Published: Friday, November 27, 2020
McDonald's and Subway are two of the world's largest international fast food restaurant chains. Each company possesses astrong brand and is an established name inthe casualeating restaurant industry.With 40,953 locations worldwide, Subway beats outMcDonald's as the largest global chain. McDonald's currently has 37,855 locations globally. So, what'sbehind this difference in global positioning? And, are the differences meaningful beyond a number of restaurants?
Ownership Structure
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 Exchangeand it hasbeenincluded in the Dow Jones Industrial Average (DJIA) since 1985 due to its market capitalization and its position in theindustry. In contrast, Subway is owned and operated by theprivate company Doctors' Associates Incorporated.
The McDonald's brand is much more valuable than that of Subway despite both companies ranked among the world's most valuable brands, according to Forbes, up to 2018, when Subway was dropped from the list. Regular, open publication of the company's financials improves itsaccess to capital which, in turn, provides more opportunities to strengthen the company's brand, a key factorbehind its continued strongfinancial results. So, it seems that brand value alone does not explain the difference between the chain size of the two companies.
Investment and Capital Resources
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. AllSubway stores are franchised.The company itself does not own any Subway restaurants. McDonald's owns about 20%of its restaurants, with the remaining80% owned and operated by independent franchisees.
Expertise gained from operating company-owned outlets enables parent companiesto improve the operating standards of the whole franchise chain. At the same time, the existenceof company-owned stores in McDonald's business structure places certain restrictions on its expansion capabilities. For example, aconventional 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 limittheability for expansion at the rate of other chains, like Subway.
Fee Structures
We have already discussed that thebusiness models of both companies are focused on franchising. A franchise license is an authorization granted by a company to an individual that enables the franchiseeto maintain control over purchasing, employment, pricing, and marketing decisions. To securea franchise license, the franchisee pays a set of fees to the parent company. Thefranchise fees to open a new McDonald's restaurant are much greaterthan that of a Subway restaurant. Thetotal investment needed to open a new McDonald's restaurant ranges from $1,215,000 to $1,945,000 plus an initial fee of $45,000, while theopening costs of a new Subway range from $116,000 to $263,000 withaninitial fee of $15,000. Thus, Subway is much more affordable for small entrepreneurs.
Geographic Segments
While the preceding factors speak to why the number of Subway locations exceeds that of McDonald's, the datareveals thatMcDonald's, with stores in 113 countries, has a broader geographic representation than Subway, which has stores in107 countries. In addition, insome countries, the number of McDonald's restaurants exceeds that ofSubway, particularly in China and Japan as well as Europe andSouth America. Subway, in turn, dominates in Australia, India, and the United Kingdom as well asNorth and Central America. The United States is the single largest market segment for both companies.
