McDonald’s is an American fast food company and is the world’s largest restaurant chain by revenue, serving over 69 million customers daily in over 100 countries across approximately 36,900 outlets as of 2016.
Although McDonald’s is best known for its hamburgers and french fries, they also feature soft drinks, milkshakes, wraps and desserts.
McDonald’s was founded by Richard and Maurice McDonald in 1940 in San Bernardino, California. What helped to gain popularity of the restaurant was the ‘Speedee Service System’ introduced by the brothers in 1948. High quality food and lightning-fast service were the backbones of their restaurant, that managed to attract a large customers.
In 1954, Ray Kroc, a travelling salesman came across McDonald’s and was immediately impressed by the fast service, high-quality food, disposable packaging, and a family-friendly atmosphere that the restaurant provided. Ray met the McDonald brothers and suggested them to franchise the restaurant as he saw a huge potential in this fast food business. The brothers hesitated but Ray persisted and eventually convinced them to allow him to lead their franchising efforts.
Ray hits on the idea of franchising to middle-class investors, who have more incentive to be hands-on and are willing to follow the McDonald’s formula. This proved successful, and new franchises began opening.
Despite the success, Ray began to encounter financial difficulties as his share of franchise profits was limited due to his contract with the brothers. During this time, Ray met Harry Sonneborn, a financial consultant, who reviewed the McDonalds’ business. Sonneborn told Ray that the real profit opportunity is in providing real estate to the franchisees, which will not only provide a revenue stream, but give Ray leverage over his franchisees and the brothers.
Soon Ray incorporates a new company named Mcdonald’s Corporation and demands to be released from his contract and bought the McDonald brothers out. The brothers agreed to a $2.7 million lump sum payment, ownership of their original restaurant in San Bernardino, and a 1% annual royalty, but when the time comes to finalize the agreement, Ray refuses to include the royalty in the settlement and instead offered it as a handshake-deal. The McDonald brothers were forced to take their own name off the original restaurant and Ray opened a new McDonald’s franchise directly across the street, finally putting the brothers out of business. Also according to reports McDonald brothers were never paid their royalties, which could have been approximately $100 million a year.
McDonald’s is a heavy franchised business model company. The McDonald’s Corporation revenues come from the rent, royalties, and fees paid by the franchisees, as well as sales in company-operated restaurants.
About 92% of the company in 2017 was represented by franchisee-run locations i.e. people who agree to operate individual McDonald’s restaurants with a licensed privilege to the branding. But rather than collect a lot in royalties or sell its franchisees cooking equipment, McDonald’s makes much of its revenue by buying the physical properties and then leasing them to franchisees, often at large mark-ups. This is how McDonald’s has become more a real estate company than a restaurant chain.
The company also keeps about 82% of the revenue generated by franchisees, compared with only about 16% of the revenue from its company-operated locations, which is reduced by the expenses of running those operations, according to the investment blog Wall Street Survivor. This is the reason why the number of franchisee McDonald’s locations has been steadily growing, as the company-owned number has dropped slightly in the last decade.