McDonald’s is the most ubiquitous and iconic brand nationwide. Commercials feature heartwarming scenes of diverse people celebrating their food and close-ups of their fast food products. It’s no wonder, then, that when you think of McDonald’s, you probably think of a Big Mac, a Quarter Pounder, a McFlurry, or even their french fries. These foods are a part of American culture. However, the restaurant chain’s expansive portfolio of property holdings suggests it is actually more of real estate mogul than a restaurateur. This raises the question of whether its 31,230 franchisees are invested in a restaurant or real estate. Here’s what it might mean for you as a real estate investor.
McDonald’s Move From Burgers To Land
During a period of rapid early growth in the 1950s, McDonald’s still struggled to attract franchisees. While other franchises at the time would sell multiple stores within a region at a time, McDonald’s wanted to maintain more control over franchisee operations and quality. They needed to franchise one store at a time to accomplish this, but prospective franchisees couldn’t afford the cost of entrance, which included the land and the building.
That’s when the first McDonald’s Chief Financial Officer, Harry Sonneborn, came up with an idea to bolster the company’s bottom line even more—through real estate investing. McDonald’s bought up or leased land and buildings, then subleased them to franchisees at a markup. This lowered start-up costs for franchisees while providing an additional revenue stream for the corporation.
Today, McDonald’s real estate holdings amount to about $42 billion, with more than half of that stemming from the 14,000-plus restaurants in the U.S., according to analyst Sara Senatore of Sanford Berstein. In addition to property appreciation, however, the corporation continues to receive monthly rents of 10% of sales plus a finance fee from franchisees. In fact, franchisee rent accounts for almost a quarter of McDonald’s revenue, rising 26% between 2009 and 2014. It’s clear that real estate continues to be a cornerstone of McDonald’s business strategy.
Restaurant Franchise or Real Estate Franchise?
In recent years, McDonald’s has come under increasingly heavy pressure from investors to consider spinning off their properties into a Real Estate Investment Trust (REIT) instead of continuing to hold them privately. Speculation about this move led company shares to rise significantly after a three-year period of lagging sales. After a lengthy and robust internal debate, however, McDonald’s C-suites decided in 2015 not to separate the real estate holdings from the franchise business. The rents provide a core revenue stream and it is easier to revamp store operations to improve profitability. In addition, the corporation looked to re-franchise more stores than it initially planned to in order to stabilize income flow.
McDonald’s significant real estate holdings make its franchisees uniquely situated. They do indeed benefit from the corporate model which incorporates real estate alongside restaurants because that is what has maintained profitability during bumpy financial times. That profitability enables the corporation to pivot when necessary and stay competitive for the interests of its restaurant franchisees. But, franchisees are not directly invested in the real estate and have no control over questions like whether it should be separated as a REIT. For prospective franchisees looking for a new business opportunity, this may be a fundamental concern.
Considering a Fast Food Franchise? Read This.
If you are thinking about a fast food franchise business, you’ll want to consider the business fundamentals as well as how the model fits into your preferred lifestyle and goals. There are many franchises available—from fast food to real estate—so it’s important to do some soul-searching by comparing your different franchise options according to your personality and work style. While owning a brick-and-mortar business may feel safe, an independently owned and operated real estate investing franchise allows you to be your own boss and steer your business toward unlimited potential financial achievement, without the added pressures of the food service industry. HomeVestors® provides the support and resources you need to help realize your goals if you choose to pursue a real estate investing franchise opportunity. Find out more today!
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