Has Anyone Copied McDonald's Real Estate Strategy?

[Nick Rutkowski]

Just curious to know if anyone has taken Ray Kroc's Real Estate strategy and did it themselves? How well did it work for you and what would you do differently if you had the chance? 

For those of you who don't know Ray Kroc, he's the reason why McDonalds is around the world. He figured out instead of owning the fast food building, own the land underneath and land contract to franchisees. Franchising played a huge role and many people became proud owners of McDonalds. Obviously, the strategy was a success and McDonalds is a multi-billion dollar company with franchises all over the world. 

Of course, this is the quick explanation of Mr. Kroc but a quick google search and you'll get the idea. 

[Don Konipol]

@Nick Rutkowski

You’ve got it a little backwards. McDonald’s does not own land under building unless they also own the buildings. For 40% of their 36,000 locations, McDonalds owns the land and the building, and leases the property to the franchisee. For another 30% of the locations, McDonalds owns just the building, leases the land from a third party real estate investor, and leases the property to the franchisee. In the remaining 30% both the land and improvements are owned by a third party real estate investor, McDonalds is the master lease tenant, and subleases to the franchisee at a 40% markup.

However, the thing to realize is that all this real estate profit is enabled by the fact that the operating system is so successful. Arguably, McDonalds could have charged much higher franchise fees and ended up in the same place financially. However, this probably wouldn’t have worked because with super high franchise fees the perception of potential franchisees would have been that the fee structure was too uncompetitive, and the result would have been that McDonalds would have had slower growth, and their competitors faster growth.

Two other positive results of the McDonalds real estate strategy was (1) franchisees are more locked in since McDonalds is also their landlord (2) McDonalds was able to bypass legislation aimed at franchisors being able sell product at high prices to franchisees and (3) McDonalds benefits from the long term appreciation of real estate prices and inflation.

All in all a strategy that was nothing short of brilliant. But not necessarily easily to duplicate.