases.
Royalties: Franchisees pay a service fee, or royalty, based on a percentage of gross sales, typically around 4% to 5%. This aligns the corporation's interests with the franchisee's top-line growth.
Initial Fees: Upon opening a new restaurant or renewing a 20-year franchise term, operators pay a one-time fee.
This structure creates a financial flywheel. As systemwide sales grow—driven by marketing and menu innovation—rental income and royalty payments increase simultaneously.
Operating Segments
McDonald's organizes its vast global operations into three distinct segments, each with specific strategic mandates and margin profiles. This segmentation reflects the maturity of the markets and the company's level of direct involvement.
"Accelerating the Arches" Growth Strategy
The company's current strategic framework, "Accelerating the Arches," evolved from the previous "Velocity Growth Plan." It is designed to modernize the brand and drive systemic growth through three pillars represented by the acronym M-C-D:
M - Maximize our Marketing: Investing in brand relevance through culturally resonant campaigns like "Famous Orders" (collaborations with celebrities) and the recent "McDonald's" anime campaign. This shifts marketing from transactional (couponing) to emotional brand building.
C - Commit to the Core: Focusing on the core menu items that drive the majority of sales: burgers, chicken, and coffee. This involves operational tweaks to improve taste (searing patties, melting cheese) and expanding the chicken portfolio to compete with Chick-fil-A.
D - Double Down on the 4 D's: Originally the 3 D's (Digital, Delivery, Drive-Thru), this pillar was expanded in 2023 to include Development (opening new stores). This signals a shift from a decade of net unit stagnation to aggressive expansion, targeting 50,000 restaurants globally by 2027.
SWOT analysis
Strengths
Provide the most affordable burgers and fries. Best protein per dollar ratio.
The company's real estate-centric franchise model provides a hedge against inflation, as its rental income streams remain robust even when operator margins compress.
In developing countries, McDonald's restaurants have a more premium appearance given its association with American standards, e.g. clean, safe, accommodating.
In countries where point-to-point transportation is less common (most people do not drive themselves to the destinations), the large footprint and accommodating environment of McDonald's makes it an excellent place for meetups, thus earning some sales and loyalty.
Economic moats
Cost advantage: While the barriers to entry for opening a single burger restaurant are low, the barriers to competing at scale with McDonald's are insurmountable for most new entrants.
Low unit cost: The company amortizes its massive fixed costs—global marketing campaigns, technology development, and supply chain logistics—over a systemwide sales base of over $130 billion. That makes McDonald's a very defensive eat-out option for consumers. It is often the cheapest option for burgers and fries.
Technology moat: To compete effectively in the modern QSR environment requires massive investment in standardization in cooking, digital infrastructure, app development, ordering kiosks, and automated drive-thrus. McDonald's capital expenditures of $3.0 to $3.2 billion annually create a "technological moat" that smaller chains cannot cross.
Real Estate Scarcity: To provide food at an affordable price, high volume of traffic is needed, which needs prime real estate locations. The "best" corners in almost every major city globally are already occupied. McDonald's legacy real estate portfolio acts as a barrier to entry, forcing new entrants to settle for B-tier locations or rely entirely on digital/delivery models, which have lower margins.
Ghost Kitchens: The anticipated disruption from "ghost kitchens" (delivery-only units) has largely abated as the economics proved difficult without the billboard effect of physical storefronts. This reinforces the value of McDonald's physical footprint
Purchasing Power: With an annual supply chain spend estimated at over $26 billion, McDonald's is often the largest customer for its suppliers (e.g., dedicated potato growers, bakery facilities). This monopsony-like power allows the company to dictate terms, enforce strict quality standards, and negotiate favorable pricing.
Branding
For McDonald's, the brand promises consistency, safety, and nostalgia.
McDonald's is often associated with happiness, rooting from kids getting toys through Happy Meals and comfort food like simple burgers and fries.
Warren Buffett and Bill Gates can afford much better restaurants than McDonald's, but Warren Buffett chose McDonald's for his morning routine, and Bill Gates's possession of "McGold Card" connects with Warren Buffett through McDonald's in a subtle way, e.g we are rich but we are like you.
It allows people to justify being cheap to dine in McDonald's without "losing face".
