Collection: Warren Buffett - #114 Investing 'McDonald's vs. Dairy Queen'


Video Link: https://youtu.be/BX_b6TORdMw


In this episode, Warren Buffett and Charlie Munger were asked to explain on the major differences in the investment territories fixed between McDonald’s and Dairy Queen?


In this episode, you’ll learn:

  • What is the difference between McDonald's and Dairy Queen.

  • What is the similarity between McDonald's and Dairy Queen.

  • What attracted Buffett and Munger to invest in Dairy Queen.

  • What is the ultimate goal of a franchise operation.

To check out all Collection: Warren Buffett <click here>

[Transcript]

(Source: https://buffett.cnbc.com/video/1998/05/04/afternoon-session---1998-berkshire-hathaway-annual-meeting.html)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:09

My name is Jorge Gobbi (PH) from Zurich, Switzerland and my question refers to food businesses, mainly McDonald’s and Dairy Queen.


Are there major differences in the investment territories fixed between McDonald’s and Dairy Queen? And if yes, would you explain them?


WARREN BUFFETT 00:28

Yeah, there are major differences. McDonald’s owns, perhaps, in the area of a third of all locations worldwide. I can’t tell you the exact percentage, but if they’ve got 23,000 outlets, they own many, many thousands of them, and operate them. And then of the remainder, they own a very high percentage and lease them to their operators, their franchisees.


So they have a very large investment, on which they get very good returns, in physical facilities all over the world.


Dairy Queen has — counting Orange Julius— 6,000-plus operations, of which 30-odd are operated by the company. And even those, some are in joint ventures or partnerships.


So the investment in fixed assets is dramatically different between the two.


The fixed-assets investment by the franchisee, or the person — his landlord — obviously is significant at a Dairy Queen. But it’s not significant to the company as the franchisor, so that the capital employed in Dairy Queen is relatively small compared to the capital employed in McDonald’s.


But McDonald’s also makes a lot of money out of owning those locations and receives —


Whereas Dairy Queen will, in most cases, receive 4 percent of the franchisee’s sales, in terms of a royalty, at a McDonald’s there’s that — there’s more than that percentage, plus rentals and so on.


So they’re two different — very different — economic models. They both depend on the success of the franchisee in the end. I mean, you have to have a good business for the franchisee to, over time, have a good business for the parent company. Both companies have that situation to deal with. Charlie?


CHARLIE MUNGER 02:36

I’ve got nothing to add. The 4 percent is not very much when you stop to think about providing a group of franchisees with a nationally recognized brand, and quality control, and all sorts of desirable business aids.


WARREN BUFFETT 02:58

No, 4 percent is at the low — if you look at the whole industry — 4 percent is in the lower part of the range. But it works fine —


CHARLIE MUNGER 03:08

Part of what attracted us was the fact that the charges to the franchisees are low at Dairy Queen.


WARREN BUFFETT 03:15

A successful franchisee can sell his operation for significantly more than he has invested in tangible assets. And we want it that way, obviously, because that means he’s got a successful business, and it means that, over time, we will have a successful business.


You want — you want a franchise operation — you want the franchise operator to make money and you want him to create a capital asset that’s worth more than he’s put in it. That’s the goal. Area 4.

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