How Did McDonald’s Expenses Change Due to Re-Franchising?

McDonald’s (NYSE: MCD), has its expenses largely clubbed under its cost of sales and SG&A expenses, which together accounted for about 82.4% of the company’s total expenses in 2018. However, this is a reduction from 86.5% of total expenses that these two cost heads accounted for in 2015. Over the years, along with a decrease in Revenue due to re-franchising, McDonald’s has successfully been able to decrease its Cost of Sales (as a percentage of Revenue). This helped the Net Income margin as it went up from 17.8% in 2015 to 28.2% in 2018. Trefis expects the margin to reach 29.5% in 2019.

You can view the Trefis interactive dashboard – McDonald’s: Breakdown Of Total Expenses – to better understand how the company’s total expenses have moved over the years and what is causing this change. In addition, here is more Consumer Discretionary data.

Total Expenses:

• McDonald’s total expenses have decreased from $20.9 billion in 2016 to $15.1 billion in 2018, which is a decrease of 27.8% over the years.
• Most of this decrease was driven by cost of sales and SG&A primarily due to the high re-franchising in the period.

Following is the how each expense head has moved over the years. For more details of each expense, please visit our interactive Dashboard on McDonald’s Total Expenses:

• COS, which contributes 48.7% to McDonald’s total expenses (in 2018), includes cost of Food, Payroll, occupancy Costs, other operating costs, and Franchised restaurants-occupancy expenses. As the company has been more efficient operationally, COS as % of Revenue has declined over the years from 61.5% of Total revenue in 2015 to 48.7% of Total revenue in 2018. Trefis estimates the metric to go down further to 47% of Total revenue in 2019.
• Selling, General and Administrative expenses, which contribute 10.5% to McDonald’s total expenses (in 2018), includes advertising and marketing cost, selling and distribution expense, pre-opening charges, and other general expenses. Selling, General and Administrative expenses as % of Revenue has increased in 2018 as the company increases its marketing effort. Trefis estimates the metric to remain around 10.3% of Total revenue in 2019.
• Other Expenses (net) includes other non-operating expense (net of income). The metric was just -1% of Total Revenue in 2018 and Trefis estimates it to be around -1.8% of Total Revenue in 2019.
• Interest expenses have increased over the last few years in both absolute terms and as % of Revenue. The metric has decreased over the years from 2.5% of Total revenue in 2015 to 4.7% of Total revenue in 2018. Trefis estimates the expense to fall a bit and thus the metric to decrease a bit to 4.2% of Total revenue in 2019.
• Income Tax expenses saw a dip in 2018 due to the fall in the statutory rate. In 2019 we expect the statutory rate to be constant but as Revenue is expected to see a rise we expect overall Income Tax to be around 10.7% of Revenue.

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