[Originally published December 30, 2020]
McDonald’s is undoubtedly one of the most recognizable companies in the world. With almost 40,000 restaurants in over 100 countries, it is the largest restaurant chain in the world and the second-largest private employer. Yet behind the millions of burgers and fries served every year, a real estate empire drives McDonald’s success.
I assumed that, like many restaurant chains, McDonald’s earns money through franchisees who pay the corporation to open up a McDonald’s restaurant. While this is true, and a significant source of their income, McDonald’s also earns money through their real estate holdings. How so?
In 1956, The McDonald’s Franchise Realty Corporation was created with the goal of purchasing property to be leased to franchisees. The corporation would lease a plot of land, then sublease it to franchisees who would pay rent and royalty fees until the corporation owned the land. In the United States, franchisees can pay up to 16% of their sales as rent, according to the Wall Street Journal. In this way, the sales of Big Macs and fries are simply used as income to finance the real estate holdings of McDonald’s.
This current system has worked wonders for McDonald’s, with the company earning $7.5 billion from rental payments alone in 2019, making up over a third of their total revenue. Perhaps other restaurants can learn from McDonald’s model! My place of work, for example, is Chipotle, a restaurant chain formerly owned by McDonald’s. Chipotle’s restaurants are all company-owned, with very few franchising in place. Who knows if a similar real estate approach could bring in more money for restaurants like Chipotle?
Further reading:
https://www.imdb.com/title/tt4276820/ (The Founder – a 2016 movie that inspired this post)