The Business Of

Fast Food | McDonald’s | Outlook

Morning All!

TGIF! The weekend is oh so near! But before we get there, we’ve got one final newsletter to round off The Business Of McDonald’s. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about McDonald’s this week…

• How Do They Make Money - McDonald’s only own and operate 5% of their 40,000 restaurants. The other 95% are franchised!

• What Are Their Margins - Starbucks 14%. Domino’s Pizza 18%. Burger King 29%. KFC 32%. McDonald’s 40% EBIT Margin is well above competitors!

• What Do They Do With Their Profits - McDonald’s shares are up 3.5x since 2012. EPS is up 1.7x and the stock’s P/E ratio is up 2x. 1.7 x 2 = 3.5ish!

Okay so, usually, we’d end the week by talking about the outlook for McDonald’s. However, we’re going to do something slightly different today! Because I find it absolutely remarkable that McDonald’s make only a third of their revenue from selling burgers. And make most of their money from allowing others to use their brand. And collecting royalty fees and rent! Today, we’ll look at other examples where the licensing business model is used effectively. I think you’ll enjoy this one! But first…

Career Talk - Audit

That’s right! It’s the next edition of our Career Talk newsletters. Sadly, Rishabh was tied up! But no fear, we’ve still got a cracking talk to bring you. And this week we’re exploring Audit with my friend Deon Vermaak. It’s a different one to our usual career talks because after leaving school. Deon decided to take the apprenticeship route rather than go to uni. After joining the External Audit team at Deloitte, Deon enjoyed 6 years at the company, before joining Intertek in Internal Audit.

Today, I’ll be chatting to him about…

• the difference between internal and external audit,

• why he chose an apprenticeship over university when he left school,

• why fraudster companies don’t get spotted by auditors, and,

• the great exit opportunities that come after starting your career in audit!

That email’s coming out imminently. But just before you click on that - let’s dive into licensing!

The McDonald’s Of Toys…

Okay, so McDonald’s have basically conquered fast food. Their ‘speedee system’ revolutionised the industry. And their restaurants became so popular that thousands of other people have wanted to open up their own McDonald’s restaurants. And use the McDonald’s brand. And we saw on Wednesday, that this franchise/license model is used by most players in the fast food industry.

However, licensing isn’t just limited to fast food restaurants! And in our previous newsletters, we’ve actually come across another company who does a lot of licensing in the retail industry. Anyone remember who?

Well, it’s Disney! All those Marvel toys, Star Wars masks, Frozen bags, Avatar whatevers that people buy in stores. Disney don’t sell them! They allow other companies to make those products, using their brands. (Because Disney own Marvel, Star Wars, etc). And then whenever people buy these products from a store… Disney takes a ~10% cut from all these sales!

In fact, the company is the largest retail licensor in the world. With over $56 billion worth of Disney merchandise sold just last year! Let’s quickly look at an example… in the photo below you can see the Ironman lego product.

LEGO will have an agreement with Disney to use the Ironman brand to make Lego products. (Remember, Disney owns the Marvel brand). And in exchange, Disney will take ~10% of all the sales from this toy. In 2022, Disney pocketed a cool $5.2 billion in revenue from merchandise. But let’s just put this $5.2bn in context. Because, how much did Disney make from licensing their movies to cinemas in 2022? $1.9bn.

And this is pretty fascinating. Last year, Disney made $1.9bn from people paying to watch their favourite Marvel, Star Wars, etc. movies in the cinema. But they made more than double this by just letting companies use the Marvel, Star Wars, etc brands to sell toys! So, like how McDonald’s don’t make most of their money from operating their own restaurants… but by selling the right to use their brand. Disney don’t make most of their money from people watching Marvel… but by selling the right for others to use the Marvel brand! Crazy!

The Greatest Licensing Deal Ever Made?

Okay, so that’s retail. And Disney are the clear winners there. But now let’s talk about another product category with a huge licensing deal. And this time, the licensor isn’t a company. It’s a person.

The product is shoes. And the licensor is a certain Michael Jordan.

Back in 1984, Nike signed an agreement with Michael Jordan creating the Air Jordan shoe brand. The agreement said that Nike could use Jordan’s name to sell their Air Jordan shoes. And in return, Michael Jordan would receive 5% of the sales. So, like McDonald’s receive a 6% royalty on franchisees’ sales. And Disney receive a 10% royalty on retail sales. Michael Jordan receives a 5% royalty on Air Jordan sales.

And this agreement has been one of the most lucrative agreements ever signed by a human being. Since 1984, over $20bn worth of Air Jordan shoes have been sold. Making Michael Jordan a little over $1.5 billion! Just last year, Nike sold $5bn worth of Air Jordan shoes. And Michael Jordan pocketed a cool $250m of that!

Michael Jordan pockets 5% of all these sales!

But let’s put this in context. Anyone know how much Michael Jordan made from playing basketball? Like, his actual basketball salary? Well, over his entire 15-year playing career. Michael Jordan made $94m through salary. Think about that. $94 million over 15 years from playing basketball. But $250 million in one year from selling your name…

So again, like McDonald’s with burgers, and Disney with Marvel. The value of Michael Jordan’s basketball ability isn’t actually in his basketball salary. But in selling the right to Nike to use his name to sell their shoes. Incredible.

Who’s Line Song Is It Anyway?

Okay, so we’ve seen 3 instances where having a powerful brand has been lucrative. McDonald’s with restaurants. Disney with merchandise. And Michael Jordan with shoes. Let’s end with one final licensing arrangement. And it’s one of the more controversial areas… it’s the licensing of music!

Now, most of you I assume will know that Ed Sheeran was recently in court. The artist was accused of using Marvin Gaye’s ‘Let’s Get It On’ song to produce his own song, ‘Thinking Out Loud’ without permission. Ed was found not guilty. But what I want to focus on here is the licensing element.

Because, artists CAN USE other people’s songs to produce their own. But they have to ask permission. Let’s use the example of Marvin Gaye. In Kanye West’s very first album ‘College Dropout’, one of his songs, ‘Starship’ uses 3 different parts of Marvin Gaye’s song, ‘Distant Lover’. So, how is this allowed?

Well, Kanye West asked Marvin Gaye’s team for permission to use the song. Kanye probably had to fork over quite a bit of money too! And as we can see below, Marvin Gaye is actually credited as a songwriter on Spotify for the Starship song. Even though Gaye died 20 years prior to the song coming out!

How does this fit in to what we’ve been talking about? Well, like McDonald’s, Disney and Michael Jordan. Marvin Gaye (and all artists) have their brand. Their songs. And so if someone wants to use their songs, they’ll have to license (or sample) it from them!

And the royalty fees that artists can make through licensing their songs is pretty impressive! Back in 2015, the Marvin Gaye estate made $5.3m due to missed royalties. As courts found that Robin Thicke and TI had used a Marvin Gaye song without permission. And in a completely different genre. According to Sting, he’s still receiving $2k per day in royalties from the licensing agreement for P Diddy’s ‘I’ll Be Missing You’! Maybe I should start writing songs rather than newsletters…

2nd Jun 2023

Nigel Jacob CFA