September 30, 2016 Comments Off on McDonald’s Secret Sauce: Commercial Real Estate Views: 948 Connect Classroom

McDonald’s Secret Sauce: Commercial Real Estate

This post was contributed to Connect Media by QuickLiquidity.

McDonald’s is the world’s largest chain of hamburger fast food restaurants. They open more stores a year than there are Chipotle locations worldwide. In fact, of McDonald’s 35,000+ locations, they have more retail storefronts than Burger King, Wendy’s, Taco Bell and Arby’s combined. McDonald’s employs more than 1.8 million people worldwide, more than the population of Philadelphia. Every single day, McDonald’s serves almost 1% of the entire world population, about 66 million people. That equates to about 75 hamburgers every second, or 5 billion annually. These statistics are astonishing accomplishments, but did you know that McDonald’s makes more money in real estate than from hamburgers? In fact, McDonald’s has nearly $30 billion in real estate holdings, making it one of the largest commercial real estate owners in the world.

Business historians usually attribute Ray Kroc with McDonald’s’ story, but in fact it was another employee that was the real genius behind their success – Harry Sonneborn. Kroc (and the McDonald Brothers) was very sincere about selling the American consumer quality, fast, cheap food. But it was Harry Sonneborn that became the key to McDonald’s success, by envisioning real estate, rather than fast food, as the real profit for McDonald’s.

In the mid 1950’s when McDonald’s began, each restaurant required a land parcel. Franchisees needed Kroc to finance the land in order to build the restaurant. Yet the restaurants were not making enough money to pay the debt on the land. Kroc was forced to build one store at a time due to the requirements banks imposed on the real estate acquisitions. Kroc could not get financing to open multiple locations at once, making it difficult to expand. He had to find another way. Then in 1956, Kroc hired Sonneborn, who immediately saw the writing on the wall; fast food didn’t make enough profit to sustain their expansion plans. Something had to be done. Investors were sought, and banks were tapped, but neither Kroc nor Sonneborn found anything landing in their favor.

Then Sonneborn figured it out; McDonald’s would lease the whole site for each restaurant (including the land) from a land owner, rather than purchasing the parcel outright. Then McDonald’s would sublease it back to the franchisee, who would manage the restaurant. McDonald’s would eventually prove a consistent revenue stream and acquire a mortgage to purchase both the land and the building. To do this, they created the Franchise Realty Corporation, which handled all the transactions. It worked. The strategy Sonneborn created allowed Kroc to buy out the McDonald brothers in 1961 for $2.7 million, enough to pay each brother $1 million after taxes. Today, McDonald’s is a publicly traded company worth around $100 billion dollars. By 1963, Kroc and Sonneborn opened their 500th McDonald’s location. Sonneborn eventually became McDonald’s CEO.

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