In 1974, Ray Kroc, the founder of McDonald’s, was asked to speak to the MBA class at University of Texas at Austin. After the lecture, and impressed with the attentiveness of the students, he agreed to go for drinks with a small group.
Once the whole group had their beers in hand, Ray asked the students”What business do you think I am in?”
The students laughed until one yelled out, “Ray, who in the world does not know that you’re in the hamburger business.”
Ray met the answer with amusement and replied back “That is what I thought you would say.” He paused and then said, “ I’m not in the hamburger business. My business, Ladies and gentlemen, is real estate.
McDonalds is one of the biggest real estate companies in the world.
That’s right. The burger flipping, fast food conglomerate, operating in over 100 sovereign states is also one of the worlds largest Real Estate companies, owning all the land its restaurants operates on. Ray knew very early on that in order to grow as a business he had to be the best at flipping hamburgers. But in order to flourish, true value lied underneath the business itself, literally.
Former McDonald’s CFO, Harry J. Sonneborn, was 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.”
It is no coincidence that most McDonald stores are located in prime areas and some would even say prime real estate. Many McDonald branches are located in the busiest streets, and in the worlds biggest cities.
Franchising is a quick and efficient expansion model, adopted by fast food chains, by using money from small investors. Ray Kroc perfected new franchising techniques, increasing the corporation’s size while maintaining strict control of its products.
Instead of making money by selling supplies to franchisees or demanding huge royalties like a typical franchise agreement…the McDonald’s Corporation became the landlord to its franchisees.
They bought the properties and then leased them out – at large markups. As a landlord it collects the rent owed from the property that the tenant/franchisee operates from. As a Franchisor, it collects a percentage of the gross sales/revenue from the same tenant/franchisee .
“Today 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. McDonald’s restaurants are in over 100 countries and have probably served over 100 billion hamburgers. There are over 36,000 locations worldwide, of which only 15% are owned and operated by the McDonald’s corporation directly. The rest are franchisee-operated.” (Wall Street Survivor)
Saying it aloud makes you realize just how simple yet brilliant a model this is. McDonald didn’t merely teach a man how to fish. But also provides them with a fishing pole and boat and charges them for it. And then also takes some of the caught fish for themselves because they can. Simple yet brilliant!
During the 2008 recession, McDonald’s leaned heavily on this facet of their business as they capitalized on an anemic property market – buying up more of the land and buildings where it operates. The company owns about 45% of the land and 70% of the buildings at their 36,000+ locations (the rest is leased). Which goes to show that if strategically planned , at a time of a crisis, any right individual/entity invests in real estate.
“ I’m not in the hamburger business. My business, Ladies and gentlemen, is real estate.”
Ray Kroc, Founder of McDonalds
Needless to say it is a very smart strategy. Being able to collect on rents helps protect them from the ups and downs of the underlying business of flipping burgers. After all, as the business owner, you HAVE to make rent at the very least.
“In 2014, the McDonald’s corporation made $27.4 billion in revenues, of which fully $9.2 billion came from franchised locations and the rest ($18.2 billion) was from company-operated restaurants.”
Looking at the year 2014, of the $18.2 billion generated by stores operated by McDonalds, the corporation keeps just $2.9 billion, after accounting for operation costs and yadi-yada. Of the $9.2 billion coming from stores operated by the franchisees, McDonalds keeps $7.6 billion. Why is that? Because it costs much more to operate your own restaurant then to have someone else operate it for you. Yeah, that’s right, franchisees/tenants also cover all costs associated with running a McDonalds store.
All that time spent wondering what McDonalds secret sauce was and it turns it was commercial real estate all along, who would’ve thunk it?
The beauty of such a method is in its simplicity. In the short run, and on a micro level, start up businesses will find this method risky and maybe even costly, sure. But in the long term, the business ends up retaining the asset. So on your balance sheet “Rent” is probably replaced with “Mortgage” and what would’ve been a liability ends up being an asset. Owning real estate for the purposes of conducting business is an ideal scenario. Owning real estate for the purposes of leasing out to a business is an even more ideal scenario. Owning real estate for the purposes of leasing out to a tenant who will in return operate your BUSINESS while paying your MORTGAGE and increasing your PROFIT? Thats finger lickin’ good. Wait, that’s not right, thats not a McDonalds reference…is it? Anyway lets face it, McDonalds has had its fair share of critics when it comes to its product and even its business practices. But in terms of this strategy, it has successfully implemented it for decades, and has kept them at the helm of the fast food ship since forever. At the end of the day business is about success, and success in perpetuity. Flipping burgers, commercial success, branding, and all the other things McDonalds have done well throughout the years, have been all driven by key main factor, and thats real estate. What more can be said? Chapeau bas McDonalds, I’m lovin’ it…
…Thats more like it.