McDonalds is a shrewd business empire that has stood the test of times, despite coming under pressure in the fast-food space in the recent past. A kingdom of more than 38,000 restaurants, spread in over 100 countries, underscores the massive business empire. The fast-food juggernaut serves more than 70 million people a day, making it the most popular family restaurant worldwide.
The fast-food joint stands out in part because it can appeal to all people transcending adults and children and cutting across all cultural barriers. Similarly, it is a leader in the Quick Service Restaurant sector.
Amid the impressive stats, have you ever wondered how Mcdonald’s makes its money?
How McDonald’s Makes Money
The Franchisee Business Model
McDonalds is not the most valuable QSR chain by chance. The fast-food joint makes billions of dollars in revenues and earnings every year, all but affirming its status and credentials in the industry. The company generated revenue by leveraging its product and fast food product line.
Likewise, it maintains a network of franchises that lease its properties and leverage its brand name. As of 2019, its network included over 36,000 franchisees as the company operated close to 2,600 outlets. Similarly, over 90% of Mcdonald’s outlets are franchises.
Maintaining a vast franchise network comes with its pros. For starters, the revenue generated by the network is far more predictable and stable. The model also keeps the company’s operating costs low, an edge that has always worked in favor of McDonald’s bottom line.
Control over land that the franchises operate on, as well as the long-term leases signed, accords McDonald the edge of being able to sign favorable deals. In this case, the QSR juggernaut can sign deals that require the franchisees to pay up a fixed amount of money each month.
In addition, Mcdonald’s operates some outlets in-house as a risk mitigating play. By doing so, the company can shield itself from the effects of franchisees terminating their agreements abruptly and in numbers.
The cost of opening a McDonald’s franchise is not for the masses. For starters, one must have between $250, 00, and $500,000 in non-borrowed cash. Likewise, one must have the financial stability to borrow an extra $1.7 million. One must also be willing to pay $45,000 right away to McDonald’s and agree to one a 20-year contract for one specific location.
Similarly, Mcdonald’s has signed deals that require franchisees to hand over about 80% of their revenues. Considering that there are more than 36,000 franchisees, the company is able to record billions of dollars in revenues from the outlets every quarter.
In contrast, the company-operated locations account for a mere 16% of total revenues. Revenues from company-operated locations are often trimmed by operating costs incurred in operating the units in contrast to zero costs from franchises.
In 2014, for instance, company-operated stores generated $18.2 billion, but the corporation only kept $2.9 billion. However, with franchisees generating $9.2 billion, $7.6 billion ended up in the corporation. Similarly, the company made $4.75 billion in net income translating to 82% of every dollar profit generated by the franchisee.
McDonalds Real Estate Revenue
Unknown to most people is that McDonald’s makes a good chunk of its revenue from real estate. The company already operates a real estate subsidiary tasked with buying hot properties and leasing them to franchisees. In return, the franchisees are required to pay rent on each leased property in addition to a portion of sales from selling fast foods.
McDonald’s took advantage of the 2008 financial crisis to bolster its real estate holdings in some prime areas. As it stands, the company owns 45% of land and 70% of the buildings on which the franchises sit on. Likewise, it is always guaranteed rental income every month.
Rental income goes a long way in insulating the fast-food giant from the downfalls of the unpredictable business of selling hamburgers. Backed by over $40 billion worth of real estate properties, McDonald’s revenue base is all but guaranteed given the amount of rental income it is always guaranteed to generate.
The real estate empire is the icing on the cake that allows Mcdonald’s to diversify its portfolio. By simply buying and leasing properties, the company has succeeded in doubling the income earned from franchises.
While the company does not lease all the properties to franchises, it is still able to rent the properties to other businesses. At times it flips them for a profit.
McDonald’s is not entirely a fast-food company. Instead, it is a major real estate company going by the over $40 billion worth of real estate properties in its books. While the company generates a good chunk of its revenues from fast food sales, the company also makes a good chunk of its revenues from its vast real estate properties in rental income.
The franchising model has allowed Mcdonald’s to enjoy economies of scale while keeping its risk and operating costs down. Likewise, the company can earn more income given the high margins in play and the fact that it does not have to spend to operate the franchises