Cornered Resource
McDonald's real estate portfolio is a classic cornered resource. The company secured prime locations at key intersections and highway exits decades ago at a cost basis that cannot be replicated today. It owns the prime real estate location to get the most traffic to keep its food affordable. This physical advantage is durable and creates a barrier to entry for any challenger attempting to replicate McDonald's convenience and drive-thru throughput.
Low efforts in maintaining the moats
Burgers and fries are not rocket science. McDonald's does not need to work very hard to maintain its moat.
Weaknesses
Zero switching cost of consumers. One can easily choose a burger king or Wendy's instead of McDonald's.
MCD mitigates this a little bit by its loyalty program. By locking customers into an ecosystem of points and personalized rewards, McDonald's creates "soft" switching costs. A customer close to earning a free Big Mac is less likely to switch to Burger King for a single meal.
The QSR sector is a zero-sum game for stomach share. That often means McDonald's is a price taker instead of price setter: subject to increasing labor cost from minimum wage hikes.
Threat of substitutes
Fast Casual: Chains like Chipotle and Sweetgreen offer a perceived health and quality premium ("counter-positioning"). While price gaps exist, the narrowing spread between a McDonald's combo meal and a Chipotle bowl makes the trade-up easier for consumers
Grocery/At-Home: As restaurant inflation outpaces grocery inflation, the "food at home" substitute becomes more attractive. The threats increase with grocery stores like Costco providing pre-made frozen equivalents like Sausage Muffins, pancakes, chicken nuggets, chicken wings, fries, etc.
Franchise operation complexity
The "Accelerating the Arches" plan requires franchisees to invest capital in technology and remodeling. This can lead to tension and disputes, as seen in past conflicts over technology fees.
Because the operations are de-centralized with heterogeneous economics, it is often hard for McDonald's to provide consistent food with the same value propositions for all the stores. It is reflected in McDonald's extremely slow pace in changing its menu.
Health Perception: The brand remains inextricably linked to "junk food" in the public consciousness, which is a liability in an era of increasing health awareness and regulation.
Opportunities
China Expansion: With the re-acquisition of the Carlyle stake in 2023 (source), McDonald's has the control needed to aggressively expand in Tier 3 and Tier 4 Chinese cities, capitalizing on the urbanization of the world's second-largest economy.
McDonald's sells significantly more cups of coffee than Starbucks, selling millions daily and ranking as a top global coffee player due to its vast reach, lower prices, and consistent quality. That allows McDonald's to undercut Starbucks value propositions. That is more obvious in developing countries that McDonald's is often used as a more casual meetup place instead of Starbucks due to the larger storefront, a larger menu selection, and more affordable pricing.
While CosMc's was a flop, McDonald's research in food allows it to try or spawn restaurants with different concepts. Afterall, it once had a large stake in Chipotle.
Threats
The emerging adoption of GLP-1 weight-loss medications presents a long-term volume threat that analysts are only beginning to model.
A structural threat emerging in the mid-2020s is the widespread adoption of GLP-1 agonists (e.g., Wegovy, Ozempic). Analysts project that as adoption reaches critical mass (potentially 6-10% of the population), it could create a 1-2% volume drag on the QSR industry as users consume fewer calories and reduce cravings for high-fat, high-sugar foods. This is a long-term, existential substitute for the habit of fast food consumption.
The Chicken Wars: Chick-fil-A continues to be a formidable adversary in the U.S., generating higher sales per unit despite being closed on Sundays. This has forced McDonald's to aggressively expand its chicken offerings with the McCrispy platform to defend its market share.
Marketing Spend: The industry creates a "Red Queen" effect where massive marketing budgets are required just to maintain current market share. McDonald's ability to outspend its rivals is a key advantage in this high-intensity environment.
The QSR sector is a zero-sum game for stomach share and McDonald's already has a lot of restaurants. That makes continued expansion harder and harder.
Health consciousness customers: McDonald's food is considered unhealthy, which has a risk of making the brand and the restaurant obsolete.
References
Seeking Alpha Earnings Estimates of MCD
2025/12/02 Overview of McDonald’s for Investors
Updates
2026/01/02 Brief Valuation
Because of the strong moat of the company that is easy to maintain, the predictability of the company is very high, and that warrants a less than 15% required return. With an expected earnings growth of around 10% per year and a dividend yield of more than 2%, one can easily earn a 12% return on the investment, and I will be happy to take that. The relative high dividend yield compensates for its slower earnings growth in traditional growth companies, so I would use my common 20 P/E to valuate the company.
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