As a brand they're in the customer satisfaction game, not the burger game like most think. Kroc once said something along the lines of "I don't know what we'll be selling in 30yrs time, but I know we'll be selling more of it than anybody else."
But yes, as a corporation MCD is in the real estate game for a lot of their profits. Obviously because it works, but the strategy also dates back to the 60's with the original franchise agreements that were negotiated which were not high enough for MCD corporation to make a profit. Something like only 2-3% (don't quote me on the figure, been a while since I read the book).
Actually the royalty Kroc started with in his initial deal with the McDonald's brothers was only 1.9% of system sales, of which the McDonald brothers received a 0.5% share. Leaving Kroc with only 1.4% to run the system, which was unachievable.
So to get around this problem, Kroc and his team developed the realestate strategy to both increase MCD income, and give them greater control over their franchisees as at the time, many were not following procedures and standards expected. When push came to shove and MCD tried to force them out, the franchisees just said "screw you" and changed the name on the door when their franchise was taken off them and continued to operate.
So MCD decided by owning the property and only giving tenants leases over the building for 10-20yrs terms at a time (again don't quote me on actual numbers)
yup, 20yrs, but lease could be terminated at any time if McDonald's QSR standards aren't met - they always had the threat of kicking the franchisee out if he didn't meet MCD standards. Owning the property also allowed them to add an extra % to the base royalty as rent for the property on top of a set lease as well, which helped the corporation survive and become profitable (during the late 60's, Kroc and MCD were barely breaking even due to the low fees, which is one of the reasons he had to buy out the McDonalds brothers - and don't believe all the hype, he didn't screw them, in fact they screwed him repeatedly over the years). From memory even to this day technically the royalty is split ie. 3% for the business and 6% as lease for the property. This is also part of the reason the plan to split the McDonalds business and it's properties into a seperate trust was abandoned back in the early 2000's when the company was stagnating - the turnaround helped too, but the property is very intertwined with the business in regards to fees etc so was considered not ideal.
It was such a profitable venture because McDonald's would negotiate for the land owner to build the store for them, for a 20yr lease term of a set $700pm, with no escalation clause. On the other hand, McD's would charge the franchisee $800pm or 8.5% of store sales (whichever is the greater). This worked especially well for them during the high inflation of the 70's when the rent McD's paid stayed the same, but their rents charged skyrocketed.
McDonalds back in the 70's in the US found it relatively easy to secure realestate as this was the same time as so many of the service stations were closing down, and their prime properties - on corner blocks, on busy roads and highways in the middle of suburbia where the young families were - suited MCD perfectly.
This part I remembered completely wrong. Service stations were a big part, but they were the competition for the sites - not the sellers. But they were pretty much the only competition as commercial businesses hadn't really hit the suburbs yet. McDonald's often won out with land owners over the oil co's because they were willing to pay higher return on the land. Oil co's were safe and secure businesses so were offering land owners 7% of the land value for rent, McDonald's came in and offered 10%.
They also found over time, unlike many other businesses - their resteraunts could withstand locations in much closer proximity to each other than their rivals (BKC, Wendy's etc). This was due to the superiority and innovation of their business and attention to detail. But again - the by product was much more real estate accumulation.
They were also extremely highly leveraged in their real estate plays, more so than any other restaurant chain (White Castle was a very similar restaurant with similar strict standards, but their owner didn't like a cent of debt - end result, in the mid 80's WC didn't have any long term debt, but only had 230 stores.
At the point McD's decided to start owning properties instead of leasing, it worked like this:
- They charged a new franchisee a $7,500 security deposit (50% refundable in yrs 15 & 20).
- McD's used these funds as a down payment on the land which they usually negotiated to buy on a 10yr instalment contract.
- Taking out a bank mortgage to construct the building with a down payment from the above funds.
In this way McDonald's started accumulating a vast property portfolio using none of their own money.
It's a fascinating story and I'd highly recommend the book to anyone.