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McDonald’s- A Bricks and Fries Company !!

Craving for a burger? Want a Coke? We always get one answer and one brand in mind when it is time for fries and snacks i.e McDonald’s. The word McDonald’s is searched more than the word Jesus in the USA. But what if I tell you that actually you eat fries of a real estate business? Baffled? Yes, you heard it right. McDonald’s is actually a real estate company. This fact is quite perplexing! Their business model is tastier than their Mac-O-Filet. 

Thanks to Richard and Maurice McDonald for all the mouth-watering range of snacks. McDonald brothers had started the business a way back in 1940:- real estate business, started with the sale of single Hamburger. McDonald Corporation now was sprouted with the idea of the drive-up restaurant. But entering this segment was quite difficult for the McDonald brothers. During that time you would have to pull up the car and go to the outlet and wait for food. Also disposable dishes and forks were not known to people. So you would have to sit in the car and enjoy the meal with normal fork and dishes and return it when you are done. It was basically the same idea of going to hotels and eating food. The difference was instead of eating in hotels you would eat the meal in your car. Hence this idea was neither time saving nor capital saving. Hence they discarded this idea and started to work on the ways that served the food more efficiently. They opened a burger stand in San Bernardino, California with a whole new concept of an assembly line.

Assembly line method was used to serve food faster and in bulk. This resulted in the selling off tons of burgers every single minute. The silverware was ditched and people saw a new way of eating in wrappers. All you have to do was throwing the wrapper after eating.

His Name Was Ray Kroc

This was totally a new idea in those days and people thought it was absolutely insane. One man who used to sell milkshake machines was one among these people. He was amazed as he got an order for eight milkshake machines from McDonald’s.  His name was Ray Kroc. He ended up convincing McDonald brothers to join their company as one franchising agent and expand the company all over America. They allowed him but they were dubious and they didn’t want to ruin their family aspect of the business. Ray Kroc said that he would take full responsibility for new locations while the McDonald brothers still owned the company, but nearly all the profit from these new locations straight went to Ray. McDonald brothers would remain the authority figure and would receive only half of the one per cent of sales. Remaining part belonged to Ray Kroc.

Brothers agreed to do what Kroc wanted in order to expand the business. Ray Kroc took control of their business. He opened the first McDonald’s restaurant in 1954. He kept the restaurant meticulously clean and tidy. He kept this restaurant as a showcase for the opening of other franchises. He told employees that if you have time to lean then you have time to clean. This strategy of him worked nicely. He then set up McDonald’s franchises rapidly all over the United States but he couldn’t make money off what he expected. 

The Great Ingress:

New franchises were difficult to be established as businessmen couldn’t come up with initial investment for property and it was not feasible to construct a building. This is when another character entered and played a very vital role here- Mr Harry Sonneborn. Harry worked with the company for 10 years, but his real estate policies sealed the fate for the immensely successful company. He suggested Ray Kroc that real business was not in Burgers and Fries but was in real estate. Ray started to lease the property and buildings for new locations. Then the company would sublease the same properties to the franchise owner who would buy and run the restaurant. So the company started to make money through leasing the lands and buildings to the franchisees. If the location was super successful, they would take part in the sales. They would research on from which source he money earned was maximum. If the calculations depicted that more money is generated from sales than leasing then they would take part in the sales. This idea worked like a cherry on the cake. They had every aspect of operation under control. Suppose McDonald’s paid $100 rent for their property; then they would charge $120 for the franchise owner. Sometimes the rate would go higher up to 40% depending upon the location. So they made money out of every possible opportunity.

Some of the people may call it as a shady and greedy business but honestly, it was a wonderful business. The Franchise owners had to pay insurance and taxes to the Mcdonald’s company. Taxes and insurances were also hiked sometimes to make money. They would even charge more rent to the locations which would make more sales than other locations. They would make tons and tons of money from this part of the company. But there were always clashes between Kroc and McDonald brothers. Kroc decided to take full hold of the company. He gathered money and bought the company for 2.7 million dollars (19 million dollars today) in 1961. Now he had full autonomy on the company. But the McDonald brothers refused to sell the first restaurant in San Bernardino.

The Big M

Being the main authority of company he forced the brothers to change the name of the first restaurant. They named the restaurant as ‘The Big M’. Then Kroc put his plan into action by opening new outlet one block away from ‘The Big M’, and the brothers were then out of the story. Kroc then established Franchise Realty Corp. He separated the leasing business from the McDonald’s corp. From realty corp. he would buy the properties and sell it to McDonald’s. This strategy continued for years to come fuelled by Ray Kroc and his ambition.

As we've seen, McDonald's is drenched in the business of real estate as much as it is in food. And, as we've all heard, the three most important elements of real estate are "location, location, location." Back in Kroc's days with the company, he would fly around in a plane or helicopter looking for the best spots to set up McDonald's restaurants. He specifically looked for land near schools and churches in a community. Today, as most of us can see, McDonald's restaurants are everywhere. But there's still a method to the madness. McDonald's typically looks for locations that are the most convenient for people -- in malls, near colleges or in airports. This strategy continues Kroc's tradition of getting to the heart of a community through its gathering places.

Let's get to the nitty-gritty: McDonald's looks for intersections with traffic signals -- typically corners of two well-trafficked streets -- and ample parking. In terms of physical space, developers look for a site larger than 32,000 square feet (9,753 square meters) and a height of 22 feet (6.7 meters). 

Things might have a little bit changed today but the business strategy is still the same. Today McDonald’s makes profit in two different ways. One is by buying and selling the properties which are in demand and second is collecting the rent from the existing properties. The fact is that even if one outlet is not making enough money McDonald’s gets profit from the location rent. Perplexing! When there is a kind of economic slowdown people go to buy fewer burgers but still, the company makes a profit from the collection of rents. But when the economy is skyrocketing McDonald’s makes even more money. As stated in an article in The Wall Street Survivor, this could be an amazing company if the two businesses were separate, Restaurant and Real Estate. From the Real estate aspect, the company would be worth $40 billion dollars and they would make 9 billion dollars in annual revenue and 4 billion in profits. If the businesses were separate they could draw a number of investors.

Now things have changed, people are getting attracted to other restaurants too. McDonald’s have to either keep their real estate business or Fries and Burgers business. Mostly they will prevail. But after all McDonald’s is a legendary company and will be legendary forever. Thanks to Ray Kroc and Harry Sonneborn…… 

By Shravan