how profitable is owning a mcdonald's franchise in melbourne (2)

How Profitable Is Owning A Mcdonald’s Franchise In Melbourne?

McDonald's is a global fast-food icon, with locations in over 100 countries – and more than 970 around Australia. So it makes sense that the famous golden arches attract people interested in franchise options and hungry customers. If you want to open a new McDonald's location in Australia, you need to meet the company's strict set of requirements to become a franchisee and have the finances to fund the business costs. So, let's take a look at how the process works.

But on top of paying franchise, advertising, and real estate fees, operators are on the hook for many other costs that they can't necessarily plan for — such as upgrading kitchen equipment and remodelling restaurants. Bloomberg's Leslie Patton compiled a list of many of these costs that have recently hit franchisees as McDonald's tweaks its menu with the addition of all-day breakfast, customisable burgers, and more.

They include: Create Your Taste Kiosks ($125,000); McCafe espresso machines ($13,000); Muffin equipment ($4,500); all-day breakfast equipment ($500 to $5,000); interior makeovers including upgrades to digital menu boards ($600,000); complete restaurant remodels ($1 million to $2 million). That's nearly $1 million in upgrades, excluding an entire restaurant remodel. The older their restaurants, the more expensive their upgrades will be for many franchisees. If they refuse to make the investments, the company can push them out of business by declining their franchisee renewal.

If you want to own a McDonald's restaurant, you will need to become a franchisee. A franchisee effectively purchases a licence from McDonald's to use their branding, products and operational structure and then runs the restaurant as their own business. While you do not have the autonomy, you would get from starting your own fast food business. In addition, you receive comprehensive training and ongoing marketing and business support in return for ongoing franchise fees.

You have the choice of purchasing an existing McDonald's franchise restaurant, or starting your location, provided you are approved as a franchisee. McDonald's franchise agreements are usually set for 20 years, and you will need to be fully committed to your restaurant during this time.

McDonald's has strict requirements for approving franchisees, and there are many criteria that you will need to meet to be considered a McDonald's franchisee. These include:

  • We do not have any other businesses or employment.
  • I can commit to a full-time unpaid training program for a minimum of 12 months.
  • Able to make a significant financial commitment (generally over $1 million).
  • Willing to run a restaurant in regional Australia.
  • We are looking to make a 20-year commitment.
  • Previous business experience or a successful career.

Purchasing a McDonald's franchise, either from an existing franchisee or opening a new restaurant, requires a large investment. While the initial franchise fee is $60,000 plus GST, you will generally need at least $1 million to purchase a McDonald's franchise and may need more if you plan on opening a new location.

FAQ's About Owning A Mcdonald's Franchise

Initial Costs

Your initial costs will vary depending on if you are purchasing an existing franchise or starting a new restaurant, as well as the location of your franchise. However, you will need to cover the following costs as part of your investment:

  • $60,000 licence fee.
  • $5,000 documentation fee.
  • Staff training and other start-up costs (approximately $160,000-$200,000).
  • Equipment and restaurant fit-out (approximately $1.6 million).
  • Your disclosure agreement will provide your initial costs in more detail once you have found a suitable restaurant location.

Ongoing Costs

McDonald's charges a 5% monthly royalty fee on your restaurant's gross sales, and you must also pay monthly rent and advertising fees, which are calculated as a percentage of your gross sales. You will also need to cover rates and utilities and operational costs such as payroll and stock.

How Do I Finance A Mcdonald's Franchise?

how profitable is owning a mcdonald's franchise in melbourne (3)

Funding a McDonald's restaurant requires a large upfront investment, and McDonald's has specific criteria around how you can finance your restaurant. If you need access to funds, you can consider the following options:

Secured Business Loan

A secured business loan requires that you use an asset, generally a commercial or residential property, as security against the loan. Therefore, you will generally receive a lower rate with a secured loan and are more likely to be approved than if you had no asset to use as security.

Unsecured Business Loan

If you don't have access to an asset such as property, you could consider an unsecured business loan. Many online and alternative lenders may be willing to let you borrow up to $500,000 on an unsecured loan.

Business Line Of Credit

Unlike a regular loan, a line of credit gives your business ongoing access to an agreed credit limit, which can be used as and when needed.

