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Why they say "McDonald's is more a real estate business than a food business"?

theforamyst

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Does anybody know why they say "McDonald's is more a real estate business than a food business"?
How do they do this?
 

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luniac

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Its because Ray Croc couldn't make a dime with his tiny McDonalds licensing percentage returns, but then he got lucky when he hired some financial whiz who proposed the genius idea of focusing on the land the McDonalds are built on instead. That's when the money started pouring in.

Source - Grinding It Out(book)
 

InspireHD

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McDonald's Corporation is made up of 37,557 restaurants in 120 countries. 34,745 of them were licensed to franchisees. There are only 2,812 McDonalds' that are operated by the company itself.

When a franchisee opens a restaurant, they provide a portion of the money required to initially invest in the equipment and everything that goes into opening a restaurant. The Corporation of McDonald's generally owns the land and building or they will have a lease for the restaurant site. This allows the Corporation to control costs. In turn, McDonald's receives the fees and royalties from the franchisees.

So, when people say that McDonald's is more of a real estate company than a food business, it is because McDonald's actually owns and controls the land and buildings instead of actually operating and profiting in the flipping of the burgers. That is handled by the thousands of businesses owners who franchise the McDonald's business. Those owners then pay McDonald's for all of the "back-end" stuff.

The movie, "The Founder" goes into detail on the historical aspects of how McDonald's came to be what it is. Ray Kroc wasn't the founder of McDonald's. He was just the guy who made it is what it is today.
 

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Years ago I spent 1 year of my life setting up what was going to be a 100+ seater fast food restaurant in the prime location on a pedestrianised shopping precinct in a major city. I had the finance set up, all the research done (including a head count of a local competitor which showed 870 people walking in between 3pm and 4pm on a Saturday). Had an agreement with the building owners who had not been able to rent it out for over a year. The city's best firm of accountants who had worked on my business plan and influenced the right people to provide the loan I needed (I was pretty much penniless and only about 20).

All the groundwork had been done and ticked off.

Everything was now pivoted on getting a change of use planning permit as the building had been a retail store since built so was not authorised for food use. This took 3 months and was a real hard grind (with a high probability of failure). If successful I would sign the lease and the hard work would really begin.

I remember the feeling when I finally got planning approval. This was it! This was the only major stumbling block that could hold me back. Or so I thought.

Then all of a sudden the building owners stopped responding to my phone calls. No one could raise a peep out of them. I bombarded them with calls never to get one returned. Talk about frustration. I couldn't figure out what the problem was.

Then the horror manifested itself.

Like an eagle hovering far above me totally out of sight McDonald's had been watching with great interest.

As soon as I had the planning consent in the bag they bought the premises from the company I was supposed to be renting them from. That was over 30 years ago. The restaurant is still going strong.

I go in there every now and again to use their toilet. A petty act I know, but not much more I could do.

And before you say 'couldn't you open up somewhere else' the answer was no. This was the only prime location available at the time. This was in the days when the high street was king and eCommerce wasn't even a twinkle. Other sites didn't have anywhere near the same footfall. Which is why McDonald's stole it from under me.
 
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theforamyst

theforamyst

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@RazorCut Sorry McDonald's did that to you and stole your chance to realize your dream.
When we look at this from a Fastlane perspective can we then say McDonald's was smarter or faster in their Execution or should we say McDonald's acted like a con men or maffia?
 

biophase

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@RazorCut Sorry McDonald's did that to you and stole your chance to realize your dream.
When we look at this from a Fastlane perspective can we then say McDonald's was smarter or faster in their Execution or should we say McDonald's acted like a con men or maffia?
The lesson I learned from reading this is to get an option to lease done before the zoning decision. Then McDonalds would have had to buy you out of the lease.

It was a wicked strategy by McDonald’s.
 

YoungPadawan

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Yeah I watched the movie "The founder" (I think that's what it was called) it goes into a bit of this.

Ray Croc seemed like a dick for the things that he did to the MacDonalds brothers
 

RazorCut

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@RazorCut Sorry McDonald's did that to you and stole your chance to realize your dream.
When we look at this from a Fastlane perspective can we then say McDonald's was smarter or faster in their Execution or should we say McDonald's acted like a con men or maffia?
It's just business. It was a smart move. Why do all the digging if someone is already there with a shovel?

It wasn't that they were smarter or faster, they just had more muscle. They had money, a track record, influence and... did I say money? They basically could pay whatever it took to buy the building.

I'm not saying I was smarter, I wasn't for sure. I was a green 21 year old kid with one business behind him who saw an opportunity, hustled enough to punch way above his weight and almost pulled it off.

It was a good, if painful, learning experience.

-
 

RazorCut

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The lesson I learned from reading this is to get an option to lease done before the zoning decision. Then McDonalds would have had to buy you out of the lease.

It was a wicked strategy by McDonald’s.
Yes it was. And yes, an option on the lease was one of the first lessons that green wantrepreneur learned after that event.
;)

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theforamyst

theforamyst

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upload_2018-11-14_22-11-12.png

For anyone interested in related movies, I got these other movie suggestions when I was looking at The Founder on Amazon.
 
