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McDonald's Real Estate: How They Really Make Their Money (2015)
- HenryBemis 9y agoI 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. Well, if one thinks of how many of these burger joints.. And yes the burgers also make some good money ;)
- kaypro 9y agoI 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.
- tptacek 9y agoThat model was only viable because Kroc found a way to scale the franchise, which the McDonald brothers had previously failed to do. Pretty much everyone involved in the early days seems to have contributed something to the ultimate success of the business. A good startup movie, by the way.
- harryh 9y agoOne of the things I really liked about the movie is that Kroc didn't actually come up with many of the ideas at all. He was just very successful at recognizing good ideas, good talent, and synthesizing them together. Traits of a good founder. Plus one on it being a good startup movie.
- WalterBright 9y agoIdeas are a dime a dozen. It's implementing them that matters.
- philliphaydon 9y ago+1 on the movie. I thought it was going to be bad but it turned out to be really good.
- elevensies 9y agoWhat 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. What impresses me least about McDonald's is their ruthless child-targeted advertising. EDIT: in sort of a quaint way the incentive structure is reminiscent of the manorial system.
- dcwca 9y agoI haven't seen child-targets marketing from them in decades here in Canada. Where do you live and what do you see?
- elevensies 9y agoAlso in Canada, I just assumed they were still doing it -- I don't watch any children-targeted media so I wouldn't see it anyway. I think I saw an ad during the hockey game last night of a kid eating a McMuffin at night. But a quick look at their youtube channel and it seems they're still at it: https://www.youtube.com/watch?v=JWMQt_-w75Y https://www.youtube.com/watch?v=JWMQt_-w75Y
- freeflight 9y ago>I just assumed they were still doing it Can't really confirm that assumption, even outside of Canada where there's no regulation in place. Last time I remember McDonald's specifically marketing to children was in the 80's, since then they've changed their marketing approach several times focusing more on how "healthy" the food supposedly is or how it's locally sourced.
- ced 9y agoI don't know about other provinces, but "In Québec, the Consumer Protection Act prohibits commercial advertising directed at children under 13 years of age." https://www.opc.gouv.qc.ca/fileadmin/media/documents/consommateur/sujet/publicite-pratique-illegale/EN_Guide_publicite_moins_de_13_ans_vf.pdf https://www.opc.gouv.qc.ca/fileadmin/media/documents/consomm...
- kjhughes 9y agoWatch The Founder, http://www.imdb.com/title/tt4276820/ http://www.imdb.com/title/tt4276820/ for an entertaining and educational dramatization of the McDonald's story, including the franchising and real estate leasing aspects.
- blackflame7000 9y agoI Second that. The Founder was a very intriguing movie.
- jason_slack 9y agoI just bought this movie yesterday. One of the things in the trailer was exactly this point of owning the real estate.
- ericabiz 9y agoI came here to suggest this. It's a must-watch if you are an entrepreneur or want to build an empire.
- samsonradu 9y agoReally glad you brought this up. It was indeed an interesting movie but I didn't really have the time to compare it with the facts. How much of what we saw was actually accurate?
- adventured 9y agoMost of the overarching premise is correct along with most of the general details of how it unfolded. Some of the darker stuff is he-said / he-said that is still debated to this day (specifically in the relationship between Kroc and the McDonald brothers).
- giarc 9y agoI happened to have read the book a month or two before watching the movie. They were very different. In Ray's biography, he passes himself off as a "My word is as good as a contract" and "When I say I'll do this, I'll stick to it." The movie interpretation has him much more ruthless.
- pjc50 9y agoSame was true for Tesco for a while - they did very well on land speculation.
- djrogers 9y agoThis has nothing to do with land speculation.
- cperciva 9y agoMisleading. Sure, technically 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. When people talk about McDonald's "selling burgers", what they mean is McDonald's and its franchisees.
- harryh 9y agoAmazon Web Services Inc. is wholly owned by Amazon, Inc. That is not true of the franchisees. That's a pretty big difference.
- maxerickson 9y agoThe fifth sentence of the article is Peel back the layers and you’ll find that the corporate entity is actually one hell of a real estate company. I don't think it is trying to mislead (or doing it by being sloppy), it's examining how McDonald's is structured (both the branded operations overall and the corporation).
- dboreham 9y ago"Retail-as-Real-Estate" plays don't always work. e.g. Sears, KMart.
- oh_sigh 9y agoSure, but McD is more distributed. Sears and KMarts are generally at malls or strip malls, so any change which negatively affects those things will affect Sears/KMart.
