Written by Hassnain Raza / Last Updated: June 29, 2022
So McDonald’s money is not made by selling burgers.
Is it really surprise you? then how is McDonald’s generate its profits?
Everyone`s perception is that McDonald’s is a burger restaurant, but it’s one of the best and most profitable real estate companies among the companies in the world.
It is said the Former CFO Harry J. Sonneborn,
“We’re not technically in the grocery business. We are in the real estate business. The only reason we sell 15-cent hamburgers is that they are the biggest source of income our tenants can use to pay us our rent.”
While more than a million hamburger has been sold to customers around the world, where 85% of its stores are owned by franchisees. Franchisees have to pay to use the McDonald’s brand name, its proprietary processes, and trademarked menu items, but unlike other franchisees, McDonald’s owns the land on which the stores are built.
It makes a lot more money off the land through the burgers and the land.
Imagine a company with $40 billion in real estate assets (before accounting for depreciation) and $9 billion in annual sales, of which almost $4 billion in profit. This is McDonald’s Property Investment Trust (REIT). Not bad, right?
To further put these numbers in perspective, this fictional REIT would account for over 40% of its current market cap and generate 80% of its earnings.
It is a great example of how diversification not only helps increase a company’s income but also reduces its financial risks. It’s both fast food and a real estate business.
Between the burgers and the country, it makes a lot more money with the country.
McDonald’s owns thousands of iconic objects around the world. From Times Square in New York to Red Square in Moscow, it has made its way around the world buying prime real estate. Franchisees pay a portion of their grocery sales, but a much larger portion of the revenue comes from the rent it pays on their properties. After all, rent in Times Square isn’t cheap, but a Big Mac is.
It still collects a royalty on its franchisee’s sales but enjoys a much stronger revenue stream from the leases for nearly 33,000 franchisee-owned restaurants.
The Founder, a 2016 film about the history of McDonald’s, explains the dynamic succinctly: “You don’t build an empire on a 1.4 percent stake in a 15-cent hamburger, you build it by taking that owns the land on which this burger is cooked.”
