McDonald's Business Is Not Burgers, It's Real Estate
Ray Kroc, the founder of McDonald’s once asked by a group of students to tell him what business McDonald’s was in.
Everyone in the room was confused by the question and one student took the chance and said that he’s in the "hamburger" business.
Kroc responded that that’s what everyone thinks but he told the students that he’s in the real estate business.
When Ray Kroc received the franchising rights from the founders of McDonalds, Maurice & Richard, Ray Kroc was on his way to make McDonald’s into a household name.
The company was always short on cash because the burgers and fries were super cheap.
Harry Sonnenborn’s, McDonald’s first president, approached Ray with an idea. As McDonald franchises kept popping up, he couldn’t understand how they sell so much in volume but couldn’t even have enough cash as a company.
Sonnenborn’s idea was to form a new corporation called ‘The McDonald’s Corporation.’ This company would be completely new and not the franchise business the McDonald brothers had brought in Ray to expand.
The idea from Sonnenborn was to own the land the franchises were built on and have the franchisees pay them rent. This became the largest source of income especially after paying down the mortgages on the real estate.
"The only reason we sell 15 cent hamburgers is because they are the greatest provider of revenue from which our tenants can pay us rent."
According to Kroc’s autobiography, Sonnenborn quit McDonald’s in 1967 because he thought that after the expiration of initial franchise agreements, the parent company was supposed to kick out the franchisees and take over the restaurants.
The simple decision of changing that aspect of the business model made McDonald’s own more that $30 billion dollars worth of real estate.
Takeaway: Reoccurring revenue with an asset that appreciates with time is like having a unicorn of a business. This is a great lesson on how you can leverage your product and brand to make a consistent stream of revenue. If you have a product business, search for ways you can add a subscription model to have consistent cash flow each month.