Some brand logos are recognizable the moment we see them. Whenever people come across huge giant golden arches, most of them think they are looking at one of the world’s largest fast-food chains.
But the reality is that McDonald’s is a real estate empire hidden under the face of a fast-food chain. And the McDonald’s franchising system functions as a layer between the underlying real estate empire and the overtly visible fast-food operation.
To understand the real way McDonald’s makes money, we need to understand how their franchising system works.
The structure of McDonald’s franchise system
Instead of opening McDonald’s outlets on its own, the company gives access to its menu, branding and operational infrastructure to anyone interested in running an outlet for them. The catch is that instead of collecting huge royalty payments, McDonald’s makes most of its money by buying out the outlet location and renting them to franchisees.
Here’s how the math behind the McDonald’s business works according to a Business Insider Report
Franchisees throw money into the venture from the beginning.
McDonald’s ensures that franchise owners are:
- paying $45,000 fees to start the franchise in the first place
- pay a rental cost calculated at 10.7% of the restaurant’s sales with 20-year terms on rental agreements
- pay a monthly royalty fee of 4% of gross sales.
These numbers are specific to the US market franchisees and might change depending on the market, but the underlying pricing mechanism remains more or less the same.
Franchise owners happily pay the aforementioned amount of money to buy the rights to McDonald’s branding because it gets people through the doors.
We also shouldn’t overlook the fact that while making money on the sales and the rent, McDonald’s also saves money passing on some of its responsibilities.
If the company rents out the location to a franchise owner, the owner becomes responsible for everything from paying the outlet staff and the costs of the food supplies.
The former CFO, Harry J. Sonneborn once said the hamburger was a simple tool between tenants and the company. That they are simply “the greatest producer of revenue from which our tenants can pay us rent.”
How many franchisees make up the McDonald’s empire?
According to McDonald’s website, more than 80% of the outlets worldwide and nearly 90% in the US are operated by franchise operators, not McDonald’s. That leaves just 20% company-owned outlets worldwide and only 10% company-owned outlets in the US.
This also why McDonald’s can sell food at such low prices. Many consumers wrongly assume that McDonald’s makes their money based on the sheer volume of food sold.
However, the combination of a smart real estate strategy and franchise revenue coupled with a continuous demand for affordable fast food is what works in McDonald’s favour.
It also gives McDonald’s the liberty to play around with what they offer by trying new menus and knowing that a dip in sales won’t be as harmful as it would have been to a self-operated company.
A new specialty burger or a reintroduction could fail but the locations still have to pay the rent and royalties.
But what are the downsides for McDonald’s in this method of operation?
If you have ever eaten in one of the outlets in another city and wondered why it is so much better or worse than at home, you’re not alone.
Since franchise owners take control of the staff and the general day-to-day running of the store, it does not meet the expectations of customers or the standards of the brand in some cases.
But McDonald’s still scrapes by despite a few bad apples giving relatively poor customer service.
This is the opposite of brands that decide to own fewer locations, not a series of franchise stores.
They get the advantage of managing all the locations under one umbrella and creating an even closer family of staff, which leads to more cohesion and uniformity, ensuring consistent customer service standards. Even consumers can be sure of what exactly they’re going to get.
The growth of McDonald’s in recent years
On a physical, global scale, there is no doubt that McDonald’s is still one of the most wide-reaching and well-known brands. There are more than 36,000 outlets in 100+ countries. This is said to approximately equate to 68 million customers a day.
As per McDonald’s 2018 annual report, it had $37 billion in real estate assets.
Net income stood at $5.9 billion in the FY 2018, up 14% since 2017.
McDonald’s Future Strategy: The Velocity Growth Plan
In 2017, McDonald’s announced the Velocity Growth Plan.
The key pillars of this growth plan are:
- Retaining their current customers by extending their focus to breakfast and family occasions
- Regaining the lost customers by improving food quality.
- Converting casual customers into committed customers with coffee & snacks
McDonald’s has even identified three accelerators, intended to drive growth in the future.
1.Using Digital technology to re-shape their interactions with the consumer — when they are eating in, taking out, driving through or ordering delivery.
2. Using Food Delivery to extend beyond their physical outlets to reach people in their homes, dorm rooms, workplaces and beyond.
3. Elevating the customer experience in their physical restaurants by using technology with the help restaurants teams who will bring the idea to life
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