McDonald’s ‘Big Win’

McDonald’s Corp (MCD) is the world s largest chain of fast food restaurants. As of Dec. 31, 2012, the company generates revenue through company-owned restaurants (around 68% of sales), franchise royalties and licensing pacts (32% of sales).

The strong growth in McDonald’s earnings over the past 20 years it is not a coincidence. Factors such as a strong brand (and also a very huge advertising budget of $788 million in 2012), a franchisee system (that reduces the company’s capital requirements) and international expansion (last year the company spent $2.9 billion toward unit openings and modernization) make good profitability numbers. The return on equity (ROE) grew from 13.20% in 2003 to 36.80% in 2012. Also, McDonald’s generates excellent free cash flow and returns on invested capital.

A key driver of the company is “Menu Innovation” which also has played a role in its productivity. In 2013 those innovations are based on four key growth categories: chicken, premium beef, breakfast and beverages. For example, a firm’s beverage initiatives are the McCafe coffee and real fruit smoothies.

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