How Does McDonald’s Make Money?

Consumer interests of the people result from mass manipulation devised by the companies where the recipients are constantly bombarded with advertisements, discounts, gateways, and other promotions. In the case of McDonald’s, it’s the aromatic fried chicken, mouth-watering cheeseburgers, and chilled milkshakes available in almost every corner of the world. McDonald’s is not just a fast-food chain- it is instead a real estate company worth 30 billion$. The business earns much of its revenue from acquiring land and properties then renting them to franchisees to run businesses using its names and techniques. Lets know How Does McDonald’s Make Money?

How Does McDonald’s Make Money?

It is not only about food

Established in 1940, it had not taken much time to attain the title of the world’s largest restaurant chain by revenue. Recurrently adapting to customers’ demands and criticisms, the company has employed 17 million workers ranking as the highest job provider in the entire globe after Walmart. Anyone who encountered the vastness of this successful fast-food empire, not be surprised by their profit gain. But they would be if they knew how much money McDonald’s makes per year. In contrast to the majority assumption, food is not the primary source of these earnings.

According to 2018 data, the company serves 68 million customers a day through its 37,855 outlets: among which 35,085 were franchised. On the way, it has emerged to the apex of most favoured family restaurants and “Quick Service Restaurant (QSR).” The company acquired a brand value worth almost 130.36 billion US dollars while securing total assets of 47.5 billion USD in 2019. It can be well-attributed to its incorporation of the franchise and institutional training in 1955.

Real estate and food

 Hence, It makes money leveraging its products, essentially fast food. However, McDonald preferred to buy the physical properties and then lease them to franchises rather than agreeing with individual brand restaurants. That is, the franchised locations were managed by individuals whom McDonald’s has contracted to maintain them.

It is proved that McDonald’s gets 82% of its income from these franchised restaurants. This motive is behind the target of acquiring a 95 percent franchise in the immediate future. To be more precise, the company only pays for that Location’s real estate. At the same time, the franchisee is simultaneously burdened with running the centre with all its cost and repaying McDonald its rent. Hence, the label of a real estate company is more suitable to McDonald’s than a corporate restaurant chain. The food is bait for the tenants to pay the company steadily.

Approximate ninety-three percent of franchised restaurants have their advantages. The revenue system is characterized by stability and predictability while it accounts for low operating costs. A constant income and rent in this regard have ensured a promised profitability to the company. The controllability over land and lease also provided them with authority over negotiating deals and the monthly tenure from the franchisee. The system has saved them from the expenses of running an enormous corporate chain and supporting them to expand their investment.

Numbers speak

A 2015 analysis points out that total sales for an average location are $2.7 million per store each year. While considering the cost of food and paper, it further shrunk into $1.7 million in gross profits. A single franchisee receives an average operating income of $154,000 per year, accounting for all other expenses, including rent, payroll, advertising, promotions, running supplies, insurance. About 22% of the average gross profits of each franchisee is paid as rent when multiplied by nearly 36000 franchised McDonald’s restaurants provide a massive fortune to the company. In brief, company financial disclosures show an annual profit of around $4.5 billion apart from the$30 billion real estate assets.

It is essential to consider that real estate often increases in value over time, unlike many other investments. Even if that is the case, the authorities allow McDonald’s to deduct depreciation from taxable rent. However, the rise in real estate’s values in the past decades might substantially increase the overall collateral value of the company’s property. This further benefit the company to make new investments by borrowing money at relatively cheap rates. Apart from these privileges, the US tax code provides immense support to real estate. 

Tactical approach

Amidst the tactics of the industry, their franchise is held at super demand. Franchisees are also subjected to specific criteria. They are provided with impressive and nearly assured money-makers due for performing their roles: Salary payment, Supply order, rent contract. Furthermore, the infamous nature of turnovers in the restaurant industry is the trivial reason to support these mechanisms. In 2019, McDonald’s rose to the 5th most prominent real estate company in the world. During the same time, its significant revenue from the franchise were 64%, 35 %, and 1 % respectively from rent, royalties, and initial fee. With decades full of experience in this business, it is effortless for them to choose ideal locations for the purpose. 

