U.S. Markets closed

What is driving capital expenditures and restaurant development at McDonald’s?

Smita Nair

Understanding McDonald's: Comprehensive company primer and profitability analysis (Part 13 of 21)

(Continued from Part 12)

In 2012, the company opened 1,404 traditional restaurants and 35 satellite restaurants (small limited-menu restaurants for which the land and building are generally leased) and closed 269 traditional restaurants and 200 satellite restaurants. In 2011, the company opened 1,118 traditional restaurants and 32 satellite restaurants and closed 246 traditional restaurants and 131 satellite restaurants. The majority of restaurant openings and closings occurred in the major markets in both years. The company closes restaurants for a variety of reasons, such as existing sales and profit performance or loss of real estate tenure.

Approximately 65% of company-operated restaurants and over 75% of franchised restaurants were located in the major markets at the end of 2012. Over 80% of the restaurants at year-end 2012 were franchised.

Capital expenditures increased $319 million or 12% in 2012 and increased $595 million or 28% in 2011, primarily due to higher reinvestment in existing restaurants and higher investment in new restaurants. The higher reinvestment reflects the company’s commitment to growing sales through initiatives such as reimaging in many markets around the world. The company claims that the increase related to new restaurants reflects its commitment to broadening the accessibility of its brand.

Capital expenditures invested in major markets, excluding Japan, represented about 70% of the total in 2012, 2011, and 2010. Japan is accounted for under the equity method, and accordingly, its capital expenditures aren’t included in consolidated amounts.

New restaurants

New restaurant investments in all years concentrated in markets with acceptable returns or opportunities for long-term growth. Average development costs vary widely by market, depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings, and equipment, are managed through the use of optimally sized restaurants, construction and design efficiencies, and leveraging best practices. Although the company isn’t responsible for all costs for each restaurant opened, total development costs (consisting of land, buildings, and equipment) for new traditional McDonald’s restaurants in the U.S. averaged approximately $2.9 million in 2012.

The company owned approximately 45% of the land and about 70% of the buildings for restaurants in its consolidated markets at year-end 2012 and 2011.

Continue to Part 14

Browse this series on Market Realist: