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Friday, December 8, 2023

How McDonald’s Makes Cash


Interested in how McDonald’s makes cash? You would possibly assume that’s a ridiculous query. It’s a fast-food restaurant, so it makes cash from promoting burgers, fries, and different meals… proper?

A better look reveals one thing shocking: the beloved burger joint makes a shocking quantity annually, not from quick meals however from actual property leases. What’s McDonald’s, actually? A quick-food restaurant or an actual property firm?

Right here’s a have a look at how McDonald’s makes cash.

The Evolution of an Empire

To start with, McDonald’s carried out a roughly normal franchise program because it expanded throughout the nation (and ultimately the world). The company would cost an preliminary franchise price, promote provides to franchisees at a markup, and frequently escalate royalty funds to develop company income.

Not surprisingly, franchise homeowners weren’t proud of these calls for and have been hesitant to fall according to what the corporate requested.

To maintain the earnings coming in, the company wanted to discover a approach to obtain larger management of particular person franchises. McDonald’s president Harry J. Sonneborn got here up with a plan in 1956: Buy the franchise places after which lease them to franchisees at a 40% markup.

⚠️ Lease got here with a caveat: If franchise homeowners didn’t observe company steering, McDonald’s might merely evict them and lease the property to a extra compliant franchisee (or simply promote the property for a revenue). This modification would revolutionize McDonald’s income mannequin for many years to return.

McDonald’s may appear to blur the road between a fast-food chain and a real-estate firm. To Sonneborn, that line was something however blurry. He described the enterprise association this manner:

We’re not technically within the meals enterprise. We’re in the actual property enterprise. The one cause we promote $0.15 burgers is as a result of they’re the best producer of income, from which our tenants pays us lease.

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McDonald’s by the Numbers

Franchisee-operated eating places herald large quantities of income for McDonald’s: the corporate retains roughly 82% of income from franchisee-operated eating places, in comparison with simply 16% of income from company-operated places[1]. Right here’s a income breakdown from 2021[2]:

  • McDonald’s had complete income of $23.22 billion.
  • Working revenue from company-owned eating places was $1.741 billion (income was $9.788 billion).
  • Working revenue from franchises was $10.750 billion (income was $13.085 billion).

As you’ll be able to see, franchises don’t simply deliver in additional income. Their revenue margins are additionally astronomically increased. Nonetheless, the above are international statistics. Listed below are the revenue margins for places in the USA in 2021 (simply to maintain it constant)[3]:

  • Whole income from US places was $8.71 billion.
  • Working revenue from company-operated US eating places was $511 million.
  • Working revenue from US franchises was $4.906 billion.

Even somebody with just about no background in finance can see that each income and earnings from company-owned eating places pale compared to these from franchised places. It’s no shock that at present, 93% of McDonald’s places are franchises.

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An Unconventional (however Efficient) Enterprise Technique

Informal shoppers know McDonald’s as a quick meals firm. However these aware of the enterprise world see it for what it’s: an actual property firm that pulls in franchisees with the promise of fast-food income. In any case, even with the price of lease, McDonald’s franchise homeowners make a mean revenue of $150,000 per 12 months.

Even excluding the price of lease (which varies primarily based on location), McDonald’s earns a hefty sum from every franchise that opens[4]:

  • A $45,000 franchise price.
  • A 4% advertising and marketing price.
  • A 4% royalty price.
  • Franchisees sometimes signal 20-year lease agreements.

Elevated revenue isn’t the one manner how McDonald’s makes cash and advantages from a franchise-heavy enterprise mannequin. This mannequin helps the company in a number of alternative ways:

1. Resilience

A profitable enterprise is a resilient enterprise. Any quick meals company has to fret about fluctuating gross sales. For example, in instances of heavy inflation, shoppers have a tendency to chop expenditures the place they will. Which may result in gross sales which can be decrease than predicted.

The COVID-19 pandemic additionally had an influence: the whole working revenue in 2019 was $4.069 billion, which dropped to $3.789 billion in 2020[5].

How McDonald’s makes cash by renting properties to franchisees supplies the corporate with a sturdy technique to face up to durations of low gross sales. A given franchise’s gross sales would possibly fluctuate from month to month or 12 months to 12 months, however that franchise nonetheless has to pay lease to McDonald’s. And in a time when the corporate is struggling a bit, that resilience could make a significant distinction.

2. Elevated Revenue from Gross sales

You noticed above that the McDonald’s advertising and marketing charges and royalty charges are within the type of a gross sales share. That’s by design. The mix of mounted (lease) and variable (gross sales) revenue lets McDonald’s benefit from two sorts of revenue.

Due to inflation, the costs of burgers and fries frequently rise, and so does the company’s revenue.

3. A Numerous Portfolio

When you’re aware of the funding world, you realize that having a various portfolio is crucial if you wish to insulate your self from market downturns. Portfolios work equally for companies. By being considerably invested in each the quick meals and actual property industries, McDonald’s stands a greater probability of defending itself from market losses.

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4. Scaled Progress

Actual property accounts for the majority of McDonald’s income. However to proceed earning money, that enterprise mannequin needs to be scalable. Fortuitously, it’s.

By frequently opening franchises, McDonald’s is ready to develop its model with minimal money outlay. The franchisees are those who cowl working prices. And whereas McDonald’s does want the capital to buy the places, the excessive lease the corporate expenses franchisees ultimately makes the brand new places pay for themselves.

As a result of McDonald’s is a big firm with sturdy funds, it will probably pay for its actual property purchases in money or finance them at engaging charges. This makes actual property purchases cheaper than they might be for a purchaser with much less monetary clout.

This kind of substantial, scaled development has one other profit for the corporate: safety towards losses. Whereas identify recognition units franchisees up for achievement, franchises can and do fail. If numerous franchisees shut down their companies directly, McDonald’s might endure a major income hit.

How McDonald’s makes cash can be influenced by the rising variety of franchises being opened, which reduces the influence of occasional franchise closures on the company. Due to the various different monetary advantages franchises supply, McDonald’s regards the occasional closure as only a threat of doing enterprise.

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Why Not Simply Kind a Actual Property Belief?

It’s clear to traders that actual property is how McDonald’s makes cash. So logically sufficient, in 2015, traders wished the corporate to create a actual property funding belief. At first, the company thought-about it. However after a more in-depth look, executives decided it wasn’t well worth the trouble.

Pete Bensen, the corporate’s chief administrative officer, advised traders that the REIT posed “vital monetary and operational dangers” that outweighed any profit the corporate would have gained.

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An Ingenious Mannequin that Has Stood the Check of Time

The McDonald’s real-estate-heavy marketing strategy has been round because the Fifties. And in a enterprise world the place innovation reigns, that appears uncommon.

The reality is that in terms of revenue and assured management over franchises, this mannequin merely can’t be outdone. Different restaurant franchises would do properly to emulate how McDonald’s makes cash in the event that they aren’t doing so already.


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