McDonald's and Subway are two of the world's largest international fast food restaurant chains. Each company possesses a strong brand and is an established name in the casual eating restaurant industry. With 44,805 locations worldwide, Subway beats out McDonald's as the largest global chain. McDonald's currently has 36,525 locations globally. So, what's behind this difference in global positioning? And, are the differences meaningful beyond number of restaurants?
The most important general difference between the two companies is that McDonald's is a public company while Subway is privately owned. The common stock of McDonald's is listed on the New York Stock Exchange and it has been included in the Dow Jones Industrial Average (DJIA) since 1985 due to its market capitalization and its position in the industry. In contrast, Subway is owned and operated by the private company Doctors' Associates Incorporated.
The McDonald's brand is much more valuable than that of Subway despite both companies ranking among the world's most valuable brands, according to Forbes. Regular, open publication of the company's financials improves its access to capital which, in turn, provides more opportunities to strengthen the company's brand, a key factor behind its continued strong financial results. So, it seems that brand value alone does not explain the difference between the chain size of the two companies.
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For established companies such as McDonald's and Subway, franchising is one way to expand rapidly with minimal risk to the parent company. Both companies use franchising in their business models but to different extents. All Subway stores are franchised. The company itself does not own any Subway restaurants. McDonald's owns 20 percent of its restaurants, with the remaining 80 percent owned and operated by independent franchisees. Moreover, the company plans to further increase the share of its franchised businesses to 95 percent over the long term.
Expertise gained from operating company-owned outlets enables parent companies to improve the operating standards of the whole franchise chain. At the same time, the existence of company-owned stores in McDonald's business structure places certain restrictions on its expansion capabilities. For example, a conventional franchise agreement supposes that the parent company owns the land and the building or secures long-term leases for its restaurants. This requires more capital, which can limit the ability for expansion at the rate of other chains, like Subway.
We have already discussed that the business models of both companies are focused on franchising. A franchise license is an authorization granted by a company to an individual that enables the franchisee to maintain control over purchasing, employment, pricing and marketing decisions. To secure a franchise license, the franchisee pays a set of fees to the parent company. The franchise fees to open a new McDonald's restaurant are much greater than that of a Subway restaurant. The total investment needed to open a new McDonald's restaurant ranges from $958,000 to $2,183,000 plus an initial fee of $45,000, while the opening costs of a new Subway range from $116,000 to $263,000 with an initial fee of $15,000. And while the recurring fees of McDonalds (8% of monthly gross sales) are a bit lower than that of Subway (12.5% of weekly gross sales, less sales tax), Subway is much more affordable for small entrepreneurs.
While the preceding factors speak to why the number of Subway locations exceeds that of McDonald's, the data reveals that McDonald's, with stores in 119 countries, has a broader geographic representation than Subway, which has stores in 112 countries. In addition, in some countries the number of McDonald's restaurants exceeds that of Subway, particularly in China and Japan as well as Europe and South America. Subway, in turn, dominates in Australia, India, Russia, and the United Kingdom as well as North and Central America. The United States is the single largest market segment for both companies.
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