McDonald's real estate empire
Issue 64 - December 24th, 2021
Most people think of french fries, Big Macs, or the McFlurry when you mention the Golden Arches, but most people do not realize that at its core McDonald’s is a real estate holding company empire.
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.
McDonald’s owns thousands of iconic pieces of real estate around the globe. From New York City’s Times Square to Moscow’s Red Square, McDonald’s has ventured around the world, buying up prime real estate. Franchisees pay McDonald’s a cut of their food sales, but a much larger portion of McDonald’s revenue comes from the rent it’s paid on its real estate. After all, rent in Times Square isn’t cheap, but a Big Mac is.
Think of it this way: An investment in McDonald's equates to the ownership of rock solid real estate assets that form the backbone of McDonald's balance sheet. The real estate is paid for with rent from the franchisees, predicated on the sales of the chain's iconic burgers and fries. In addition to purchasing the real estate, these sales also inject additional revenue into the income statement in the form of royalties and corporate store sales.
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.”
Today McDonald’s makes its money on real estate through two methods. Its real estate subsidiary will (1) buy and sell hot properties while also (2) collecting rents on each of its franchised locations. 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.
“The Founder,” a 2016 film about McDonald’s history explains the genius behind their business model succinctly: “You don’t build an empire off a 1.4% cut of a 15 cent hamburger, you build it by owning the land on which that burger is cooked.”
Newsworthy Links To Share
Zillow announced a new feature that is designed to let would-be homebuyers search properties collaboratively with friends and family, thus turning the experience into a “group sport.” The feature is called SharePlay and it integrates with FaceTime, Apple’s proprietary video calling technology that comes preinstalled on devices such as iPhones. Users can access the feature by starting a FaceTime call then, while the call is still going, navigating to the Zillow app and SharePlay session. (Inman)
Elon Musk says he lives in a $50,000 home at SpaceX, but he leaves out the part about his mansion in Austin. (WSJ)
Americans love buying stuff, and most of them love keeping it, too. Self-storage stocks returned over 80% this year, outperforming all other equity REITs and the S&P 500. Hot markets include Florida, Texas, Phoenix, and Atlanta. (CRE Daily)
Public Storage (PSA), which pioneered self-storage as a desirable asset class, is a great case study on the sector’s meteoric rise. A $1,000 investment in the company in 2009 would be worth over $60,000 today, including dividends. Rising construction costs and low housing supply ensure continued demand.
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