- tunap 9y agoLosses are useful, too! McD's has been renting a lot in my town(85331) for 5+ years now, and yet to break ground. ~6 months ago the local "fish wrapper" ran a story on this very topic. As an aside, back when oil was >$100/barrel Exxon/Mobile had numerous boarded up properties around Phoenix with For Sale/Lease signs that were neither for sale or lease, as the losses/write downs were valued to dilute the windfall profits they were raking in at that time(my source was an agent for CBRE).
- matt4077 9y agoThat makes no sense. Sure, you can make a $1 loss to save 50 cents in taxes. Or 5 cents, in the US. But why would you? Also, real estate investments don't actually have a direct impact on profits when reporting on accrual basis (as all larger companies are required to). Those costs can only be deducted over time (something like 10 years for buildings).
- tunap 9y agoForgoing revenues, potential profits and taxes on selling/leasing the property(@ pre-2008 market highs); writing off loses of rental income; property depreciation; betting on rising real estate prices(all were still chanting "buy RE, it will only go up" pre-2008). Those are some some possibilities I can think of, but IANAL or CBRE agent, but when I asked one why the blighted corners owned by the biggest earners on Wall Street during the skyrocketing RE bubble were sitting vacant for years, the answer was there was no expectation to sell or lease. And it was not a tank problem, the tanks were removed as the boards went on the windows. edit: rewording & added last point.
- TheGRS 9y agoWell 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.
- greedo 9y agoThe owner/operators purchase from approved vendors; I've been out of the game for awhile, but we bought everything through two distributors; bread products from an approved vendor, and everything else from a second vendor.
- frankydp 9y agoIt is all through one distribution vendor with regards to product now. Only plant(equipment) purchases are outside of the primary distributor now.
- greedo 9y agoIt's killing me that I can't remember the distributor! Sixteen years of working through them and my mind is a sieve. This was in SoCal, and they had the contract for almost all of the region.
- nuclear_eclipse 9y agoIn Ohio and upstate NY in the early 2000's, the distributer we used was named M&M.
- PhantomGremlin 9y agoI will guess that it was Golden State Foods. They are a supplier to McDonald's, and California is The Golden State.
- WalterBright 9y agoIt 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. The same goes for any restaurant, it's why they ply you for drinks.
- ghaff 9y agoLook at movie theaters. They make all their money to a first approximation from popcorn and soda. The movie is just the loss leader that gets people in the door. It's also where the now much-mocked "super sizing" comes from. They can up the revenue per meal while upping the cost by almost nothing.
- cat199 9y agoI'd agree if you are talking about the 'movie industry' - While yes, what you describe is true - part of this has to do with the film rights pricing which is mandated by the studios/distributors, so even if a theater wanted to structure things differently, they could not.. Of course many of the major theatre chains are also related to the studios, so it gets a bit hard to see which end is up.. but I digress
- huac 9y agoThe studios have an incentive to not overcharge as well - if the theaters go bankrupt then distribution just got a whole lot harder. But yes, the accounting in the entire movie industry needs to be taken with a pinch of salt, and perhaps some mind-altering chemicals.
- DerekL 9y ago>Of course many of the major theatre chains are also related to the studios, so it gets a bit hard to see which end is up. As far as I can tell, not in the US. Open Road Films is a joint venture of AMC and Regal, but Open Road only has about 1% of the film market. National Amusements has a controlling interest in Viacom, which owns Paramount Pictures, but National Amusements only has about 1% of North American movie theaters. None of the big US studios own any of the big 3 US theater chains.
- NicoJuicy 9y agoThe site is getting slow, so here you go : http://webcache.googleusercontent.com/search?q=cache:http://blog.wallstreetsurvivor.com/2015/10/08/mcdonalds-beyond-the-burger/ http://webcache.googleusercontent.com/search?q=cache:http://...
- towndrunk 9y agoAlong similar lines... with Donkin Donuts https://www.bostonglobe.com/magazine/2014/09/17/the-secret-world-dunkin-donuts-franchise-kings/pb2UmxauJrZv08wcBig6CO/story.html https://www.bostonglobe.com/magazine/2014/09/17/the-secret-w...
- lbsnake7 9y agoThis 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.
- yodon 9y agoWhen Starbucks went public, they explicitly told the investment community "don't invest in us because of coffee, invest in us because of real estate, we are a real estate company that happens to sell coffee"
- fuckemem 9y agoPerhaps that explains why their coffee tastes awful.
