McDonald’s is Actually a Real Estate Business
McDonald’s is the most recognizable fast-food chain on the planet, without a doubt. The golden arches are more recognizable than many religious symbols and they have an ever-growing presence in over 119 countries.
It sounds unbelievable.
But, what if I told you something that was even more unbelievable.
McDonald's makes most of its money through real estate, not hamburgers.
The Drive-Up Restaraunt
Drive-up restaurants were extremely popular throughout the late 1930s and early 1940s, with many diners offering curbside delivery. With this new and exciting form of dining, you were able to eat in the comfort of your car, while stationed in front of or next to a restaurant.
This was not the fast food that we are familiar with today, however.
As you pulled up to the restaurant car stalls, waiters would come out and take your order, bringing your food out on standard, reusable dinnerware, such as the bowls and plates that you use at home. Once you completed your meal, you would then return the dirty silverware and plates and be on your way.
It was a traditional, dinner experience but in the comfort of your car.
This experience was a pure gimmick and did not provide any real value other than a unique experience. Drive-up restaurants did not save consumers time or money and they were more of a hassle than eating at a normal restaurant.
A New Idea
The origin of McDonald's begins with two people, Richard and Maurice McDonald. They had grown tired of the drive-up restaurant fad and realized that there was much more that could be done to make the experience better.
They opened a burger stand in San Bernadino, California, and used a new assembly line method to assemble their food faster and in bulk. Everything in this restaurant worked like clockwork, and they could spit out tons of burgers every few minutes. The silverware was ditched as well, and people saw a new method of eating the food directly out of the wrapper, which you simply threw away when finished.
It caught on fast and customers began coming from miles away to check out this amazing new assembly line burger stand where you ate your food out of paper. It was something that had never been seen before.
This caught the attention of Ray Kroc, a milkshake machine salesman who ventured out to the original McDonald’s restaurant to sell them some milkshake machines. He would end up convincing the McDonald’s brothers to allow him to join their company as a franchising agent, helping them expand their unique idea around the country.
While they eventually agreed, the brothers were skeptical and didn’t want to ruin the “family” aspect of their business. Kroc assured them that he would take full responsibility for these new locations, with them having nothing to worry about except their small, local burger stands. The brothers would merely be an authority figure and wouldn’t need to contribute any of the effort to grow the company.
They agreed to receive one half of one percent of sales, in exchange for Kroc having the franchising rights for McDonald's, a deal that they would later regret.
The Growth of an Empire
As time progressed, Ray Kroc realized that he was not able to franchise as many locations as he had originally hoped. Because of the economic situation, many potential franchisees backed out because they could not secure enough capital to purchase the property and construct the building.
This is when a man named Harry Sonneborn came into play.
He gave Ray Kroc an idea that would go on to make McDonald’s into the billion-dollar company that it is today.
Sonneborn convinced Ray Kroc that the real money in this business was in the real estate, not the burgers and fries. His idea was for McDonald's themselves to lease the building and property for the new locations, and then rent it out to the franchisees who were looking to open their own McDonald’s for a reasonable price.
So, McDonald's would own the land and make money off of it by leasing it to its franchisees. However, if the location was super successful, McDonald’s would take a percentage of their sales instead of making them rent the building.
It was a genius formula that has continued to pay off to this day.
A Great Business Model
When they first started this subleasing operation, McDonald's would charge an extra 20% to the people leasing the restaurant. So, for an estimate, if McDonald's paid $1000 a month for their property, they would charge the restaurant owner $1200. This upcharge rate would eventually go up to 40%, making the McDonald’s corporation even more money.
Over time, the restaurant owners would have to pay their own insurance and taxes, which McDonald’s also put an upcharge on. On top of this, they would often charge even more for locations that were doing better than others.
This strategy is why McDonald’s is still successful today. When the economy begins to go into a recession and fewer people go out to buy burgers, the company still collects the same rent amounts from store owners.
But, when the economy is doing extremely well, they make even more money by collecting based on the sales of a location. They flip and flop these two methods depending on what is going on in the economy, and they always come out on top.
Separating the Businesses
Revenues earned by food sales are not as good as they once were. Sales levels have been super inconsistent, going from highs to lows and back again all the time. Because of this, investors are actually pushing for McDonald’s to separate the real estate business and the restaurant business, where if one fails, the other still stands.
As stated in an article by the Wall Street Survivor, this could be an amazing endeavor if they decided to follow through and separate the companies.
The real estate alone would create a company with over $40 billion worth of holdings and over $9 billion in annual revenue. It would be a powerhouse and would draw in investors from across the globe, looking to get their piece of the delicious McDonald’s real estate revenue.
Regardless of their future plans, it is undeniable that McDonald’s has found the perfect formula for long term growth and annual profits. Their delicate balance between real estate and hamburger sales has created a very unique opportunity for them and that is why they continue to grow.
