"We are not basically in the food business. We are in the real estate business."1
"We are in the real estate business. The only reason we sell hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent."2
Regardless of whether either variant of the quotes above, often attributed to former McDonald's CFO, Harry J. Sonneborn were actually uttered, there is little doubt that they are nonetheless true. While McDonald's does not generally outright advertise this -- although inferences to it can be found on the corporate website -- perhaps one of the most negelected points people seem to miss, when talking about McDonald's, is the fact that the corporation is a real estate powerhouse.
The largest commercial real estate landowner in the United States, McDonald's property portfolio was estimated to be valued around eight billion dollars, as of 2001. The origins of McDonald's real estate empire begin much earlier than this, however.
Although McDonald's first opened its doors in 1954, it wasn't until 1956, after courting many an investor, did Ray Kroc consider and implement an idea put forth by Sonneborn, to tap into the real estate market. Shortly after Sonnenborn made his pitch to the investors (the same audience to whom he purported made the statements above), the Franchise Realty Corporation, McDonald's real estate subsidiary, was born.
In simplified terms, McDonald's makes money on real estate via two methods. First, it buys and sells properties, as one might suspect. Often these are restaurant lots, but such is not necessarily always the case. McDonald's will buy properties that it feels are, or will be, hot locations, and it of course sells properties that are underperforming or otherwise not doing so well. Again, all of this seems pretty orthodox.
Secondly, on top of the franchise fees which McDonald's charges its franchisees to use the "McDonald's" name, it charges rent to the franchisees to use the corporately-owned properties. According to their August, 2003 10-Q, McDonald's had approximately $1.6 billion dollars in earnings available for fixed charges, for the six months prior to June 30, 2003. Of those earnings, $141.6 million -- nearly ten percent -- came from "rent charges...considered to be representative of interest factor"3.
...nope, those numbers sure ain't no small fries.
In the end, while it is true that McDonald's is best known for its famous burgers and fries, it might be said that the corporation's overall focus is aimed more at construction than consumption.
Works Cited:
- 1http://www.swarthmore.edu/bulletin/archive/96/nov96/backpages.html
- 2http://www.campusprogram.com/reference/en/wikipedia/m/mc/mcdonald_s_corporation.html
- 3http://eol.finsys.com/%5Cedgar_conv_html%5C2003%5C08%5C08%5C0001047469-03-026735.html
Works Referenced:
- http://www.smartmoney.com/tradecraft/index.cfm?story=20020415
- http://www.realestatejournal.com/reits/reits/20010711-gibson.html
- http://mcdonalds.com/corp/franchise/realestate.html
- http://www.bus.lsu.edu/academics/entrepreneurial/franchiseclass/pages/Knowledge/Introduction.html