Quick Take That McDonald’s operating margins exceed those of other restaurant chains such as Chipotle, Panera Bread and Starbucks are often highlighted.

This can be misleading since more than 80% of McDonald’s stores are franchised. Franchised restaurants generally have margins 3-4 times those of company-operated stores.

Comparing the margins of McDonald’s company-operated stores against that of Chipotle paints a different picture altogether.

While comparing various restaurants, investors often highlight how McDonald’s juicy operating margins of over 30% are better than those of Chipotle Mexican Grill (NYSE:CMG) or Panera Bread or even Starbucks (NASDAQ:SBUX). What they fail to mention is that more than 80% of McDonald’s restaurants worldwide are run by franchisees while the rest are run by the company itself.

Since the franchisee model has very little fixed costs, its margins are naturally higher. For McDonald’s, the franchised margins exceed 80% and are more than four times the company-operated margins. [ ]

How To Go About It ?

While comparing two items, it is only fair that you compare apples to apples. Therefore, for chains like Chipotle whose all restaurants are company-owned, the more accurate way of comparing margins would be to compare them against McDonald’s company-operated margins.

Now, suddenly the picture looks much different. McDonald’s company-operated EBITDA margin of 18% trail Chipotle’s 23-24% meaningfully. [ ] The result is not totally unexpected though. Given McDonald’s pricing, it is no wonder that the world’s biggest fast food chain survives on more frugal margins. However, the average revenue of ~$3 million per store more than makes up for the thinner margins. Chipotle’s average revenue per store is less than $2 million annually. [ ]

Note that McDonald’s does not include selling, general and administrative expenses while calculating its operating margins. We have included these expenses while subtracting depreciation and amortization costs while calculating EBITDA. That is why, the figures mentioned here might differ from what the company reported.

See full analysis for McDonald’s Corporation

Similarly, while analyzing McDonald’s own performance, it can so happen that the overall margins expand even though the individual margins of company-operated stores and franchised stores decline. This will happen when a greater proportion of new additions are franchised stores. The company-wide margin can even obfuscate any weaknesses that the individual restaurants might be facing. Therefore, you need to be careful about the headline margin since an increment in the figure does not necessarily mean an improvement in operations.

We have a $92.80 price estimate for McDonald’s, which is in-line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis