So many people thought the last blog post was wrong that I need to take it seriously. Several Europeans who claimed direct knowledge of the traffic in that McDonalds in Milan suggested it was profitable.
One person tartly tweeted that my post was from the "Thomas Friedman school of observing something inconsequential and developing an unverifiable explanation".
Here is how I thought about it...
Here is the P&L from McDonalds in 2014.
I am assuming this was a company owned store - and I will not allow any of the generalised SG&A to be billed back to this store.
Company stores had 18.17 billion in revenue and 15.29 billion in direct costs (listed as food and paper, payroll and occupancy etc). This is about an 18 percent margin.
This store was (ignoring Venice*) in the most expensive place to operate in Northern Italy. I roughly knew these numbers and it was almost inconceivable to me that this store isn't 18 percent worse than the average MickeyD's in terms of operating costs or the like.
That suggests the received wisdom about the lack of competitiveness of certain European countries (and the need for an internal devaluation or deflation) is wrong. Staggeringly wrong. Now whilst I am bullish on many European names and I am here looking for prospective investments but I am far from that bullish.
I come from another expensive country (Australia) where cost-competitiveness doesn't look all that good. McDonalds has only closed a few stores - but it has downsized several in high cost areas near me. A small high-cost store seems to be acceptable. A large one, not so much.
The store in the high-cost but highly trafficked Bondi Beach is small. It never looks profitable, but I may be wrong there too.
*Venice is a frighteningly expensive special case at least in part because the logistics are difficult.
An alert reader tells me that this site has a history of concessional rent - and has been the subject of legal action. http://www.reuters.com/article/2012/10/16/us-mcdonalds-milan-idUSBRE89F1BP20121016
Maybe that explains it.