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Flipping Burgers or Real estate? McDonalds

McDonald's doesn't make their money by selling Burgers, Fries or Mcflurries. Who would have thought this right? If this took you by surprise, then you all are in for something no less than a shocking revelation!

All my life I have only known McDonald's as the largest fast food giant, but the reality is that McDonald’s is a real estate empire shadow sided under a fast-food chain.

McDonald’s franchising system operates as a layer between the underlying real estate empire and the overtly visible fast-food operation. Peel back these layers and it's only then one would realize that the corporate entity is fundamentally more of a real estate company.

Former McDonald’s CFO,Harry J. Sonneborn,is even quoted as saying, “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”

The Start?

Let us trace back to the inception of McDonald's which had humble beginnings.The McDonald brothers first opened up a hot dog stand in 1937 in Pasadena before venturing out to open their very first restaurant.

Over time McDonald’s has grown to become a true global behemoth and holds a solid foundation all across the globe. But what's less known is their reliance on real estate only with the motive to expand the McDonald’s global economic footprint. It was this paradigm shift that resulted in what now is a multi-billion dollar property empire.

Functioning of the franchising system: A series of ingenious gambits

They wanted to expand the empire, but they did not outset private McDonald's outlets, on the contrary the company collaborated with interested franchisees by giving them access to its branding and operational infrastructure.

In this perfect-seeming strategic road-map, what's the catch and how would McDonald's benefit?

  • Instead of making money by selling supplies to franchisees or worse, demanding huge royalty payments the McDonald’s Corporation became the landlord to its franchisees. What they did essentially was they bought the properties and then leased them out – at large markups!

  • McDonald’s monetized their franchisees slightly differently. Rather than merely relying on food sales they diversified their revenue stream.

  • McDonald's corporate had put forth the franchise agreement in 2017 as per which franchisees operate roughly 85 percent of McDonald’s restaurants.

  • While McDonald’s revenue streams include profits from the ingredients purchased through McDonald’s corporate, they also generate substantial revenues through their lease-back program.

It is indeed a trade-off between the franchisees and the McDonald's corporation. Let us have a look at this strategic alliance.

  • The company owns some of the most iconic McDonald's locations spread across over 38,000 locations worldwide and one will for sure find an outlet in the vicinity of popular attractions across the globe such as: London's Big Ben, Time Square: Manhattan and how can I not mention India's oldest McDonald's outlet which is in Jaipur near Raj Mandir.

  • Although the franchisees pay lucrative property holdings to the McDonald's corporate but they also benefit from collective marketing and the brand image they get to be associated with in addition to the top-up incentives.

  • The substantial revenue generated from the franchisees accounts for about 82%, compared to only 16% profit gains, the company benefits from privately owned and operated outlets.

To sum it up, McDonald’s makes its money on real estate through two methods. Its real estate subsidiary will buy and sell hot properties while also collecting rents on each of its franchised locations: A win-win situation indeed!

Let us talk numbers, what exactly contributes to the modest selection of franchised restaurants that make up the McDonald's empire?

  • To talk a little on the franchising overview, approximately 93% Of McDonald’s restaurants worldwide are owned and operated by independent local business owners: Franchisees

  • Profitability of these owners depends on many factors including operating and occupancy costs, financing terms and most important and on the ability to operate the business effectively.

  • For the US market the average cost that has to be paid to the McDonald corporate is minimum of $500,000 of non-borrowed personal resources for a franchisee to be eligible.

  • If we talk about India and other international markets, decisions relating to the selection of candidates are made locally by the management in the country where the restaurant is located.

Operational Stumbling Blocks:

  • With McDonald's all of us have at some point or the other faced the issue where the food items offered vary distinctively in terms of tastes & consistent standard requirements.

  • The prime reason is because the franchise owners take control of the staff and the general day-to-day running of the store which makes it all the more hard to maintain the set customer expectations.

  • This is where the brands which have created a closer family of staff, leads to more cohesion and uniformity, ensuring consistent customer service standard; get an advantage!

By and Large:

The velocity growth plan that was initiated in 2017 has indeed worked in favor of the McDonald's corporation showing annual profits that float around $4.5 billion, according to company financial disclosures. To add to that it has more than $30 billion in real estate assets as well. The mutually beneficial relationship between the Franchisees and the McDonald's corporate has helped them to pivot quickly and efficiently.The future plan of the company is to increase the percentage of franchised restaurants so it is pretty evident that the leadership at the company is leaning in that direction anyway.

All in all this arrangement is brilliantly coherent and portends well for McDonald’s long-term growth.

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