McDonald’s Real Estate: How They Really Make Their Money

So McDonald’s doesn’t make their money from selling burgers.

Does that really surprise you?

A lot of us don’t realize that McDonald’s isn’t really a burger-flipping restaurant chain. Well, it is, but not purely. Peel back the layers and you’ll find that the corporate entity is actually one hell of a real estate company. Former McDonald’s CFO, Harry J. Sonneborn, is even quoted as saying, “we are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”

The fast food giant came from humble beginnings. The McDonald brothers, sons of Irish immigrants, first opened up a hot dog stand in 1937 in Pasadena before venturing out to open their first restaurant. By 1953 they had seen some success using an assembly line method of burger preparation. They’d already started franchising the system, but not the atmosphere or name of their restaurant.

Meanwhile, a milkshake machine salesman named Ray Kroc had taken notice of the brother’s restaurant concept after selling them 8 of his machines. Ray could see the massive potential and quickly partnered with the McDonald brothers, serving as a franchising agent. After six years of working with the McDonalds and finding their ambition ultimately falling short of his own, he elected to buy them out and became the owner of McDonald’s Corporation in 1961.

Franchising is a model by which fast food chains can expand quickly and efficiently by using the money of small investors. Ray Kroc perfected new franchising techniques, increasing the corporation’s size while maintaining strict control of its products. Around this time is when CFO Sonneborn came up with the strategy that McDonald’s continues to use today.

Instead of making money by selling supplies to franchisees or demanding huge royalties…the McDonald’s Corporation became the landlord to its franchisees.

They bought the properties and then leased them out – at large markups. In addition to that regular income, the corporation would take a percentage of each shop’s gross sales.

Today McDonald’s makes its money on real estate through two methods. Its real estate subsidiary will buy and sell hot properties while also collecting rents on each of its franchised locations. McDonald’s restaurants are in over 100 countries and have probably served over 100 billion hamburgers. There are over 36,000 locations worldwide, of which only 15% are owned and operated by the McDonald’s corporation directly. The rest are franchisee-operated.

READ FULL STORY