Ever wondered how does McDonald’s, the world’s largest fast-food company makes money? What is its business model? McDonald’s operates in over 120 countries in the world as a quick-service restaurant, but do you know it generates major revenue from real estate? Interesting, right?
Well, let’s look at McDonald’s business model and how it makes money more in detail in this article. So, let’s get started…
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Introduction to McDonald’s
Does McDonald’s need any introduction? No, Of course, McDonald’s doesn’t need an introduction, it is quite a familiar brand to people over the world. Especially, it became a household name to the US people since its inception. The business was first started in 1940 by brothers Dick and Mac McDonald as 15 cent hamburgers Speedee Service System. Due to business fluctuations in 1948, the brothers closed their business for a few months. After nine months they reopened it as a self-service drive-in restaurant with a menu of 9 items. Hamburger, cheeseburger, milk, coffee, soft drinks, a slice of pie, and potato chips are the menu items and a 15 cent hamburger is the staple of the menu. With the restaurant’s success, the brothers adopted franchising and ran nine franchises before it became a successful food chain. In fact, this concept of franchising is one of the core reasons why McDonald’s has its unique space
Though McDonald’s was started in 1948, it’s history began in 1954 when a Multimixer salesman Ray Kroc visited Dick and Mac McDonald for supplying more Multimixer orders to them. After Kroc learned their business and their need for a nationwide franchising agent, Kroc joined them as a franchising agent. He opened his first McDonald’s fast-food center in Des Plaines, Illinois in April 1955. To the surprise, the first day sales were $366.12.
In 1961, Kroc acquired the total rights of the company for $2.7 million. In 1967, McDonald’s expanded into international markets with the restaurant opening in Canada.
The company has over 38000 restaurants worldwide in over 100 countries as of January 2020. Undoubtedly, its core values and mission are the reasons why McDonald’s is the most popular food chain restaurant in the world.
Okay, enough said! Let’s quickly get into its business model to learn how it makes money.
Business Model
McDonald’s puts its customers and people first. It’s a large network of food chains do the right things, value customers and their experience. These core values help the company still sit top among its competitors. Franchisees, suppliers, and employers make success to the company as they all work towards a common goal. In fact, this is the primary reason for McDonald’s becoming a dominant quick-service restaurant brand.
While franchisees work for successful entrepreneurship and commitment to communities, suppliers work for ensuring the highest levels of safety and quality. The employees are taught and shared complete knowledge of McDonald’s in all its restaurants to motivate them to work towards its goals.
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As the maximum number of McDonald’s restaurants are its franchisees, the company actually mentions them as a collection of small local businesses providing the same quality everywhere.
With a total of more than 38000 restaurants, 93% of its total restaurants are franchised as of 2018 with an operating income of $8.8 billion. The company’s operating income in 2017 was $9.55. This simply says how valuable the company is.
How McDonald’s Makes Money?
McDonald’s Products
McDonald’s Corporation makes some part of its revenue directly and from all its franchises by selling fast-food items. The menu includes hamburgers, cheeseburgers, french fries, Big Mac, Filet-O-Fish, Chicken McNuggets, oatmeal, shakes, McFlurry desserts, McCafe beverages and other items. McDonald’s offers a full breakfast menu in some of its restaurants.
Product’s Revenue
McDonald’s runs with a brilliant concept of serving the same menu in all its global restaurants without compromising the quality. However, it is never far away from its customer’s tastes and behaviors. It inspired everyone in the company to be customer-centric and is constantly updating their restaurants to provide the utmost customer service.
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In fact, it mentioned three key pillars in its growth strategy which are:
Retain – Retain customers focusing on their strengths
Regain – Regaining lost customers enhancing offerings and convenience
Convert – Converting casual customers into committed customers
Thus the company made a billion dollars revenue with its outstanding strategies.
McDonald’s made $8 billion in revenue in the US market in 2017, the largest amount generated by McDonald’s since its launch.
It valued at 126.04 billion in the year 2018, emerging as the most valuable fast-food chain brand.
Real Estate Revenue
McDonald’s locates and leases sites from landowners that are interested to grow McDonald’s corporation units. Those landowners have to sign a contract of leasing back the improved McDonald’s unit to the company after 20 years. The company then would sublease the store to the franchise demanding a 40% markup for the real estate services. Thus it ensures it has control over the franchise making the person a tenant. This is an unargued business strategy of making steady cash flow to manage the costs and make profits. Only in FY2014, McDonald’s Corporation had received $6.1 billion in rental income as per reports.
As you see above, McDonald’s has a heavy franchised business model which is the company’s long-term business strategy. With a large number of franchisees, over 93% of its total McDonald’s Corporation units, it makes a great deal of income from rental income.
It reported about $37 billion in property and equipment, which is definitely a big deal from real estate. Hence, it’s no surprise to say McDonald’s is a commercial real estate service provider making good amounts of profits.
So, this is how McDonald’s, the world’s leading fast-food chain makes money in two completely different ways.
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Challenges
McDonald’s had seen a disappointing revenue in FY14, the net margins declined by 14% leading the company to oversee cost reduction strategies. Thus it closed underperforming restaurants and revised its other strategies. However, within a short time, the company boomed. In 2019, it posted a net income of $6.03 billion.
The fast-food industry has hefty competition, hence it is really difficult for any company to keep up the position. However, as McDonald’s is constantly working on improving the quality and performance in all its franchisees and restaurants, the company is keeping its position. Moreover, the company identified three accelerators (digital, delivery, and experience of the future in the US) that would drive the company towards growth in all aspects.
Bottom Line
So, this is how McDonald’s works and makes money. This is, in fact, a unique and inspiring business model that is bringing profits to the company.