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theforamyst

theforamyst

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Yes it was. And yes, an option on the lease was one of the first lessons that green wantrepreneur learned after that event.
;)

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What other lessons did you learn besides that one, if any? ;)

Lets say you could go back in time, and are talking to that building owner again and tell him you want to put an option to lease in the contract. How should this be worded? Bc you already were negotiating w/ him to lease the building.

And then lets say there was an option to lease in the contract but he still went behind your back and sold the building to McDonald's. What would have happened then? How would that option have helped you?
And what if the building owner didn't respect your option to lease?
 
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theforamyst

theforamyst

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I've rented and watched The Founder on Youtube. (the SD version is almost as good as the HD version). I still don't understand why it's good to own the land or the building?
 

biophase

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I've rented and watched The Founder on Youtube. (the SD version is almost as good as the HD version). I still don't understand why it's good to own the land or the building?
The alternative is to lease the building from someone. Would you rather do that? What part don’t you understand? Do you think it’s not good to own real estate?
 

Davejemmolly

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I still don't understand why it's good to own the land or the building?
There are multiple answers to this question, though fundamentally, purchasing real estate versus renting is primarily about risk mitigation.

As a tenant, you are ultimately at the mercy of the landlord when it comes to the amount of rent payable, and the length of the lease term.

Ultimately, this means that another party has the potential to drastically affect the way you do business (ie, not renew your lease and force you to move premises).

There are another tax reasons why it makes sense to buy rather than rent, together with potential for capital appreciation etc, but security of tenure is the primary reason, particularly for business with huge set up / store fitout expenses.
 

Sauce

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I don't know how true this is any more. Most McDonalds are ground leases. There are several reasons including:

A ground lease substantially reduces the tenant's front-end development costs because it eliminates land acquisition costs.
All rent payments made under a ground lease are deductible by the tenant for federal and state income tax purposes.
(source Pros and Cons of Commercial Ground Leases)

I couldn't find a stat for the number of stores that are on leased land owned by McD corporate - but it is less than you might think. In the past I think, McD bought the land and rented it to the tenant (franchisee), but as they scaled, I am guessing it wasn't economically feasible to keep doing, especially with the amount of royalties they are generating.
 

InspireHD

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I don't know how true this is any more. Most McDonalds are ground leases. There are several reasons including:

A ground lease substantially reduces the tenant's front-end development costs because it eliminates land acquisition costs.
All rent payments made under a ground lease are deductible by the tenant for federal and state income tax purposes.
(source Pros and Cons of Commercial Ground Leases)

I couldn't find a stat for the number of stores that are on leased land owned by McD corporate - but it is less than you might think. In the past I think, McD bought the land and rented it to the tenant (franchisee), but as they scaled, I am guessing it wasn't economically feasible to keep doing, especially with the amount of royalties they are generating.
I couldn't find a current number. The only thing I could find was as of Dec. 31, 2017. They report that they are the lessee of 12,262 restaurants through ground leases. From how I am understanding it, in some cases they lease the land and own the building and other cases they lease the land and the building. That 12,262 seems to be a combined number. The leases usually run for 20 years and allow for rent increases and renewal options.

In 2017, they made around $10.1 billion in revenue from the franchised restaurants and $12.7 billion from company-operated restaurants. Another interesting note is that they own $36.6 billion of property and equipment, which they hold at cost, so who knows how much more that is worth. Effectively, they are generating $22.8 billion in revenue a year and hold more than $36.6 billion of property and equipment. I would bet that property is worth more than $36.6 billion.
 
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theforamyst

theforamyst

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@InspireHD In some countries you can't have different owners bc whoever owns the land also owns everything that's build on it.
 
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theforamyst

theforamyst

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The alternative is to lease the building from someone. Would you rather do that? What part don’t you understand? Do you think it’s not good to own real estate?
Sorry, I guess I didn't phrase that clear enough. I ment more in relation to having/offering a franchise biz like McDonald's does. But reading the comments I see it's about having more control.
But at the back of my mind I also had the thought of; What does it matter that you own the land bc there is land everywhere.. Perhaps this is even a more stupid remark :)
 

Johnmev

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The restaurant itself is one LLC and the property is another LLC.. Example: Mcdonalds= Ariba LLC and 148 South Street LLC is the name of the property. The rental company charges rent to the restaurant llc at like 11k a month. The income from the restaurant gets converted from earned business income to unearned rental income. Property tax laws benefit those who own property in this country. You take out the loan for the property and run the business for like 10 years and cash out the business and the property that you now own free and clear.
 

WJK

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Sorry, I guess I didn't phrase that clear enough. I ment more in relation to having/offering a franchise biz like McDonald's does. But reading the comments I see it's about having more control.
But at the back of my mind I also had the thought of; What does it matter that you own the land bc there is land everywhere.. Perhaps this is even a more stupid remark :)
There's only a scant few prime corners, with the right access and traffic patterns. That's the most valuable real estate in any town or community.
 

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