The $3 billion Burrito business that’s got everyone talking

Headlines have been dominated in the past week by the listing of Mexican fast-food chain Guzman y Gomez (GYG). It is the most successful listing of an Australian business in three years.
 
What’s more, the share price was listed at $22 per share and quickly jumped to $30 per share, pushing the value of the company to a whopping $3 billion.
 
Founded in 2006, the GYG brand currently has 124 outlets across the country plus 16 overseas (140 in total). The company is aiming to grow its footprint to 500 stores in the next few years and its big goal in time is to catch McDonald’s Australian presence.
 
For context, the biggest chains of fast-food businesses in Australia (by number of outlets) are:

 
As you can see, the 124 GYG stores currently operating pales in significance to some of the other big operators in Australia.
 
I like eating at Guzman y Gomez and they seem to have a very successful business when it comes to the customer experience. Outside of that, I don’t know much about running a retail business, but the investor market seems to think they have good prospects.
 
What does interest me, though, is whether GYG chooses as a business to lease all their properties, rather than own them. It turns out they opt to lease.
 
I have written previously about my admiration for the McDonald’s brand and story, and how I regard them as the model for real estate investing.
 
There are 1,000 McDonald’s in Australia and 41,200 McDonald’s globally.
 
McDonald’s only owns 2,100 of the 41,200 stores worldwide. The majority are franchised. The majority of GYG stores, on the other hand, are owned. While McDonald’s doesn’t own a big portion of its stores, it does own a big portion of the property the stores sit on.
 
The McDonald’s property empire is valued at $44 billion. They generate $25 billion in revenue each year. Of that $25 billion, $9 billion (36 per cent) comes from the rent it collects from franchised stores.
 
McDonald’s makes $10.5 billion in profit each year. Of that $10.5 billion in profit, $6 billion (57 per cent) comes from its net rental income.
 
In other words, more than half of McDonald’s profit each year comes from rent collected on the properties they own!
 
Compare that with GYG who makes $759 million in revenue and $32 million profit, none of which comes from property or property income.
 
I love the GYG brand and hope they do well – again I must emphasise that I know nothing about retail businesses.
 
But it’s hard to see the success of McDonald’s being repeated any time soon, particularly if the main reason for their success isn’t replicated.