The Ronald McDonald Method

Real Estate Kings / McDonald's buys the franchise property and leases it back to the investor
Tuesday
2021-04-06
​McDonald’s is the world’s most successful and recognisable fast-food restaurant. The secret to their success won’t be found in the sauce of any big mac.
 

In the beginning

Dick and Mac McDonald opened their first McDonald’s restaurant in San Bernardino, California way back in 1940. The two brothers gained success through a fast and cost-efficient food delivery system. In 1954 their methods attracted the attention of visiting salesman Ray Kroc, who saw the potential to scale up the thriving business. Ray Kroc got right onboard and founded the McDonald’s Corporation a year later.

By 1958 McDonald’s had sold 100 million hamburgers across the US – but Kroc wasn’t resting on his laurels. Three years later he would buy the McDonald brothers’ equity in the company with an ambition to see the fast-food chain to go worldwide. After taking over the US, McDonald’s branched out to Canada in 1967. By September, 1971, it reached Europe, opening a store in Zaandam, close to Amsterdam in the Netherlands. Followed quickly by a store the same year in Munich, West Germany – followed by a store Paris, France in 1972.

From those humble beginnings, McDonald’s has grown into the biggest fast-food restaurant chain in the world with a net worth of an estimated (US) $163 billion. At the time of this article’s publication, McDonald’s Corporation (MDC) own-operate and franchise 39,198 golden arched sites over 120 countries, serving approximately 70 million people daily. That means McDonald’s feeds about 1% of the world’s population every day! Of its yearly profits, an average of 40% comes from the European market, often outplaying North America.

The Vision

International markets are saturated with a range of high-quality fast-food offerings. So why does McDonald’s always come out on top?

Ray Kroc believed a uniformed business mantra was the absolute key to success. “If I had a brick for every time I’ve repeated the phrase Quality, Service, Cleanliness and Value, I’d probably be able to bridge the Atlantic Ocean with them,” Kroc said.

Buying into the franchise, you weren’t just buying the rights to logo, you were buying an ethos of everything that exists within the business. In 1961, Kroc set up the ‘Hamburger University’ at the McDonald’s headquarters in Chicago, Illinois, comprehensively teaching new franchisees the ins-and-outs of product control as well as daily operations.

For franchisee’s in Europe, a minimum of 26 weeks regional training must be completed before receiving the keys to a store. Franchise candidates are expected to put on the uniform, learning everything from business management and stock control to french fries and bathroom cleaning. This strict process ensures dedicated and knowledgeable owners who understand the core values of McDonald’s. This tedious training process is why many hail McDonald’s as the golden standard of franchising. 

What’s it all worth?

A McDonald’s franchise is not cheap. An unattainable dream for most. Nevertheless, of it’s almost 40,000 global sites, about 90% of those are franchised! The cost varies from country to country – location to location, however this is what you’ll need to qualify for your own franchise. We’ve based it on the UK standard which is one of the leading European markets:

  • Down payment – franchisees pay on average 40% of the start-up costs which vary

  • Liquidity – at least £100,000 in unencumbered funds

  • Initial franchise fee - £45,000

  • Higher education – preferred

  • Business experience – demonstrated experience of successful ownership or business management and knowledge

  • Good credit history – this will be checked

  • Training – a willingness to undergo vigorous training at your own expense

  • Customer service – you will be tested on your love for people and the service industry

  • Willingness – to grow and develop the business


In addition to the McDonald’s qualification process, you will agree to the following essential terms when buying into the franchise:

  • Service fee – an ongoing monthly fee of 4% of gross sales

  • Advertising and promotion – not less than $4 of gross sales

  • Rent – average monthly 20% land and building rent to McDonald’s

  • Annual fees – various subscriptions and support fees

What’s in it for the franchisee?

That’s a large overall investment to sell cheeseburgers and fries, right? So why do so many business savvy people invest in the McDonald’s franchise system?

Well, a steady average income for one. The average McDonald’s store generates (US) $2.7 million annually. The fast-food giant is famous for its impressive product cost margins. Combining profits with the highest standard of training, high-value location, and arguably the world’s most iconic marketing and branding – no wonder people invest large sums of capital (and reinvest with multiple franchises) into the McDonald’s system. Even with the brief down turn of McDonald’s franchises mid last decade, McDonald’s franchise numbers have once again been steadily growing. 

The innovators

The McDonald’s Corporation is dedicated to its franchisees as much as they’re dedicated to their shareholders, constantly redefining themselves as a relevant global brand. The American based company operate a decentralised system that allows cultural product variations in order to flourish in different markets.

From the early times when the McDonald’s brothers invented (an unpatented) sauce dispenser that accurately and evenly distributed the perfect amount of sauce to each burger. They were also one of the first fast-food chains to give provide free Wi-Fi to their customers, increasing foot-flow. They were also one of the first movers on home deliveries (which has become common life today).

Even the subtle implementation of McCafé shows a great deal of research and investment on behalf of all their global operators. Beverages have one of the highest mark-ups per unit. With McDonald’s grand purchasing power, they were able to adapt to the market and create a whole new business within a business.

Even today, amidst the global Covid-19 pandemic, McDonald’s clear adaptability has demonstrated a deep resilience installing long-term confidence for franchisees. This gives both old and new investors the belief they will always be safe in whatever challenges lie ahead.  

The real money maker

Although McDonald’s was initially built on shakes and fries, the grandeur of its modern success comes from real estate. As it stands, the McDonald’s Corporation is one of the world’s biggest real estate companies, with a property portfolio estimating (US) $30-$40 billion. The company’s ability to diversify its revenue from sales and rent completely changed the game.

To simply rely exclusively on franchisees profits can be rather risky. What McDonald’s does is buy the properties, generally in prime locations, and lease’s them to the franchisee. As mentioned previously, McDonald’s charges an average of 20% of the average gross profit of each month, on each site.

When you franchise over 35,000 sites worldwide – the profits sure adds up. This move by McDonald’s could be seen as exploitive by some. However, it ensures McDonald’s market value is strong – and confidence is king for investors. Furthermore, it also gives McDonald’s greater control over its brand and assets. In the event there was an issue with a franchisee, McDonald’s would still own the site – and need only look for a more suitable operator. Or in the event of a failed site, they can always flip the property to recover costs.

With their company’s reputation at stake, you can bet your final cheeseburger McDonald’s will do their homework. As for you, potential franchisees, how many big mac’s are you willing to pay?


I'm lovin' it / Franchisees are lured in by McDonald's impressive profit margins