Monday, December 7, 2009

McDonalds Real Business Burgers or Real Estate

Last time when I went to McDonald’s outlet in Delhi with my nephew (my sis’ elder son), I decided to irritate him a bit. I just love it when he is frustrated with my questions. He is all of 8, but just like any other kid, outspoken and naughty.

I wanted to give him a tough time and as we entered McDonald’s outlet, I told him that I am not going to buy him a cold drink if he is not able to answer my answer which obviously was to irritate him and he was definitely going to have the cold drinks irrespective of his answer.

“So, Chummu (his nickname) tell me what do McDonald’s sell?”, the moment I asked this question, he frowned at me as if I am a fool or trying to make fun of him by asking this stupid question. He didn’t uttered anything for next two minutes and was double checking at the back of his mind whether the answer he is going to say is correct or not.

I reiterated, “Chummu tell me what is the business of McDonald, what do they deal in?” The purpose of irritating him was seeing some accomplishment as I started smiling and he finally opened his mouth – “mamu don’t make fun of me! They sell burgers aur kya.” I knew this was coming and then started tweaking the question which was not his cup of tea.” Hey dude! I agree with you that they sell burgers but selling burgers is not their core business.

I mean they don’t make enough money from selling burgers. So, what is it which fetches money to them?” The mercury was rising as he could not counter me and made a second guess that McDonald’s then must be making enough money from cold drinks.

On the face of it, Chummu is absolutely right that McDonald’s sell burgers and cold drinks and it is a common perception too. McDonald’s do sell burger but they don’t make enough money from selling burgers as they do from real estate business. Yes, this is what they do in most of the countries abroad. Close to 15% outlets are owned by McDonald and as per their business model which is completely different from other food chain models, they charge rent on the basis of sales. Apart from this, as in case of normal franchise business they also charge franchise fees and marketing fees.

The former CFO of McDonald’s CFO, Harry J. Sonneborn is often quoted as having said -

“We are not basically in the food business. We are in the real estate business.”

“We are in the real estate business. The only reason we sell hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent.”

It is a common belief among masses that McDonald’s, the largest chain of fast food restaurants is a market leader in hamburgers which is true but actually it is a real estate power house. It is the largest commercial real estate landowner in the United States. McDonald’s property portfolio was estimated to be valued around eight billion dollars, as of 2001. To explain it further, McDonald’s makes money on real estate by buying and selling properties which are generally restaurant lots. On the one hand, it invests in hot locations while under performing locations are also sold out to balance the portfolio.

Well !! Chummu is too young to understand the business model of McDonald’s and he finally had his share of cold drinks but next time you don’t lose on yours if someone asks you – What is the business of McDonald’s ?

SOURCE:Amit Khandelia on