For example, intersections with high traffic spaces are often considered a desired place to start restaurants. The company weighs traffic services and space availability and buys the property with long-term fixed interest rates. Their huge existing property holding provided with most favourable deals. An accessible location close to high spenders is a market tactic to lure customers. Customers are the starting point that approaches the service provided by the restaurants, which contributes to the rent to McDonald’s. 

The factor of average Location contributed to 2.7 million dollars in sales. When someone signs the franchise agreement, they stipulate every detail about running the establishment as suggested by the company. These franchisees required to pay;

  •  An upfront investment of 1-2 million dollars
  • down payment
  • One-time franchise fee of 45 thousand dollars
  • Monthly ongoing royalties.

Monthly payment and rent is crucial source to repay the debt behind land and building acquisition. As a result of new stores, add both to its revenue and its real estate holdings. 

Conclusion

To conclude, McDonald’s as a fast-food company is a common misconception. It is a real estate company that gains profits from the mortgage from chained-system of restaurants. The attractiveness of the brand and its menu make it a desirable enterprise among franchisees. The more the franchisees receive from their restaurants, the more rent yielded to McDonald’s company. The company invests this profit in more endeavours and properties, employing millions of people and influencing the economy. The profitability of these franchisees depends on the Location, the percentage of rent paid to McDonald’s, and how well you manage your place. 

Frequently asked questions

Who gets the profit from McDonald’s?

A considerable amount of McDonald’s profit goes to its shareholders. In 2016 alone, the company has given shareholders around 67% of its total profit. The rest of the money is reinvested into market operations for further expanding the operations. 

Who owns McDonald’s?

McDonald’s was founded by Richard (Dick) and Maurice (Mac) McDonald in 1940. The triumph of the world’s most profitable enterprise started from a hot dog stand in California, the USA, famous during car racing seasons. American businessman Ray Kroc partnered with the McDonald brothers in 1955, who owned ever since. He Brought it out in 1961 and introduced the

franchise. He was opened first in Illinois, USA. Later transformed into McDonald’s System, Inc., known today as the McDonald’s Corporation. Kroc died in 1984. Currently, Chris Kempinski is the Chief executive officer of McDonald’s.

Do McDonald’s profitable for franchise owners?

Business Insider claims a franchisee acquires an estimated yearly profit of $150,000 a year. A gain of $150,000 from $2.7 million in sales is not even 6 percent. Franchisees are left with this amount considering all the expenses such as food cost, supplies, crew payroll, and other costs imposed by the corporate. The purchase of the franchise is also not a cheap affair. The initial investment of a franchisee is falling between $1 million and $2.2 million.

What is the business strategy of McDonald’s?

Product strategy: The products are famous around the world. The primary food items are burgers, French fries, breakfast items, soft drinks, milkshakes, and desserts. But changes have been constantly and made to adapt to customers' demands and geographical preferences. It also ensures low prices, customer services, and fast services.

Price strategy: This has aided the reputation of the firm. However, other means to improve profits are also utilized. Combo offers and special offers are such means. Distribution strategy: The company only select desirable Location considering various factors such as availability of space, availability of traffic facilities, and accessibility to the Location.

Promotion strategy: The company incorporates various promotion campaigns and other procedures such as offers and advertisements to attract and modify people’s interests.

Marketing strategy:

  • Value-added menu improvements
  • cost savings
  • operational efficiencies
  • improving brand awareness are some of the techniques used to influence consumption patterns

 Financial Strategies: Franchise is the single most financial strategy promoted to ensure maximum profit with minimum investment. Allowing franchise restaurants in the land owned by the company provides both rent and profit share, which invested in other properties and enterprises

along withholding them.

How Does McDonald’s Make Money?

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