Why McDonald’s perform better during recessions?
While travel, leisure and hospitality have taken a down turn during the coronavirus pandemic. Fast food chains are still getting their big bucks in return. Burger King and McDonald’s would often perform better because the cost of food prices are generally much cheaper. People will always need food to eat. In 2009–2010, during the recession while many stores closed down. KFC and Subway lead the way to expand to more locations in the same period. McDonald’s always grew in revenue by opening up more locations each time.
McDonald’s Origins — how it all started?
The “Mc” part means son. “Donald” part means ruler of the world. Started by Richard and Maurice McDonald. They started a series of failed fast food chains including hot dogs during the 1920’s in California during the great recession. When they opened the very first McDonald’s they were doing well but soon realised that most of their revenue was coming from three sources.
Since they figured this out they reduced the number of items on their menu to include the top three sources and re-branded. They stopped using glass plates and replaced them with paper plates. Then McDonald’s became a sensation.
Ray Kroc a businessmen who became in love with the McDonald’s business of selling food. He worked several jobs, one of his many hustling jobs was selling ice-cream machines until he got one big order from the McDonald’s brothers. At this time the brothers had opened for fast food outlets in more than 20 locations but was not doing as well as the main fast food restaurant. They gave Ray the opportunity to open up more franchise locations and he took it with his big open hands. This was when Ray got the idea to buy all the McDonald’s fast food restaurants where it would be built upon to rent it out. This way Ray would be able to keep all the profits while the brothers would walk away with zero dollars. The brothers were so frustrated they sold the company to Ray Kroc.
McDonald’s as a real estate company
There are many McDonald’s locations worldwide but only a small percentage of them are owned by the company. The people who run McDonald’s across the globe lease their name, branding and logo in exchange for a fee known as a franchise. McDonald's buys the property and the franchise owner pays above market rent prices for a 20 year lease as well as royalties. Needless to say, there is also a franchising fee. In addition, they also pay for all the costs associated for running the fast food chain. This includes equipment, signs, seating and decorations.
Believe or not McDonald’s is the fifth richest real estate company in the entire world. The other companies which are higher in revenue than McDonalds
are Wheelock & Company, New World, Henderson and Prologis. McDonalds earn their revenue from rent and not selling burgers.
In 2009, 64% of revenue came from rent and 35% in royalties.
Why does McDonald's sell bad quality burgers for so cheap?
Former McDonald’s CFO Harry J. Sonneborn told his investors. “We are in the real estate business. The only reason we sell 15 cent hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent.”
When McDonald’s started out as a company, they did make most of their revenue from burgers and fries. Billions upon billions of customers have been served McDonald’s.
Lesson to learn
The trick is to own the land of the building and then make the business your tenant.