- arkades 9y agoTheir coffee tastes awful for the same reason that McD's makes awful food: it's optimized for standardization/consistency. Starbucks roasts all their coffee to relatively exorbitant degrees to cover up the inconsistency brought about by their very-multi-origin sourcing. Some Starbucks locations sell "single origin" coffee which tastes quite a bit better, if only because they don't have to hide the variance in taste and can afford not to roast it to hell.
- fuckemem 9y agoThat is interesting. Thanks. So it takes some effort to make it taste that bad. Keep up the good work SB!
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- vuln 9y agoKind 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.
- lukateake 9y agoStarbucks?
- vuln 9y agoNo. Dollar Tree, we recently acquired Family Dollar which is how our store count is so high.
- hncommenter13 9y agoHey, sorry to leave this here, but didn't see any contact info in your profile. Would love to chat with you about the dollar store industry, if you'd be so inclined. I'm particularly curious about Dollarama in Canada, if you're at all familiar with them. My email is in my profile. The basic question: why is Dollarama so much more profitable than everyone else?
- sjg007 9y agoDon't they sell seconds and then cheap generic Chinese crap?
- deleted 9y ago[deleted]
- ThomaszKrueger 9y agoAnother one is Wawa. They seem to be everywhere now.
- noer 9y agoI wish this were true and not hyperbole. It's the part of the mid-atlantic that I miss most in the midwest.
- Reason077 9y agoMcDonald's business model of renting premises to their franchisees sounds similar to the way many pubs are operated in the UK. Breweries (and "PubCo's") typically own the premises, which is leased to a tenant (publican) who is required to purchase the brewery's products. https://en.wikipedia.org/wiki/Tied_house https://en.wikipedia.org/wiki/Tied_house
- johannes1234321 9y agoIn a pub setting the pub owner is free to select food and furtineture and such. Breweries will assist, but there's a lot of freedom. In franchise you have to stick to the branding and menu offers and in practice you have to follow the prices (legally they can't force independent franchise companies to sell a burger for the same price, but there are ways) giving very little freedom.
- sofaofthedamned 9y agoThere is no freedom in a UK pub franchise that will help you, because if you do well they will screw you the month after on tied beer prices.
- stcredzero 9y agoIf 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? 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.
- hectorr 9y agoWhile this is true, it is extremely hard to do in practice. You have to get good information, make sure it is good information, convince a market that it is good information, and then prevent your competitors and your clients from simply replicating your process.
- stcredzero 9y agoYou have to get good information, make sure it is good information Yes, but often much of this can happen largely as a consequence of your doing something else, and you may not realize it. convince a market that it is good information Which is just basic Marketing. and then prevent your competitors and your clients from simply replicating your process Which is also a common issue with startups in general. Good word of mouth can keep you ahead of competitors, and you can make it cheaper for clients to just pay you than it would be to do it themselves. All basic things.
- warcher 9y agoSome people have done sorta ok with this as a fallback position when their business model failed. I think it's a pretty dicey proposition. Foursquare did it after failing at everything else, and while they're ostensibly 'profitable' they're deeply in the red with little hope of a return to their investors. They're surviving to fight another day, but... eh.
- hiroshid 9y agoThere is a danger here. McDonald's system = Windows Franchisees = OEMs Franchisees not doing their best = laptop filled with crapware
- csours 9y agoReminds me of the story of Family Video: 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 https://www.forbes.com/sites/noahkirsch/2017/02/21/the-last-...
- gist 9y agoThis 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. 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.
- robbrown451 9y agoSure, but the burgers are a critical component of the whole picture. 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.
- Semiapies 9y agoYes, it's how they "really" make their money in the sense of how precisely the money goes from franchise owners to them, rather than anything surprising about how the money is made.
- fraserharris 9y agoAn 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. Source: McDonald's: Behind The Arches, John F. Love (July 1, 1995) Edit: changed ie to eg, thanks for the correction all
- noir_lord 9y agoCertainly noticeable in the UK, the variance between one BK and another can be huge where McD's is so consistent it's hard to tell who owns which. McD's are masters at standardising 'generally acceptable in a pinch' food.
- pbhjpbhj 9y agoI thought UK McDo were a single company and not franchisees?
- djulius 9y agoAlready seen in "rich dad poor dad" 20 years ago !
- temp246810 9y agoOff 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. If all you need is a basic drink, they get it more or less right for several hundreds of a percent lower.
