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Is McDonald's A Restaurant — Or A Real Estate Empire?

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Is McDonald's A Restaurant — Or A Real Estate Empire?

McDonald's Corp (NYSE: MCD) is a business where consumers walk into a location and exchange money for food or beverages. By every definition, this makes it a restaurant.

But digging behind the numbers makes the case that McDonald's is more of a real estate company than a fast-food chain, according to the popular YouTube channel The Food Theorists.

The History: McDonald's generates more money from royalty revenue and rent payments from franchisees than it does from actually selling food to customers, according to The Food Theorists. To explain this concept, the video reviews McDonald's early history.

Ray Krock teamed up with the founders of McDonald's to expand the chain across the U.S. in the 1950s.

While Krock was successful in expanding McDonald's presence, Harry Sonneborn is credited with convincing the McDonald's team to switch their strategy. This conversation was featured in the 2016 film "The Founder."

Sonneborn argued that McDonald's shouldn't be in the burger business, and rather said it needs to be in the real estate business. It's difficult to build an empire by taking a 1.4% royalty fee on a 15-cent hamburger. Instead, the view was that McDonald's should own the land where each burger is cooked.

The franchising model evolved to consist of a franchisee paying an upfront fee to McDonald's, but under one important condition: the franchisee must operate out of a building McDonald's owns on land it also owns — and pay rent. This is in addition to regular royalty payments.

See Also: Making Sense Of McDonald's Q3 Results

Fact-Checking McDonald's Q3 Results: McDonald's reported third-quarter results that provide an opportunity to put the numbers to the test in 2020.

Approximately 7% of all McDonald's stores are company-owned and operated. This means that the remaining 93% of stores pay some form of rent and royalty to the corporate office.

According to the third-quarter report, the revenue generated through food sales at company-operated restaurants was $2.2864 billion, while revenue from franchised restaurants were $3.0448 billion.

So there we have it. McDonald's generates more revenue from sitting back and collecting rent checks and royalty payments than it does by selling food at its own corporate-owned locations.

Photo by Bryan Hong via Wikimedia

 

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