When I first started studying business, I absolutely loved reading interesting case studies. One of the first assignments that came across my lap was a deep study into the massive success of McDonald’s — and how it built its empire.
Back then, the marketing mantra of the fast-food success story wasn’t that they sold the tastiest burgers (that‘s always clearly been Wendy’s).
It also wasn’t how they industrialized the restaurant industry with efficient fast food.
It wasn’t even about how they put extra salt and “natural beef flavor” into their fries to encourage the addictiveness of it. (Why do you think you can’t win that bet and just eat one Lay’s potato chip?)
No, at the time, the main “secret” behind McDonald’s success was thought to be their marketing efforts towards children. They sold the fun experience of McDonald’s to kids. The ball pits, the fun, colorful slides. Hell, the old Happy Meal toys are even now collector’s items worth hundreds, if not thousands of dollars.
Remember the McDonald’s Beanie Baby? I don’t. But people are willing to pay big bucks for them, apparently.
But McDonald’s has since moved onto another business model in the modern age — real estate.
McDonald’s Franchise Model
It all boils down to its franchise model. It may surprise you to learn that over 93% of their restaurants worldwide aren’t directly owned by the McDonald’s corporation.
That’s 36,059 restaurants out of a whopping total of 38,695 locations around the world run by third parties.
And there’s a good reason for them wanting to have almost all of their eateries operated by other people — boom or bust, the corporation still collects the rent.
This is great for the shareholders of McDonald’s stock — it’s gone from $1.80 in 1980 to a recent peak of $217 last year.
But it may not be good for the franchisees themselves.
We can see why below.
How much is a McDonald’s Franchise to Open in 2022?
Have you ever wondered what it takes to open up a McDonald’s in this day and age?
After tens of thousands of locations, they have the process down pat. And here’s a hint: You should already be pretty wealthy.
- Make sure you have $250,000-$500,000 in non-borrowed cash
- Have the financial stability to borrow up to $1,700,000 extra
- Pay $45,000 to McDonald’s right away
- Take a nine-month intensive training course on how to run a restaurant the McDonald’s way
- Agree to a 20-year contract for one specific location that they choose
- In that contract, agree to pay 4% of your monthly sales, plus a large flat rental fee or a rental fee based on your monthly sales
- Build up the entire interior of the location according to their specifications on your own dime — they’ve already had the property developed and the building constructed
- Buy any new equipment at your own expense for the next 20 years
With the average McDonald’s location earning around $2.7 million per year, those percentages can start adding up quickly.
So quickly, in fact, that governments are being lobbied to investigate the practice as a form of price gouging.
The Service Employees International Union states that “the chain’s rate of return on its real estate ranges from 10.5 percent to 19.3 percent — between double and triple the industry average of 5.9 percent.”
Up to a 19% return on rental property? That’s an insanely high rate of return to experience every year.
And the beauty of it for McDonald’s? They require that as a promise for an entire 20 years.
But don’t get out your tissue boxes just yet.
Although there’s a lot of hassle and expense to running a McDonald’s franchise, an active owner who works at a location can expect to take home a $108,000 salary and earn up to $150,000 from the location itself each year.
Unless the location fails, that is.
The Financials Behind the Fast-Food Chain
It gets a bit more interesting (and apparent) when you look at the most recent public financial statements.
In 2019, McDonald’s made a huge profit of $6 billion from $21 billion in revenue. A 28.5% is an astoundingly high profit margin for a restaurant.
$9.4 billion came from the 7% of locations they still own. Huge, right?
But those locations cost them almost $8 billion in direct expenses. If you add on the rest of the company’s operations, that number starts going negative.
So where did the $6 billion in net income come from? Well, just look at the other part of the revenue. It came from one very highly profitable source — the fees of franchise owners.
Another indicator of their true modern business model? We just have to take a glance at their balance sheet.
McDonald’s has an enormous $47.5 billion in total assets around the world.
And guess what $39 billion (82%) of that is?
Property and equipment — at cost.
They own all of the real estate and buildings for almost every single McDonald’s location in existence. And with almost 39,000 locations, that’s a lot of prime property around the world.
A franchisee fails at running a location? Don’t worry, just make them pay McDonald’s to get out of the contract and find another owner.
Or at worst, rent out or sell the location. Either way, they still get paid.
And that one phrase above on the financial statements — at cost? Just imagine how much the real estate is worth now after all these years and thousands of locations.
McDonald’s isn’t a fast-food company. They’re real-estate barons.
Want more fun stories? Join Pryor Thoughts for free today!
