McDonald’s is ubiquitous. No matter which country or major city you go to, you are bound to find a McDonald’s outlet. As of 2020, the company was operating 39,198 restaurants worldwide and held the title of ‘The World’s Largest Restaurant Company’. But what if, I told you, McDonald’s is a real estate empire hiding under the guise of a fast-food chain?
So how did what seems like a restaurant come to hold 41 billion dollars of real estate, and how do these landholdings fit in the overall scheme of McDonald’s business model?
While the brand has sold more than one billion hamburgers to customers around the world, 85% of its stores are owned by franchisees. Franchisees pay to use McDonald’s brand name, its proprietary processes and trademarked menu items, but unlike other franchises, McDonald’s owns the land the stores are built on.
The reason of high profitability is that it owns the land and buildings at most of its locations – and its franchisees pay McDonald’s rent. They started by leasing out to franchisees, charging a 20% markup but increased it to 40%. They were minting a lot of money. The brand also made an arrangement in the lease agreement that if the outlet was doing well, then the markup would go up. The franchisee paid the lease markup or 5% of sales, whichever was higher making McDonald’s invincible.
The chain kept expanding and McDonald’s real estate business kept growing. They expanded domestically and internationally, reaching 10,000 outlets by 1988. By 21stcentury, they had 35,000 outlets in more than 100 countries, with one McDonald’s opening every 5 hours.
The major strategy lessons for new entrepreneurs:
Try to find a growth model with minimum liabilities. In this case McDonald’s did not have the liability to pay rent yet it became one of the largest fast-food chain
As an entrepreneur, it’s important you create an alternate source of income if your original business goes down
Focus on building real assets that can provide strength if things do not work in your favor.
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