Wait, Who Has A Real Estate Empire?
The Economics of McDonald's will shock you
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When you think of McDonald’s, you think of a fast food franchise that became famous for the Big Mac. In fact, you would probably assume that McDonald’s makes all of its money from the sell of their famous Big Macs.
However, McDonald’s is actually one of the largest real estate holding companies in the world not a fast food company. The Real Estate company is worth a staggering $42 Billion while $20 billion of that is rent money from their franchisees.
McDonald’s has 39,000 restaurants that are in 100+ countries. The interesting part is that McDonald’s owns 55% of the land under the locations along with 80% of the buildings. Their $42B real estate holdings are 80%+ of total assets and can be thought of like apartment buildings.
The story of McDonald’s starts with the controversial takeover of Ray Kroc from the McDonald brothers.
As Ray Kroc said, “I was an overnight success alright, but 30 years is a long, long night.”
In 1954, he visited a restaurant in San Bernardino, California that had purchased several Multimixers. There he found a small but successful restaurant run by brothers Dick and Mac McDonald. Kroc was stunned by the effectiveness of their operation. The McDonald’s brothers produced a limited menu, concentrating on just a few items burgers, fries and, drinks. This created a focus on quick and good service which might be laughable to some today.
The McDonald brothers were looking for a new franchising agent. This allowed Ray Kroc to seize on the moment that he has been waiting for all his life.
In 1955, he founded McDonald’s System, Inc., a predecessor of the McDonald’s Corporation, and six years later bought the exclusive rights to the McDonald’s name and operating system.
The original model that Ray Kroc used was to charge an initial franchise fee, escalating royalty payments, and selling them marked up supplies. This made the franchisees upset with the way things were going. (Keep in mind Franchises were a new thing)
This led to Ray Kroc turning to Harry J. Sonneborn who created the genius real estate model for the fast food chain. Kroc and Sonneborn decided that McDonald’s would be landlords and no longer in the food business.
Kroc and Sonneborn launched McDonald's Franchise Realty Corp in 1956. They started buying real estate and leasing it to franchisees with a 40% markup. Most importantly, if the upset franchisees didn’t like the rules then they would be evicted.
"We are not in the food business. We are in the real estate business. The only reason we sell $0.15 burgers is because they are the greatest producer of revenue from which our tenants can pay us rent."
-Harry J. Sonneborn on McDonalds in 1958
In 2020, McDonald's made $10.7B in revenue from franchisees. Rent was 64% ($6.8B) of that figure (rent is 35% of all the revenue).
McDonald’s will charge between 8-15% of franchise sales for rent at each location.
For example, if your local McDonald’s makes $100,000 this month, they will automatically pay corporate $10,000 for rent!
Overall, McDonald's made $19.2B in 2020 which was between: franchisee-ran stores (55%) and company-ran stores (45%).
The Franchise model is incredibly more profitable for McDonald's due to 79% operating margins vs. only 14% operating margins for company-owned stores.
McDonald's uses company-owned locations to test new food along with new technology before rolling them out to franchisees.
With McDonald’s being a real estate company, they put a massive emphasis on finding the right location to build a new McDonald’s. They have a huge team that works on this every single day. They use walking/traffic data, census data, and the potential growth of the area. Some of the things that they for for in a lot is: 50,000 square feet, a big area to put the Golden Arch signs, building height of at least 23 feet, and big parking lot potential.
Keep in mind that I did not discuss the % of money that McDonald’s gets from franchisees using their logo and selling their products.
Next time you are in a McDonald’s and you wonder why the service is so bad, you need to think about my newsletter. McDonald’s Corporation only cares about the rent not the actually everyday operations.
I hope everyone has a great rest of the week!
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Stay Hungry, Stay Long