ANALYZING THE PROFITABILITY OF TWO RESTAURANT CHAINS. Analyzing the profitability of restaurants requires consideration of their strategies with respect to ownership of restaurants versus franchising. Firms that own and operate their restaurants report the assets and financing of those restaurants on their bal- ance sheets and the revenues and operating expenses of the restaurants on their income statements. Firms that franchise their restaurants to others (that is, franchisees) often own the land and buildings of franchised restaurants and lease them to the franchisees. The income statement includes fees received from franchisees in the form of license fees for using the franchiser's name; rent for facilities and equipment; and various fees for adver- tising, menu planning, and food and paper products used by the franchisee. The revenues and operating expenses of the franchised restaurants appear on the financial statements of the franchisees.
Exhibit 4.42 presents profitability ratios and other data for Brinker International, and Exhibit 4.43 presents similar data for McDonald's. Brinker operates chains of specialty sit-down restaurants in the United States under the names of Chili's, Romano's Macaroni Grill, On the Border, Maggiano's Little Italy, and Corner Bakery Cafe. Its restaurants aver- age approximately 7,000 square feet. Brinker owns and operates approximately 81 percent of its restaurants. McDonald's operates chains of fast-food restaurants in the United States and other countries under the names of McDonald's, Boston Market, Chipotle Mexican Grill, and Donatos Pizza. Its restaurants average approximately 2,800 square feet. McDonald's owns and operates approximately 29 percent of its restaurants. It also owns approximately 25 percent of the restaurant land and buildings of franchisees. The financial ratios and other data in Exhibits 4.42 and 4.43 reflect the capitalization of operating leases in property, plant, and equipment and long-term debt, a topic discussed in Chapter 6.
Required
a. Suggest reasons for the changes in the profitability of Brinker during the three-year period.
b. Suggest reasons for the changes in the profitability of McDonald's during the three- year period.
c. Suggest reasons for differences in the profitability of Brinker and McDonald's dur- ing the three-year period.
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.