The Truth About Running A Franchise

WHO hasn't dreamt of owning a successful brand-name franchise such as McDonald's or Domino's, rolling up about 11 am in a Mercedes and just watching as the business makes cash? So when we hear that 7-Eleven franchisees have been caught out underpaying their workers and claiming they can't afford to pay them properly, it's a bit of a shock. Most of us think these franchise businesses are a licence to print money.

It turns out the franchise game is tough to win. Often the only people earning less than the kid behind the counter are those who bought the franchise. This is because the life of a franchisee is a life of fees. They pay the franchisor to buy the business, pay a share of takings, and often many other charges.

Bakers Delight and Boost Juice founders make it onto the rich lists. Meanwhile, many franchisees go bankrupt or end up fighting their franchisor in court. Franchise disputes are so common the Australian Competition, and Consumer Commission has a whole page set up to make sure franchising runs smoothly. So why on Earth would anyone buy a franchise?

About 10 per cent of the small businesses open at the start of the financial year close by the end of the year. Surviving the first year is no guarantee of a long life. Within four years, nearly four in 10 small businesses are gone. This is exactly why people buy franchises. They want a successful business model. But here's the thing. Some research shows franchises fail even more than independent small businesses. If you pay a fortune to set up your small business then watch it fail anyway, you'll be pretty angry. That's why there are so many websites and groups set up for angry franchisees.

  • Bakers d'Lies is one of them.
  • The Facebook page Australian Franchising Scams is another one.
  • The page on Unhappy Franchisee.com for Curves women's gyms is another.

The complaints and legal claims on these websites are sometimes questionable, but the anger is real. Half of the franchisees say they don't make a fair profit in America.

Part of the problem is that if your franchise is successful, the head office knows, and they can often put another franchise around the corner. Do you know how there's often a 7-Eleven around the corner from another 7-Eleven? That's why. But of course, the problem is often clueless franchisees, like the man who bought a bakery and was then shocked to find out he had to get up at 2 am every day. But would a good franchisor let someone so clueless run a business with their brand attached? Wouldn't they check everybody? Don't they want everyone to succeed? In 2010, research showed half of the franchisees went into the business based on their "gut feeling". No wonder so much gut-busting work leads to so much gut-wrenching failure.

This year, Griffith University and the University of NSW did an in-depth study of 28 current and former franchisees. It found most had no specific business education, and nearly half didn't even consult an accountant before buying their franchise.

One unhappy former fast-food franchise described how they fell for the franchisor's sales job: The franchisor was saying look at all the foot traffic. In hindsight, there were many people walking past but not walking into the store because it was outside the shopping centre. They were walking past to go to the shopping centre. The demographics of the clients in that area couldn't afford our product. We were new to Australia. We didn't know about this. Another former fast-food franchisee regretted not doing more work before buying into the dream: "They did encourage would-be franchisees to speak to other franchisees. If I had done that, I would have heard how hugely unhappy they were with the franchise and how the financial model did not work. I probably would not have gone ahead. Simple as that!"

One retail franchisee described why they cut corners on due diligence: "It cost me $240,000 to buy the franchise … There was no way that I could afford to spend money on a lawyer or accountant. I was stretched." There is an endless supply of people willing to put their life savings into a franchise without much thought. Unfortunately, some franchises prey on that weakness. Pie Face opened dozens of stores all over Australia, then swiftly shut many of them down and went into administration. Krispy Kreme did much the same, while Eagle Boys Pizza has shrunk from more than 300 stores to under 200 amid a storm of complaints from franchisees. Still, people keep buying franchises. It's like being at the casino. People who win keep playing and don't stop talking about it. People who lose keep their mouths shut and slink away. So if you listen but don't watch closely, you can get the impression winning is easy.

The Biggest Fast Food Franchises In The Australian

Long-established fast-food chains will always be difficult to get anywhere near them in terms of unit numbers across the country. But, in most cases, we're talking about big brands that are this big due to decades of growth in the market compounding. Yet, as we are seeing now in some instances, this multiple decade market presence can come with its unique challenges to 2020 and beyond. For example, ageing store networks that need substantial refurbishment and investment becomes a significantly bigger issue when talking about hundreds of locations requiring it.

