McDonald’s Real Estate Strategy — How Ray Kroc Built a Global Empire
Despite knowing it isn’t healthy, many of us see the McDonald’s Golden Arches and pull in on auto-mode. Let’s face it: McDonald’s is cheap and nasty, but it’s hella tasty, and when you’re on the road, it’s a reliable meal that gets the job done.
That was Ray Kroc’s intention when he took McDonald’s national and then international. As a traveling salesman, he was frustrated by the inconsistency of the restaurants he stopped at, and after pulling into the original McDonald’s restaurant in California, he was hooked on the idea of blanketing America with the golden arches.
However, burgers and fries are only the surface layer of how McDonald’s makes money. The real business model isn’t built on burgers and milkshakes but on bricks and mortar: McDonald’s is a real estate empire posing as a fast food chain.
Let’s look at how Ray Kroc struggled in the early days, how a genius financial mind called Harry Sonneborn saved the company, and how tapping into the power of real estate helped McDonald’s go global.
Burgers and Fries Weren’t Enough
If you’ve read Gridning It Out or watched The Founder, you’ll already know how McDonald’s started. I’ll save that for another post, as there are many business lessons to learn from Ray Kroc, so a series is more than justified.
What many don’t know is that McDonald’s wasn’t an instant success. It was tough going in the early days, and Kroc found himself in financial trouble before he met Harry Sonneborn. Being ambitious, he aggressively opened new locations, but despite growing fast, McDonald’s was only making 1.4% of the revenue from franchises. Having borrowed heavily to finance expansion, Kroc was struggling to pay back his loans. He also had limited power over how the restaurants were run.
While the exact details of how they met are unknown, Kroc met Harry Sonneborn through a mutual business connection. Sonneborn had been a financial executive at Tastee-Freez, and he immediately saw a flaw in Kroc’s business model. He convinced Kroc to buy land and lease it back to franchisees, meaning it would have a steady stream of rent no matter how each location performed, and Kroc would have more control over each location.
In 1956, Sonneborn set up the Franchise Realty Corporation (FRC). This is widely regarded as the turning point in McDonald’s and Kroc’s fortunes.
“You’re not in the hamburger business, you’re in the real estate business.” — Harry Sonneborn to Ray Kroc.
Rapid Expansion and a Growing Real Estate Empire
Kroc had already been expanding aggressively before Sonneborn came along, but the new McDonald’s business model allowed him to put the pedal to the floor. Franchise Realty Corporation started buying land all over America and collecting rent from franchisees. This solved Kroc’s previous cash flow problems and allowed him to open 200 locations by 1960. In 1961, Kroc bought out the McDonald’s Bros, and Sonneborn became the President. By 1970, McDonald’s had over 1,000 locations worldwide.
While the rental income stabilized the business financially and helped Kroc expand faster, the role of the huge capital pools the land unlocked shouldn’t be overlooked. Rather than trying to pay back loans on 1.4% revenues of burger sales, McDonald’s was able to tap existing land values to buy more, and so a virtuous cycle unfolded. Each location provided more rental revenue and yet another plot of land/building that added to McDonald’s assets, which helped finance the next one, ad infinitum.
These days, 85% of McDonald’s 40,000 locations are franchises. That means no matter what the state of the economy or the current concerns of the business world, Ray Kroc’s brainchild just keeps collecting rent. It’s essentially one of the biggest landlords on planet Earth, with a rental income of $7.5 billion annually. That rent comes in hail, rain, wind, or snow — it’s the franchisee's job to come up with it!
What a business model! How can you use what you’ve learned in this post to fuel your business? I’ve been thinking a lot about how one affiliate website can pay for the next one, much like Ray Kroc’s McDonald's model.
If you enjoyed this post, you might also like my posts on Aristotle Onassis or Mark Leonard, two great entrepreneurs and business geniuses from whom you can learn a lot. Check those posts out and let me know what you think!
