Exclusive – Propel figures show collapse in McDonald’s UK franchisees’ profits: The pre-tax profit margin of 25 of McDonald’s UK’s most sizeable franchisees declined by almost 92% from £103.3m to £8.4m in 2022, as higher labour costs impacted profitability, according to analysis by Geof Collyer, of Lavender Bank Partners. The analysis, which is based on reporting by Propel over the past two months, found the 25 franchisees generated £1.27bn of sales in 2022, up 8% on the pandemic-impacted year of 2021. This generated about an extra £5m of royalty/system fees, increasing the total from just over £58m in 2021 to just over £63m in 2022. Collyer said: “Average sales per store were around £4.5m. McDonald’s UK is notoriously secretive about specific site numbers, but we estimate that there were around 250 company-operated stores in 2019, with more than 1,100 franchise stores. In FY19, pre-pandemic sales of McDonald’s UK company operated stores was reported as £726.5m, an implied sales per store of just under £3m per managed site; around one-third lower than the 25-franchisee phalanx average. The pre-tax profit margin of the 25 franchisees was down by almost 92% from £103.3m to £8.4m. Even stripping out the £7.86m of help from the UK government in FY21, which accounted for around 8% of reported pre-tax profit, that is still a big drop. Every group saw its pre-tax profit fall. Despite this, and probably because the franchisees can see the post-pandemic wood from the trees at last, with sales growing, the aggregate dividends paid were broadly flat at £15.3m, with half of the groups increasing dividends in FY22 versus FY21. It should be noted however, that 8% sales growth was below the Consumer Price Index move of 10.5%. More than 70% of franchisees grew sales by less than inflation, and despite some additional sites.” Collyer said incremental sales were partially eaten up by increased rent, but that higher labour costs did “the most damage”. He said: “As expected, aggregate labour costs rose; by twice the pace of overall sales, at 16.6%. Higher labour costs took around 200 basis points off margins, increasing aggregate staff costs by more than £50m. There was 12.1% for rent on additional sales and there was no help from the government in FY22. That left the balance to get swallowed by other operating cost pressures including worldwide food inflation and surging utility costs before arriving at a pre-tax profit down 92%. The franchisees did maintain their £15m of dividend payments, underlying the fundamental cash generative nature of the business, but an incremental sales conversion margin of 20% for the brand owner compared with a drop from almost 9% pre-tax profit margin in 2021 to 0.7% pre-tax profit margin in 2022 shows where the power of the franchise resides.” Collyer’s analysis comes as other established franchised brands have seen their UK performance comes under pressure. Earlier this month, Propel revealed Papa John’s UK & Ireland posted a pre-tax loss of £2,908,000 in the year ended 25 December 2022 (2021: £6,704,000) as it reported a 21.8% decline in like-for-like system sales during the period, which saw the exit of its second largest franchisee. Earlier this summer, the business announced a shift in its UK strategy with the acquisition of 91 sites previously operated by the M25 division of Drake Food Service International to form a portfolio of company-owned restaurants. It subsequently added a further 27 sites to its company-owned estate in the UK, bringing its total ownership to 118 restaurants. It will be interesting to see how McDonald’s UK business will benefit from also buying in franchise sites during the past 18 months, having acquired South Coast Foods (24 sites) in April, and its largest UK franchisee, Appt Corporation (43 sites) last March. Last month, Costa franchisee Sim Trava said “due to the erosion of our margin from the increased price pressures forced on us by Costa and the economy in general, in mid 2022 we entered into discussions with Costa to attempt to resolve these issues and redress the balance to allow our margins to return back to historic percentages”. The business, which operates a 31-strong Costa estate in the north west, saw overall turnover rise from £14,202,245 in 2021 to £23,312,311 last year. But a pre-tax profit of £1,037,119 turned into a loss of £689,306 and Ebitda fell from £1,914,971 to £1,432,636 as costs rose by almost £4m. The full in-depth analysis on the state of the McDonald’s UK franchisee landscape by Geof Collyer will be published this Friday (27 October) as part of Propel Premium (see details of how you can subscribe to Premium below). The 25 McDonald’s franchisee business, and Sim Trava feature in the UK Food and Beverage Franchisee Database – the first time profiles of the top food and beverage franchisees have been available in one place in the UK. The latest database, which featured 110 franchisee business, was sent out today (Wednesday, 25 October) to Premium subscribers and is sent out again bi-monthly, including new entries and updates to existing entries. Companies can now have an unlimited number of people receive access to Propel Premium for a year for £995 plus VAT – whether they are an operator or a supplier. The single subscription rate is £495 plus VAT for operators and £595 plus VAT for suppliers. Email kai.kirkman@propelinfo.com to upgrade your subscription.

Premium subscribers to have exclusive access to videos from Propel Talent and Training Conference this Friday: Propel Premium subscribers are to receive 13 exclusive videos this Friday (27 October) from Propel’s Talent and Training Conference. They feature KAM managing director Katy Moses sharing exclusive research on the key trends impacting the sector's ability to recruit and retain staff; Jordan Moore, head of talent at Gail's, on recruitment campaign based around enjoying working in hospitality while having a work-life balance, called “The Early Bird Never Works Late”; Leanne Gunson, head of learning and development at Pizza Pilgrims, on the company's academy, how it is helping it recruit and train new staff, and inspire its existing employees using outside influences; James Hacon interviewing Indian-born British chef, restaurateur, and cookbook author Asma Khan of Darjeeling Express, about the journey to opening her first restaurant, operating an all-female brigade of talented amateur chefs, paying everyone equally and what hospitality means to her; a panel of the best late-night operators discussing how the late-night sector is evolving to attract talent, featuring Adam Dilks, group people director at Nightcap, Beth Anderson, people director at Revolution Bars Group, and Chantal Wilson, people director at NQ64; a panel on the evolution of people experience through data with Phillip Eeles, co-founder of Honest Burgers, Sunaina Sethi, co-founder and people director at JKS, and Will Fraser, ex-Saracens/England Rugby player (who talks about his work in creating cultures through data); Sixty Eight People's Abi Dunn interviewing Nina Panayiodou, and Andrew O'Callaghan, operations director and people director from Dishoom, about the culture that everyone is talking about; Helen Melvin, people director at Heartwood Collection, discussing the challenges of recruiting and retaining high-class chefs; Hannah Plumb, talent and culture director at The Alchemist, talking about the opportunities and challenges of building a people culture in a different country; Olajide Alabi, equality, inclusion and well-being partner at Turtle Bay, discussing the impact of the group's Four Days at The Bay initiative, and the investment the business has made in its equality, inclusion and wellness programme; Kenny Blair, managing director of Scottish independent restaurant and bar operator Buzzworks Holdings, on creating recruitment initiatives, including its use of TikTok to find new employees; Steve Rockey, group people director at The Pig, talking about the group's chef academy and its initiatives to recruit and retain staff; and Dame Karen Jones, chair of Hawksmoor and Mowgli, talking to James McLuckie, group chief learning officer at Mapal, about what the sector does right when it comes to finding and nurturing talent, and also what it could do better. Email kai.kirkman@propelinfo.com to upgrade your subscription. Premium subscribers also receive access to six databases: the Multi-Site Database, which is produced in association with Virgate; the New Openings Database; the Propel Turnover & Profits Blue Book; the UK Food and Beverage Franchisor Database; the Who’s Who of UK Food and Beverage; and the UK Food and Beverage Franchisee Database. They also receive their morning newsletter 11 hours early, at 7pm the evening before; regular video content and regular exclusive columns from Propel group editor Mark Wingett.