An important point about owning the franchise real estate: a rental agreement is far stronger for the landowner than a franchise agreement is for a franchiser. The McDonald's franchise agreement specifies the address the franchise must be located. In effect, McDonald's can cancel a franchise agreement by ending the rental agreement. This gives them enormous power to enforce company-wide standards on cleanliness and mandate suppliers. Other chains (eg: Burger King) do not own the majority of their franchise properties and have had more significant problems with enforcing franchise standards.<p>Source: McDonald's: Behind The Arches, John F. Love (July 1, 1995)<p>Edit: changed ie to eg, thanks for the correction all
What impresses me most about McDonald's is the highly effective and efficient incentive structure. You have the franchise owner who is very committed financially and can make a high income, plus lots of low cost labor following a very precise process. And they seem to be able to replicate it at almost any scale.<p>What impresses me least about McDonald's is their ruthless child-targeted advertising.<p>EDIT: in sort of a quaint way the incentive structure is reminiscent of the manorial system.
Watch <i>The Founder</i>,<p><a href="http://www.imdb.com/title/tt4276820/" rel="nofollow">http://www.imdb.com/title/tt4276820/</a><p>for an entertaining and educational dramatization of the McDonald's story, including the franchising and real estate leasing aspects.
It was an eye-opener for me when I was a teen and bought a gallon of soft drink syrup from a McDonald's for use at a party. It worked out to about 5 cents a cup for the drink in a soft drink, which sold for 75 cents (if I remember correctly). McDonald's doesn't make money selling burgers, they make money selling the soft drinks and the fries.<p>The same goes for any restaurant, it's why they ply you for drinks.
The Founder is a movie that tells the story of the birth and growth of McDonald's (<a href="https://www.rottentomatoes.com/m/the_founder/" rel="nofollow">https://www.rottentomatoes.com/m/the_founder/</a>), and it covers much of the ground covered in this article.<p>In addition to being a very well-done movie, it does a superb job of describing the relationship between the visionary founders of a startup, and the sales guys and bean counters who turn it into a successful business. It doesn't matter that the McDonald brothers were revolutionizing burgers, the telling of this part of the story captures perfectly the same sort of activity that goes on at any startup with a new idea, (emphasis on new). It also captures very well how the suits recognize a good thing when they see it, buy into the vision (but for very different reasons from the founders), and finally take over and render the founders obsolete.<p>Really great movie for anyone involved with startups.
Kind of OT but the company I work for has more locations than McDonalds, and Walmart. Not combined but separate. Which baffles me. When I first started here I never knew what went into a retail store, from architecture, construction, store layout, buying, merchandising, it's insane... We call our headquarters the 'Store Support Center' because our mission is to support all 16,000 if our stores nationwide and a few in Canada.
Misleading. Sure, <i>technically</i> McDonald's doesn't make much money from selling burgers because most of the burgers are sold by franchisees. But by the same argument, Amazon doesn't make any money from selling EC2 instances -- those are sold by Amazon Web Services Inc.<p>When people talk about McDonald's "selling burgers", what they mean is McDonald's <i>and its franchisees</i>.
I just watched "The Founder" last night. I had always assumed Ray Kroc was the genius who pivoted to focusing on real estate for their expanding franchise model when really it was Harry J. Sonneborn who convinced Ray that was the way to go. Worth a watch.
Well now I'm pretty curious, how does McDonald's operate all of their distribution channels with the whole franchise/renting model? Most of the Micky D's I've seen have tons of freezer food that they put through various machines to make all of the food items quickly. I can't imagine they let owners get their primary products from anything other than a distribution center. Do the owners need to buy those products separately? Can they buy from alternate distributors? Do they franchise their distribution somehow? Maybe I'm overthinking all of this. But I am genuinely curious how that factors into the franchise model since that means McDonalds is still very liable for food production.
This has been well know for a long time. However the fact is the only reason that McDonalds is able to collect rent (in the dollar amount that they do) is if their product and service, the franchise, is able to sell hamburgers to customers. As such the value of the real estate (if the franchise fails to operate) is nowhere near what it is with a profitable operating restaurant. While the locations are valuable if you have ever seen a vacant McDonalds, and who typically rents those, you will know that the rent received and royalties is nowhere near what it is with a McDonalds restaurant.<p>So I think it's a bit misleading and hyperbole to say 'how they really make money'. The only reason the can make that money is because of the product and the customer base that patronizes the McDonalds. So in the end it is because of the product. "How they really make their money" is because of that product.
McDonald's business model of renting premises to their franchisees sounds similar to the way many pubs are operated in the UK.<p>Breweries (and "PubCo's") typically own the premises, which is leased to a tenant (publican) who is required to purchase the brewery's products.<p><a href="https://en.wikipedia.org/wiki/Tied_house" rel="nofollow">https://en.wikipedia.org/wiki/Tied_house</a>
One of the core arguments of article is misleading, since it claims McDonald's is a real estate company based on the share of Net Income coming from owned versus franchised restaurants. The share of Net Income is a misleading comparison, because
(1)it fails to account for the cost of capital associated in owning real estate
(2) over 85% of McDonalds are franchised, the remaining 15% produce all of that income, so even on this misleading basis of just considering net income, the profits are more balanced than the article makes it appear.<p>- percent franchised vs owned <a href="https://www.fool.com/investing/general/2016/04/03/what-percentage-of-mcdonalds-restaurants-are-owned.aspx" rel="nofollow">https://www.fool.com/investing/general/2016/04/03/what-perce...</a><p>- quote from article that is misleading"Of that $18.2 billion generated by company-operated stores in 2014, the corporation keeps just $2.9 billion. Of the $9.2 billion coming from franchisees, the corporation keeps $7.6 billion."