Subway - 1300+ Locations (Au)

The brand and its franchise owners have invested heavily in refreshing its presence in the market. This continues to be an ongoing process across a large network of stores. Arguably the brand has suffered from its long track record of growth success before increased Competition and palate changes, with store numbers receding in recent years. Reports indicate the brand had some 1,400+ units in 2015. The brand has had to address a perception of it being out-shined by many newer, on-trend food concepts. A menu and brand refresh can attract and hold the next generation of consumers to the brand.

Mcdonald's - 1,000+ Locations (Au)

how profitable is owning a mcdonald's franchise in melbourne (2)

After hitting the Australian market in the early '70s, McDonald's has been a staple in the market since. Its burgers mainly competed with Hungry Jacks and the corner milk bar burger for so long. However, with the explosion in local specialty burger chains, arguably, the global giant 'blinked' more recently with the Create your taste, handcrafted burger range, which has been withdrawn. Adding the McCafe concept to the business has significantly increased the ability of the business to attract a broader custom beyond its traditional 'fast food' base.

Dominos - 694 Locations (Au)

The Australian Domino's master franchisor also holds the rights and operates the brand in international markets through Asia and European countries with 2,600+ total locations. With franchise owners in the group currently averaging 2.2 stores, growth through internal candidates prominently. The brand has been extending its menu to appeal to a broader consumer market beyond pizza and giving it the ability to increase its average transaction value.

Kfc - 680+ Locations

KFC is a subsidiary of YUM! Brands, with 24,000 KFC restaurants globally. YUM! Operates the KFC, Taco Bell, Pizza Hut and Habit Burger. While KFC Australia owns and operates 50 restaurants across the country, the business is characterised in Australia with having groups of franchise owners with large blocks of restaurant numbers in regions. At face value, broadly, many of the locations appear tired and need refresh and revitalisation investment. The brand has been effective in marketing campaigns at a national level, being highly active and visible with major sporting code promotions over an extended period, giving it arguably, a disproportionally high profile. However, it can't be said that the brand is aggressive and highly innovative in stretching its menu range across the years.

Hungry Jacks - 420+ Locations 

Hungry Jacks (aka Burger King in the USA) has been a permanent presence in the Australian market since McDonald's arrival. The brand has a high proportion of company-owned and run outlets, with a lower % of stores owned and operated by franchise partners. At face value, broadly, many of the locations appear tired and need refresh and revitalisation investment.

Red Rooster - 360 (Au) Locations

She is owned by the multi-brand operator Craveable Brands, which runs Oporto and Chicken Treat. Another brand in this fast-food niche appears to have a significant portion of aged locations needing refresh and re-investment.  This looks to be a crucial next phase of the brands' life cycle. Having trouble with its place in the market over recent years with fresher, on-trend food competitors pouring into the market and no doubt taking market share from it, Red Rooster has signalled a clear intent and plan to take action. Kudos to the brand for clearly acknowledging the issue and acting bolder than many other established food brands, which we've seen a decline over recent years. Now for the delivery of the plan for all stakeholders.

Pizza Hut - 254 Locations

The master franchisee licence for the brand was purchased by Allegro private equity from Yum! Brands in late 2016. It has also purchased the remaining Eagle Boys locations (127) in 2016. By appearances, the brand has slowed new franchise development, with the brand withdrawn as a corporate presence from the vast majority of recognised franchise growth platforms.

Nando's - 270 (Au) Locations 

Founded in South Africa in 1987, the brand sells franchises only in Australia yet operates in 35 countries. The brand was highly visible and very strong in the ongoing growth and market presence several years ago in Australia, yet has had a period of significant decline over recent years. Operates a self-proclaimed 'blended franchise and company-owned store model. Unfortunately, the company has featured extensively in reports centred around issues of store refurbishment costs and closures over recent years. The refurbishment works would seem crucial to position the brand for the future competitive fast food / casual dining consumer market.

Oporto - 172 Locations

Owned by a multi-brand operator, Craveable Brands, operates the Red Rooster and Chicken Treat brands. With the vast majority of stores located in NSW, the brand is focusing on growth in the QLD, VIC and WA markets in 2020. The brand has also had expansion into Singapore and Sri Lanka recently.  

Conclusion:

All the while, new food competitors and concepts hit the market, investing in new locations and more modern menu offerings. Yet, these have certainly not withstood the test of time in the market.

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