How McDonald’s Took Over The World (With Property, Not Burgers)
What would you guess is McDonald’s biggest source of income?
- French fries
- None of the above
If you’ve already figured out where this article is going, then you know that the correct answer is D – McDonald’s earns mere pennies from the beloved food items it sells.
The real money is in real estate. And McDonald’s has one of the biggest property portfolios in the world.
With a $30 billion real estate empire, the McDonald’s strategy merits a closer look.
Ronald McDonald's Real Business Model
Most franchises work by licensing out the right to use a company’s trademark, the right to run a business as an extension of a larger corporation.
Franchisees pay royalties to the franchisor as a fee for the right to operate. Some support for the facility comes from corporate and the franchisee must operate the business according to the corporation’s strategy.
But McDonald’s started doing things a little differently almost from the beginning.
The company started franchising in 1956 with a clear vision of using property to accrue wealth, not just burger sales. Ever since then, the method has remained virtually unchanged.
McDonald’s purchases property and finances it with long-term fixed rates. In turn, the company leases the property to franchisees at a considerable markup, basically renting out their own properties to run their own business.
The sale of all those burgers and fries by the franchisee-operated restaurants goes towards rent of the property.
Why It's Worked
This rent is paid in addition to royalties and other fees such as for advertising. Keep in mind, however, that the royalties are rather negligible compared to other franchising methods.
McDonald’s doesn’t need to charge exorbitant fees for others to sell burgers under their Golden Arches. All their income comes from rent.
As prices inflate, so does the amount paid in rent to corporate while corporate’s fixed payments on a property stay the same.
The result is a long-term reliable positive cash flow.
An average of 20% of income from sales goes to rent. Lease clauses often stipulate a minimum amount so that there is always something coming in. Even when sales slow down, that rental income remains constant.
It also works out well that the franchisees bear all the operating costs. Corporate doesn’t feel any of that bite.
In fact, company-run McDonald’s restaurants bring in a lot in sales, but around 85% of that income goes right back into the operating costs. So it makes sense to have thousands of other franchisee locations taking care of their own expenses and sending back to corporate a portion of profits in rent.
With some 36,000 locations around the world and only a handful of them being directly owned and operated by corporate, McDonald’s is essentially running a 30,000+ unit apartment complex.
And their classic burgers simply help their tenants to afford the rent.
Lessons From Mickey Dee's
There are a few good takeaway points from Macca’s methods.
Diversifying reduces financial risk
McDonald’s is both a real estate giant and a fast-food tycoon. They franchise a popular brand, sell a beloved product and earn rental income all in one package deal.
Investing in rental property is great additional income
So what if burgers don’t sell very well for a time? Or competition increases? That rent money is still pouring in.
Take advantage of tax advantages
Their property depreciates (but technically it doesn’t) and they take advantage of that.
Mickey Dee’s is a United States-based company in which the country’s tax laws allow depreciation tax breaks to apply to property despite the fact that real estate usually grows in value over time. No one knows for sure exactly how much this may have saved McDonald’s but one can guess it’s quite a bit!
To learn more about how you can break into property investment and explore your finance options, contact Funding Options.
– Dom Cassisi, Managing Director