I remember watching a documentary a few years back where Ronald was talking to some uni grads telling them that in reality he's one of the largest real estate owners globally since the trend is to OWN the space they occupy and not just rent.<p>Well, if one thinks of how many of these burger joints..<p>And yes the burgers also make some good money ;)
20 years ago when I did some consulting for the Gap, I saw inside their data systems and realized they were a large real estate organization. It was the first time I witnessed the dynamic nature of corporate America.
Sure, but the burgers are a critical component of the whole picture.<p>It's almost like saying that grocery stores are not really in the grocery business, they are in the business of accepting cash and credit card payments. True, that's where they "make their money", but that business would dry up pretty quick if they didn't stock groceries.
Off topic: I've trained myself to look for a McDonald's first when in a pinch and need coffee. This vs looking for a Pete's or a Starbucks.<p>If all you need is a basic drink, they get it more or less right for several hundreds of a percent lower.
If you're ever at a meetup, and the presenter dances around the question: "How does your company make money?" then ask yourself, is it possible that this company is in marketing/advertising? More generally, ask yourself: Does this company's operations give it high quality information about a particular market?<p>The takeaway: Don't dismiss a useful service that you can't directly monetize. It's possible that you can gain high-quality information which can be monetized indirectly. It's all about getting better information about a particular market than everyone else.
"They used to hold the promise of good fast-food but now the food is neither fast, nor good. In fact, in 2014, the average drive-thru wait time was over three minutes (the longest it has ever been in about 15 years)."<p>Nobody goes there anymore. It's too crowded.<p>I know it's a serious worry, but seems like one of those good problems to have.
The site is getting slow, so here you go : <a href="http://webcache.googleusercontent.com/search?q=cache:http://blog.wallstreetsurvivor.com/2015/10/08/mcdonalds-beyond-the-burger/" rel="nofollow">http://webcache.googleusercontent.com/search?q=cache:http://...</a>
I thought about this recently when a new cafe opened up in a prime location (replacing another cafe). The rent must be enormous, and it occurred to me that no matter how good or efficient the cafe operates, the rent will probably simply rise until the cafe is merely earning at average market rates.<p>I found that rather depressing. All those people struggling to improve their business are merely struggling to increase the income of the property owner. (I guess if I had the money and inspiration to become a property owner it would be less depressing).
I heard a professor tell a story about the founder of McDonalds going to a business class as a guest. He asked the students "What business am I in? Can anyone tell me?" and they all laughed, "why hamburgers of course". Then he corrected them. They're not just in real estate but they are very, very good at selecting franchise locations. The professor also claimed that Burger King's primary consideration on where to put their stores is the relative distance to McDonalds.
>During the 2008 recession, McDonald’s leaned heavily on this facet of their business as they capitalized on an anemic property market – buying up more of the land and buildings where it operates.<p>I think a lot of why real estate works for them is that the business is not affected by recessions - they may even sell more burgers if people can't afford fancy places. So they can buy real estate cheap when others can't.
This doesn't preclude McDonalds from holding risk. For a long time people said "Buy Kmart and Sears because the value of their real estate is more than their stock values." Then the real estate market tanks.... Real estate is an illiquid investment.<p>Also - when people choose to eat less burgers, or there is less innovation in the menu, the stock price dips.
Reminds me of the story of Family Video: <a href="https://www.forbes.com/sites/noahkirsch/2017/02/21/the-last-video-chain-the-inside-story-of-family-video-and-its-400-million-owner/#2d813359da60" rel="nofollow">https://www.forbes.com/sites/noahkirsch/2017/02/21/the-last-...</a>
Along similar lines... with Donkin Donuts<p><a href="https://www.bostonglobe.com/magazine/2014/09/17/the-secret-world-dunkin-donuts-franchise-kings/pb2UmxauJrZv08wcBig6CO/story.html" rel="nofollow">https://www.bostonglobe.com/magazine/2014/09/17/the-secret-w...</a>
Many times I get cold and cardboard crispy chickens. It sucks. And 99% of the time it's from the drive thru..<p>I've been to multiple understaffed McDonald's and man does the quality suck. When they have staff things are decent but now I can predict when a McDonald's will be bad.
This is somewhat false. McDonalds amassed all of this real estate during the normal course of doing its main business. It would be like saying Walmart is in the shelf business because they have a lot of shelves. If amassing large amounts of real estate is the end goal, selling burgers for 50 years is probably not the best way to do it. I think McDonalds fears that if it spins off its real estate holdings, those properties will have no loyalty to McDonalds and could become a Starbucks or whatever. The value that McDonalds provides is that it is everywhere and at low prices. If it isn't everywhere, then it can't provide low prices and the whole thing crumbles.
I wonder why this is sitting at the stop when the MS critique with less votes in less time in at the bottom of the page?<p>Hacker News story placement can be confusing at times. I would understand if they have some tech centric metric somehow, but this isn't even tech?