In late February, THL Partners agreed to take CKE Restaurants (CKR) private in a transaction worth $694 million. CKE operates both Hardees and Carl’s Jr Restaurants. As you can see from the chart below, CKE operates about 3100 locations whereas McDonalds (MCD) operates nearly 32,000.
My first impression of the CKE deal was, “Wow, that doesn’t seem like much.” So I ran the math. Effectively, CKE was paid $478,799 per location. I wondered how this compared to McDonalds? McDonalds has around 32,000 total locations and a market capitalization of $75.8 billion. This equates to nearly $5.9 million per location. Please note that some liberties and assumptions were needed to make an apples-to-apples comparison. You can see these assumptions in the chart below.
| Note | |||
| Hardees Company Stores | 416 | ||
| Hardees Franchised Stores | 779 | ||
| Carl’s Jr Company Stores | 482 | ||
| Carl’s Jr Franchised Stores | 1426 | ||
| Total Company Stores | 898 | 29% of total stores | |
| Total Franchised Stores | ‘ 2205 | ||
| CKE Restaurants Selling Price | $ 693,900,000 | ||
| # Stores * | 1449 | formula = franchised location = 25% value of company store | |
| Value per store | $ 478,882 | ||
| McDonalds Market Value 2008 | $ 75,800,000,000 | ||
| # Franchise Stores | 25,465 | ||
| # company stores | 6,502 | 20% of total stores | |
| # stores * | 12,868 | formula = franchised location = 25% value of company store | |
| Value per store | $ 5,890,467 | ||
What is interesting in this comparison is that McDonald’s business model and Hardees’ business model are very similar. They both serve hamburger-hungry consumers. They market differently and price differently, however, they have very similar menus and covet the same 20-something male customer.
So how can McDonald’s business model yield ten times the value? Here are some key differences in their models:
- McDonald’s market share of total fast food market 19%
- CKE’s market share of total fast food market is under 1%
- McDonalds is the world’s largest owner of corner lots and owns thousands of it’s locations which it leases back to franchisees
- CKE does not own real estate
- CKE choose to divide into two brands Hardees and Carl’s Jr.
- According to McDonald’s 2008 annual report, it spent $2.355B on selling related items on $16.560B in sales or 14.2%
- According to Hardees’s franchise offering circular, each store is required to spend 5.8% (plus an unknown regional contribution) of sales on advertising
- The Golden Arches are one of the world’s most recognizable symbols or brand while Hardees has nothing comparable
An entire book could be written why McDonald’s business model is better than Carl’s Jr’s business model. However, the message of this posting is to illustrate how two very similar businesses and business models can yield very different financial results for their owners. Let’s hope that the new CKE owners can innovate the business model to create a market value closer to McDonald’s.
Notes:
* Due to franchise revenue accounting differences an assumption had to be made as to the value of a franchised location vs. a company location. For our computation, a franchised location was valued at 25% of a company location.
