McDonald’s: Flipping burgers or flipping real estate strategies?

It would be extremely rare to cross paths with someone who doesn’t know what McDonald’s is. The franchise has restaurants in over 100 countries. What many people don’t realise though, is that McDonald’s is actually a real estate business. American businessman and then CFO of McDonald’s, Harry J. Sonneborn quoted ‘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.’

The original founders, the McDonalds brothers met with entrepreneur Ray Kroc, who initially wanted to sell the business milkshake machines. Ray Kroc quickly learned of the business’ potential and convinced the brothers to join them in the expansion of McDonald’s.

Ray Kroc was able to expand the business across America as he had envisioned but soon came to realise that he wasn’t getting the revenue he initially foresaw. Luckily, businessman and then CEO of McDonald’s, Harry J.Sonneborn shared his unique strategy on how they could change their business model. He suggested that the company purchases the land that the restaurant sits on and then lease it back to the restaurant at a 20% markup. After the strategy was successfully implemented they realised that they could further develop their unique business model by having the franchisees either pay the monthly rent or give up a percentage of the sales for the month. This decision was made based on whichever figure was higher. This strategy proved to be very helpful, especially during times of recession when sales depreciated significantly.

Today McDonald’s still makes use of real estate investment strategies which has also enabled them to achieve restaurant performance levels that are among the highest in the industry. The McDonalds’s Real Estate Corporation has even added buying and selling of ideal properties as part of their investment strategy and has more than $30 billion in real estate assets.

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