There are two brands that everyone knows regardless of where they are.
Two brands that represent how far the American culture has gone.
Coca-cola and Macdonald’s.
Despite the fact that they are both unhealthy, the world loves them.
It is the world's largest restaurant chain by revenue, serving over 69 million customers
daily in over 100 countries across 37,855 outlets as of 2018.
When Russia started its invasion of Ukraine, the news that hit the world was when Macdonald’s
announced that it's leaving Russia in solidarity with Ukraine.
It closed down its 850 locations across the country and leftover 62K people jobless.
It was an absolute shock since it's one of the biggest private employers in the country.
The exact opposite happened a little over 30 years when the soviet union opened up to
the world.
On the 31st of January 1990, the first-ever Macdonald’s opened its doors in Russia.
People stood in lines for hours just to find out how an American burger tastes.
A year later, the soviet union collapsed and Macdonald’s expanded to over 850 stores.
I am not trying to make a case that was the reason but you know, it's an interesting coincidence.
When Macdonald’s opens a store in your country, it's a sign that the country has embraced
globalism, and the opposite is true.
When you look at Macdonald’s, their business model seems simple, sell American-style burgers
and french fries and don’t forget to place a few ice-cream machines that never work)).
That’s how restaurants usually work.
However, that’s not how Macdonald’s actually makes money.
Macdonald’s doesn't make money by selling burgers or nuggets because it's not in the
business of selling food but rather it's in the real estate business.
What?
What Macdonald’s has to do with real estate?
Tech billionaires might dominate the Forbes list with their enormous wealth that derives
from their share in companies they have founded.
But, the people who actually make money are the ones who own properties and rent them
out.
The coffee shop on the corner of the street might make a lot of money, but a huge chunk
of that cash goes directly to the pocket of the owner of the property and that’s what
Macdonald’s realizes early on when starting its business.
Selling burgers might be an interesting business, but it’s nowhere as profitable as real estate.
When Ray Kroc purchased Macdonald’s, he struggled to grow the business.
He knew that the only way to grow this business is through franchising because there is no
way to open dozens of thousands of stores across the globe.
The only way is to use the power of small investors who would agree to operate individual
McDonald’s restaurants with a licensed privilege to the branding.
The only question is - if franchising is so efficient, then why other brands aren’t
as successful as Macdonald’s?
Ray had spent his entire life visiting restaurants across America, selling giant milkshake machines.
He used to tell his customers, that people don’t want to wait for 20 minutes to get
a milkshake and demonstrate his machine which made 8 or milkshakes in one go.
He went from one sales call to the other, getting rejected.
People simply didn’t see the need to buy such a machine.
They never thought the food was a time game.
People definitely wouldn't mind waiting half an hour for well-cooked food in a nice restaurant
but when you are in a hurry, all you want to do is grab your meal in a few minutes and
get back to work.
But the only way to make that work is by franchising.
The problem with franchisees is that they are unpredictable since the revenue depends
highly on where it’s located and who is running the franchise.
So it came up with a more stable franchising model.
It purchases the land on top of which Macdonald’s is built and leases the land to the franchisee,
by leveraging its product, fast food, to franchisees who have to lease properties, often at large
markups, that are owned by McDonald's.
The MacD brand will attract large crowds to the store and in return will the company will
receive a stable stream of income from rent.
That’s how McDonald’s owns thousands of iconic pieces of real estate around the globe.
From New York City’s Times Square to Moscow’s Red Square, McDonald’s has ventured around
the world, buying up prime real estate.
Franchisees pay McDonald’s a cut of their food sales, but a much larger portion of McDonald’s
revenue comes from the rent that it leases.
After all, rent in Times Square isn’t cheap, but a Big Mac is.
On top of the royalty that Macdonald’s makes on its franchisee’s sales, it has a stable
income from leases that it collects from dozens of thousands of locations across the world.
As a wise man once said: “You don’t build an empire off a 1.4% cut of a 15-cent hamburger,
you build it by owning the land on which that burger is cooked.”
And that’s what separates Macdonald’s from the rest of the restaurant chains.
Its business model is closer to Netflix than a restaurant since it's more of a subscription
business.
Its revenue is far more stable and, most importantly, predictable, while the operating costs are
measurably lower, allowing for an easier path to profitability.
The only question is - why would anyone become a Macdonald’s franchisee?
Why start a Macdonald’s franchise when Macdonald’s is actually making most of the money?
The answer is simple and straightforward.
The restaurant industry is extremely competitive and most restaurants are barely surviving
since margins are really low.
The restaurant business seems pretty simple since you don’t have to reinvent the wheel.
But often margins are so low that only 20 percent of restaurants actually end up making
money.
About 60% of restaurants fail in their first year of operation, and 80% fail within 5 years
of opening.
So, if you can survive in the restaurant business, you can make it in any other industry.
And that’s what makes Macdonald’s such a lucrative business.
Margins are so high and the brand is so popular that there is no way you wouldn't end up making
money since Macdonald’s often has notoriously strict criteria for its franchisees to make
sure that it works out.
Have you ever seen a MacD that doesn't attract large crowds?
That’s how Macdonald’s rose to become the most valuable fast food brand in the world
with an estimated value of about 184 billion U.S. dollars.
Even if you take KFC, Subway, Burger King, Domino’s pizza, Pizza hot all tother, they
wouldn't be as valuable as Macdonald’s.
the second-largest chain is Starbucks, which comes at half of MacD’s valuation.
Macdonalds hold almost 60 billion dollars worth of real estate worldwide, which makes
it one of the largest real estate holders in the world.
That’s why its 184 billion dollar valuation isn't just based on investors' expectations
but rather is backed by real hard assets.
in 2014, the company made $27.4 billion in revenue, with $9.2 billion coming from franchised
locations and $18.2 billion from company-owned locations.
It’s clear where most of the company’s profits are coming from.
As real estate prices kept rising in the last years, so did the company’s stock.
It’s of course a slow business model that doesn’t promise any astronomical returns.
Since Macdonald’s owns the locations, it’s extremely careful in choosing the locations,
but once it chooses a location, the rest is simple and straightforward.
In other words, instead of aiming at profit margins, the company is focused on creating
passive income sources.
each new location is one way or another a passive income source.
its valuation might not shoot to the moon like some tech stocks ( yes I am talking about
tesla), but its steady gradual approach makes it crisis-proof.
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Thanks for watching and I will see you at the next one.