It seems crazy that fast food restaurants like McDonald's can stay in business when
the cost of their food is so low.
How can anyone really turn a profit offering dollar menus, coupons, and value meals?
While it may seem like fast food restaurants are pricing themselves out of business, the
most successful ones employ lots of tricks to make sure patrons keep coming back.
Plus, there are some factors most people don't consider.
For example ...
Real estate
One of the most surprising ways that fast food companies make money has nothing to do
with food.
Most fast food restaurants are licensed franchises that fall under a much larger corporation.
These corporations make a lot of money from real estate by leasing out franchises to smaller
companies or individual owners, who then turn over a percentage of their profits.
One former CFO of McDonald's said the company is "not technically in the food business.
We are in the real estate business.
The only reason we sell fifteen-cent hamburgers is because they are the greatest producer
of revenue, from which our tenants can pay us our rent."
McDonald's owns about 45 percent of the land and 70 percent of the buildings that are home
to its franchises.
In 2014, roughly a third of their $27.4 billion in revenues came from their franchised restaurants.
After all, those fees have to be paid, no matter how business is going.
Limited menus
Fast food restaurants cut down on overhead by offering limited menu items.
This helps keep their costs low and leads to higher profit margins, since the foods
they offer are typically cheap to make.
For example, a 50-pound bag of potatoes can be purchased for less than $10.
This means the side of fries you spend a few dollars on actually costs the restaurant pennies.
Burger joints don't offer very many side items, so there's a good chance most customers will
just default to those super-profitable French fries.
"How do you know you're gonna love the taste of these fries?
That's how."
Upselling diners
The main purpose of value menus or coupons is to lure the customer into the restaurant.
From there, fast food places employ other tactics to make sure that they make a profit.
While that value menu may look tempting, restaurants will try to steer you away from the lower-priced
items in favor of more expensive foods.
This tactic, called upselling, is used in most industries and is one of the ways fast
food companies keep turning such large profits.
You might tell yourself you're going to just order a one dollar burrito, but when you get
to the restaurant and see mouth-watering images of combo meals, there's a good chance you're
going to rethink your order.
Fast food menus will prominently feature these tantalizing images to convince you to spend
more money.
And even if you manage to hold out even after seeing the pictures on the menu, there's still
a good chance you'll cave when the cashier asks if you'd like fries with your order.
Fast food restaurants employ this psychological tactic because they know it will be hard for
you to say no.
A study conducted at Eastern Illinois University found that people will eat 85 percent more
when asked directly, according to Eat This, Not That.
It's harder to turn down that extra food when you're being asked if you want it by another
person.
By using this method, restaurants know they can easily get you from purchasing a single
item from the value menu to dishing out five dollars or more for a meal.
"McDonalds and you and you!
You too!"
Cashing in on extras
If you've ever added guacamole to your burrito bowl at Chipotle, you know
what it's like to get hit with an extra charge once you get to the cash register.
But even with the sticker-shock, customers still pay up, and in droves.
As it happens, the restaurant is making a pretty decent profit off of that dollop of
guac.
A single avocado costs between 50 cents and a dollar, but Chipotle charges an additional
two bucks for a side of guacamole.
Considering the popularity of the dip, those profits add up pretty quickly.
Low prices, low wages
Another way fast food restaurants keep their costs low is paying their workers lower salaries.
Despite raking in a ton of money each day, the average fast food place pays their employees
just a little bit over the federal minimum wage.
This drives down the overhead cost significantly.
Low wages may help restaurants cut down on costs, but it has a lot of people frustrated.
Many workers have demanded higher minimum wages in recent years.
Convenience
Fast food restaurants are a multi-billion dollar industry in the United States alone.
When you factor in the number of locations all over the world, you're looking at a business
that turns astronomically large profits.
The average American spends roughly $1,200 on fast food each year, with around 9.3 million
Americans served every day.
One of the reasons they're so popular is their sheer convenience.
It can be hard for many people to find the time to cook or sit down for a meal, but fast
food restaurants offer a far faster option.
Soft drinks, hard cash
Fast food restaurants make a profit on soft drinks — they're one of their biggest moneymakers.
A large soft drink may only cost you a buck or two, but that can translate up to a 90
percent profit margin for restaurants.
Each soft drink sold costs the restaurant less than a quarter.
High profit margins on soft drinks are one of the reasons that fast food restaurants
can afford to offer cheap options like dollar menus in the first place.
While they might actually lose money on those items, they more than make up for it in soda
sales.
"This ice cold Coke is calling you: 'I'm just a dollar!
At McDonald's!
Come get me!"
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