Robots will replace workers at McDonald's! Really?

Just google "robots will replace workers McDonald's" and it becomes clear there will a mass slaughtering of jobs in the coming decade. If not tomorrow. Hold it.

The folks at Nanalyze analyzed MD's business model and came to a different conclusion.

Why McDonald’s May Never Use Robots to Flip Burgers

It says 'may', but it makes a lot of sense.

Increasing Sales or Decreasing Costs?

When it comes to increasing sales, that might come from entering new markets like Kenya, being more clever with advertising spend, or developing new food products to increase sales (think all day breakfasts). When it comes to decreasing costs, the biggest bang for the buck appears to be reducing labor costs. At least that’s the case for franchised McDonald’s restaurants where labor is the biggest expense at 24% of net sales ...

Then, add to that the whole minimum wage debate about paying workers $15 an hour, something that a previous McDonald’s executive said would result in “a job loss like you can’t believe“. This, of course, led to some rumors that McDonald’s may decrease costs by adopting the type of robotics technology we talked about before in our article on A High-Tech Burger Joint of the Future.

Here comes the kicker.

Astute readers may pick up on the fact that the McDonalds franchise model charges restaurant operators (in the majority of cases) a fee based on revenues, not profits. Why would McDonald’s care about developing robots to flip hamburgers if the franchisees were the only ones to benefit? Well, it could be because not all McDonald’s restaurants are franchises.

One look at revenues from the last quarterly earnings report shows us that McDonald’s receives about half their revenues from franchises and half their revenues from company-owned stores. Then, consider the following:

Of the 37,406 restaurants in 120 countries at June 30, 2018, 34,521 were licensed to franchisees

That means that only 2,885 restaurants (7.7% of total) generate half the revenues for corporate McDonald’s. That number is slowly declining over time, with McDonald’s aiming to have around just 5% of company-owned stores ...

For the majority of their franchises, McDonald’s makes money on the “franchise fees” they charge franchisee restaurant operators (up-front fees and 4% of sales). Again, if McDonald’s invests in robots to lower labor costs, how will they stand to benefit if their franchise model is to charge a fee based on revenues? One look at their long-term strategy shows that they seem more interested in driving revenues, not decreasing costs for restaurant operators.

Here is reason number 2 that robots would not make much sense.

Is McDonald’s a Real Estate Company?

Operating research teams can be expensive, especially when you give away your research to everyone for free. That’s why we were glad to see someone else had already performed the heavy lifting on this one. An article by Chase Purdy over at Quartz talks about how McDonald’s is actually a “brilliant $30 billion real-estate company.” In order to understand that statement, we need to understand their franchise model a bit better. For the majority of franchises, McDonald’s uses a “conventional franchise model” which involves buying or leasing property in some of the best locations in the world and then renting it to their franchisees. This means that McDonald’s is receiving a whole lot more than 4% from their conventional franchises. Consequently, they’re more of a commercial landlord than a restaurant operator. They still get paid regardless of how many burgers are sold, and they can always raise the rent for those locations where lots of burgers are being sold.

Full research here