- sjg007 9y agoI dunno man. Peet's has never failed me latte wise or even coffee wise. Starbucks can be a little burnt. And straight coffee at McDs is watered down for the senior citizens.
- tim333 9y agoMcDonalds is surprisingly not bad at coffee these days. They overtook Costa and Starbucks in the UK in terms of cups sold. Also the new self service kiosks make ordering a bit less grim http://burgerlad.com/2015/02/mcdonalds-touch-screen-ordering.html http://burgerlad.com/2015/02/mcdonalds-touch-screen-ordering...
- PhantomGremlin 9y agoAhhh, London. When I spent some time there 30+ years ago, I bought coffee from the McDonald's across from the Warren Street tube station (still appears to be there according to Google Maps). But it was of necessity. It was very difficult to get a good cup of coffee from other UK fast food outlets. Has coffee caught on in the UK? At the time, coffee seemed to be mostly an after dinner drink.
- marricks 9y agoI 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? 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?
- omegaham 9y agoFrom the rules: > On-Topic: Anything that good hackers would find interesting. That includes more than hacking and startups. If you had to reduce it to a sentence, the answer might be: anything that gratifies one's intellectual curiosity. Personally, anything that is counterintuitive or surprising gratifies my intellectual curiosity. "You thought that X was important for this business, but you've been bamboozled this whole time! It's actually Y!" The discussion has introduced a couple of great documentaries as well as anecdotes from people who have worked in similar circumstances in retail, (i.e. the business is important, but the valuable real estate that they're sitting on is even more important) so I don't have a problem with this sort of submission.
- marricks 9y agoMakes sense, more curious about the opaqueness of voting and what shows at the top!
- FrankenPC 9y ago20 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.
- sjg007 9y agoHow does the work with malls?
- afashglaksnhb 9y agoAt a guess the company owns a long lease on the space in the mall and sub-lets it to the franchisee.
- sjg007 9y agoMany times I get cold and cardboard crispy chickens. It sucks. And 99% of the time it's from the drive thru.. 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.
- geophile 9y agoThe Founder is a movie that tells the story of the birth and growth of McDonald's (https://www.rottentomatoes.com/m/the_founder/ https://www.rottentomatoes.com/m/the_founder/), and it covers much of the ground covered in this article. 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. Really great movie for anyone involved with startups.
- yeukhon 9y agoI hope this isn't like The Social Network which is mixed with a lot of fictions.
- aaron-lebo 9y agoI watched that the other day. Kroc was just as visionary, if also greedy and manipulative and ready to succeed at all costs. He's clearly not afraid to steal a business or wife. He's also somehow easy to relate to (thanks Keaton). You can see him lying to himself and justifying his actions. Got the feeling that Kroc wasn't all that different from many SV founders. You don't go to SV to make a burger stand, you go there to make an empire. There's a reason Kroc is discussed in business schools. On a side note, reading about the founding of Twitter there's a lot this kind of back and forth.
- tripplethrendo 9y agoCan you recommend any reading on the founding of Twitter?
- aaron-lebo 9y agoI've been listening to: "Hatching Twitter: A True Story of Money, Power, Friendship, and Betrayal" https://www.amazon.com/dp/B00CDUVSQ0/ https://www.amazon.com/dp/B00CDUVSQ0/ As you can tell, it's the kind of thing meant for the best seller list and isn't a scholarly work or anything, but the preface stresses it's based on lots of interviews. If nothing else, it's a fun read and the background of the founders is pretty interesting.
- tim333 9y ago>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. 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.
- emiliobumachar 9y ago"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)." Nobody goes there anymore. It's too crowded. I know it's a serious worry, but seems like one of those good problems to have.
- bsder 9y agoSorta, except that it is at the expense of places like Olive Garden, Macaroni Grill, etc. The problem is that if those customers continue on their downward trajectory, it's going to hit McDonalds too ...
- olibhel 9y ago> Nobody goes there anymore. It's too crowded. Then why is it crowded?
- greedo 9y agoIt's a Yogi Berra-ism.
- anothercomment 9y agoI 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. 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).
- mathattack 9y agoThis 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. Also - when people choose to eat less burgers, or there is less innovation in the menu, the stock price dips.
- Dagwoodie 9y agoI 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.
- resalisbury 9y agoOne 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. - percent franchised vs owned https://www.fool.com/investing/general/2016/04/03/what-percentage-of-mcdonalds-restaurants-are-owned.aspx https://www.fool.com/investing/general/2016/04/03/what-perce... - 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."