McDonald's: The Secret Real Estate Mogul

Learn how McDonald's is actually a real estate company disguised as a burger company.

Like any other big restaurant chain, Mcdonald's has 40000 chains spread out over the entire world, but what if I told you it’s the 5th most prominent real estate holder globally.

Most people know Mcdonald's as a burger company, and I felt like this for most of my time until I came across the book Rich Dad Poor Dad. Reading the book made me curious about how McDonald’s works as a real estate company. As I read more about it, I discovered some fantastic stats.

Whether you are a fan of their food, you will become a fan of their business model.

1st, let’s discuss what a franchise is??

A franchise is a type of business owned and operated by an individual (franchisee) but branded and overseen by a much larger—usually national or multinational—company (the franchisor). Ex-Pizza Hut, KFC, Patanjali etc.

Most franchise-based companies get money from rent or royalties from their brand name and trademarked menu items by taking a cut from the sales, but they have to operate by the rules set by the company.

For example- McDonald’s has strict control over its burger-making process and the order the owners must follow. It also has Hamburger University to train the business owners on how to run these stores.

But what made McDonald’s unique is that they get more money from the rent the franchisee owners give than the burgers sold in those restaurants.

In 2021, around 85% of McDonald's profit came from these franchises.

Let me explain how it works!!! 

What McDonald’s does is that it buys real estate in the best locations, and whenever someone comes to buy their franchisee, then they give that piece of real estate to them and advise them to operate on that piece of real estate. Since these locations are some of the most prime locations worldwide, few deny them.

It leases out these franchisees for around 20 years and regularly collects revenue from them in rents, making McDonald’s the landlord of its franchisees.

So,

 Other Franchisees Revenue= Royalty sales. (from their trademark items)

McDonald’s revenue= Rent + Royalty Sales ( where Rent > Royalty Sales ); this sets McDonald’s apart from others.

Owning the real estate also gives McDonald’s more control over franchisee owners when they can easily kick out the owner if he does not obey his orders, just as an owner can easily keep out his tenant.

If any restaurant does not work out, they can sell the land. Land value also does not depreciate like cars or bikes. So, all in all, they have established an economic moat around their business.

As it is said, the movie The Founder ( movie based upon Mcdonald's)

“You don’t build an empire off a 1.4% cut of a 15-cent hamburger; you build it by owning the land on which that burger is cooked.”

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

Hence we can conclude that their main business is real estate, and their side business is food. 

Let’s look at a few stats and simultaneously analyze some more points.

Let’s see some stats-

• Franchisees own 93% of McDonald's stores, and the remaining by the company. Hence McDonald's receives rent from 93% of its stores.

Analysis: The number of company-owned stores was 15% in 2015, but now it’s only 7% which shows the company does not want to own stores by itself but rather rent its lands to franchisees. 

It costs way more money to run your store than sit back and collect cash. 

• Company-owned stores make 47% of revenue, but why is the company shifting away from it??

Analysis: The profits from company-owned stores are only 14% of the revenue but from rented stores is 80% of revenue hence it is more logical to give rent.

7% of company-operated stores made a revenue of $8.1 billion in 2020; they made a profit of only $1.15 billion because expenses stood at $6.9 billion. On the other hand, while 93% of the franchise-operated stores made a revenue of $10.7 billion, profit stood at $8.5 billion because it cost McDonald’s only $2.2 million to run these outlets. 

Bonus Stats:

• It is the 5th most prominent real estate owner globally, with assets amounting to 40 billion USD.

• It owns 55% of the land and 80% of the buildings.

•  Franchisee-run stores generate 65% from rent and 35% from the burger sales commission.

• A New McDonald's Opens Every 14.5 Hours

So whenever you are analyzing McDonald's stock,  remember you will be exposed to two industries- real estate and food.

But to start a McDonald's outlet, franchisees have to pay an upfront fee of around 1.5 to 2.5 million USD and have to follow the rigid rules set by McDonald's. So why do they start under such conditions?? (In US)

The average revenue from a McDonald’s store is 2.7 million USD and 150k profit per year. Hence, despite risks, it is a relatively safe bet to open a McDonald's store compared to starting a restaurant from scratch because of McDonald's brand visibility and support. Facts also say that during covid 85% of restaurants were supposed to be closed. Also, they get help from McDonald’s in case of crisis.

At last, one question might be popping up in everyone’s head.

How does Mcdonald's select the best Real Estate locations??

McDonald's uses traffic analysis, walking patterns, and census data to identify promising real estate locations.

An ideal location has:

◻️50k+ sqft

◻️Corner or corner wrap with signage on two major streets.

◻️Signalised intersection

◻️Build height of 23ft

◻️Parking lot potential

What do you think of this real estate Mogul? Do you like their business model? Do comment down your opinions.