mcdonalds-real-estate

McDonald’s Real Estate: Why Is McDonald’s Valued Like A Tech Company?

As the story goes (as recounted in The Founder), Ray Croc was taking over McDonald’s from the McDonald brothers (we’re in the 1950s).,

As he spoke to Sonneborn (a businessman who would become president and chief executive of McDonald’s), he told Ray Croc:

“You don’t seem to realize what business you’re in; You’re not in the burger business. You’re in the real estate business.”

That was more than fifty years ago, and yet, only now, in 2022, McDonald’s seems to have fully executed this quote!

Just a reminder that when it comes to business, a good chunk of success is about execution, and yet, while execution might seem quite straightforward, it might also take decades to fully roll out in the real world!

This is McDonald’s in 2022, with a fully-rolled “heavy franchised business strategy!”

mcdonalds-strategy

Many have argued over the years that McDonald’s is more of a real estate company than a restaurant company.

Why is it the case?

While McDonald’s does use a heavy-franchise model, where most restaurants are franchised (McDonald’s keeps a low ratio of chain restaurants where it can also do product development and discovery, which then gets extended to its franchised restaurants), there is a twist.

McDonald’s secures the land or the rental contract of the land; therefore, the franchisee, even if an “independent restaurateur,” is locked into McDonald’s growth plan.

Indeed, one of the risks of a franchising strategy is the loss of standards, especially related to product quality.

To prevent that, McDonald’s controls the land, thus making sure that the franchisee is aligned with the product’s standards.

In addition, starting a McDonald’s franchising operation might be quite expensive, and it might require substantial experience.

Therefore, this works as friction at the onset, which should motivate to open McDonald’s restaurants only those who really have solid growth plans.

In fact, as McDonald’s highlights, an initial investment to open up a restaurant might range from $1,008,000 to $2,214,080 (including a $45,000 franchise fee), and at least half a million of liquidity available to be invested into the business.

Franchisee can’t go on and open a McDonald’s on its own, instead, the land lease agreement has to go always thourhg the company.

In fact, McDonald’s keeps them separated.

On the one side, the land development process; on the other side, the franchisee selection and operations.

On the one hand, the company has a real estate arm dedicated to the selection of lands for developing new restaurants. As the company highlights:

McDonald’s looks for the best locations within the marketplace to provide our customers with convenience. We build quality restaurants in neighborhoods as well as airports, malls, tollways and colleges at a value to our customers.

Some of the key criteria for restaurant development are:

  • 50,000+/- sq. ft.
  • Corner or corner wrap with signage on two major streets.
  • Signalized intersection.
  • Ability to build up to 4,000 sq. ft.
  • Parking to meet all applicable codes.
  • Ability to build to a minimum height of 23′ 4″.
mcdonald's-land-development

Source: McDonald’s

When it comes instead to the franchisees, McDonald’s offers a proven playbook and process to create a money-making restaurant machine.

This is how owned vs. franchised restaurants look like!

mcdonalds-owned-vs-franchised

By 2022, McDonald’s had 38,169 franchised restaurants vs. 2,106 owned and operated ones.

With franchised restaurants contributing to most revenues.

mcdonalds-revenue-breakdown

Of over $23 billion in revenue in 2022, $8.74 came from company-operated stores, while $14.1 billion came from franchised restaurants.

This shift to franchised restaurants is also about margins!

mcdonalds-owned-vs-franchised-margins

For instance, in 2022, franchised restaurants generated $11.75 billion in margins vs. its operated restaurants, which generated $1.37 billion in margins.

mcdonalds-profits

In 2022, McDonald’s generated $6.18 billion in net profits, compared to $7.54 billion in 2021.

The company runs a heavily franchised business model, where it has reached its target of 95% franchised restaurants worldwide.

What does it mean?

A much lighter organization

mcdonalds-employees

McDonald’s had 150,000 employees in 2022, compared to 200,000 employees in 2021 and the same in 2020.

Valued with multiples which are absolutely off the charts for a restaurant company!

mcdonalds-ev-revenue-multiple

For some context, in relative proportion, McDonald’s EV/Revenue Multiple is higher than Apple, which is the most valuable company and brand in the world!

Below is a full picture of McDonald’s business model!

mcdonalds-business-model

To recap:

  • McDonald’s does use a heavy-franchised model. However, the company has tweaked the model to quickly expand its operations through franchising, while at the same time keeping control over standards followed by the franchisees, as McDonald’s operates as the landowner/operator.
  • This tweak is extremely important as it helps balance out the otherwise too-aggressive franchising strategy, which is great for growth, but it might result in a loss of control over process and product quality standards.
  • For that, McDonald’s has created two separate operations arms: one is a real estate development unit to develop the land for the restaurants; the other is the franchising operations to select franchisees and help them kick off operations.

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