Food Theory: McDonald's is NOT a Restaurant!

hi i'd like to start a mcdonald's franchise mctastic so this says you agree to pay a franchise fee up front a mick franchise fee if you will nice and you'll have to pay us a percentage of all your mixed sales okay also we get to pick the location of your restaurant we own the mcbuilding and you can only make rent from us this is a bit more intense than i was expecting i owe my mixed soul to the company should we do this another time you seem [Music] mcflurrious hello internet welcome to food theory the channel that's just a front for a thriving cat herding business it's no secret that i'm a foodie a fast foodie in fact and mcdonald's was my home cooking growing up my diet was a daily rotation of mcburgers mcfries and mixed sodas realizing that that might not be the healthiest option i tried to get into their salads for a while the mix shakers but to be honest they mix sucked sure over the years i've watched as mcdonald's has changed and evolved classing up their dining spaces expanding into specialty coffees introducing video games into their play spaces seriously when mcdonald's first put nintendo 64 consoles in the play area it blew my mind and yet for all of that change mcdonald's has been a constant i know what i'm gonna get i know what it's gonna taste like i know that the ice cream machine is gonna be broken i know mcdonald's and so do you or do we about five years ago when i was searching for my first house our realtor told me something that completely blew my mind no joke it was one of those moments that you have in life when your perspective completely changes about the world around you like when you find out that the illuminati is actually real i mean what no i forget that i said that anyway our realtor told me that mcdonald's isn't a food company it's a real estate company you heard that right the most famous and highest grossing fast food chain in the world actually generates more from real estate efforts than they do from you know actually selling food the food is a side business for their purchasing and owning of buildings and land in the five years since this little factoid has appeared on lots of different listicles but in all honesty this was one of the reasons i wanted to make this channel in the first place to tell you mind-blowing stuff like this i mean having multiple revenue streams is smart business but this goes way beyond mere diversification mcdonald's is arguably the most successful restaurant chain in history and yet they're somehow even more successful in an entirely different industry so that's what we're getting to the bottom to today theorists is mcdonald's primarily a real estate company or is that just some click-baity distortion of the numbers and if mcdonald's is a real estate company why how so put on your business socks people cause it's business it's business time let's start at the beginning mcdonald's was founded in 1930s california by the mcdonald brothers richard and maurice the earliest version of the restaurant which served hot dogs and barbecue didn't really resemble what we know as mcdonald's today except for one thing getting food to its customers fast the mcdonald's brothers were way into efficiency and optimization theory for another day and their speedy service system caught the attention of milkshake mixer salesman ray kroc who teamed up with the brothers and in 1955 began building mcdonald's franchises outward from california at a feverish pace however crocs fortunes didn't really take off until he met an investor named harry sonneborn who introduced croc to a new way to make money in the restaurant business real estate this clip is from the 2016 film the founder a film i highly recommend if you haven't seen it gets really into the heart of the matter you don't seem to realize what business you're in you're not in the burger business you're in the real estate business you don't build an empire off a 1.4 cut of a 15 cent hamburger you build it by owning the land upon which that burger is cooked spoiler alert soniborne's idea proved to be wildly successful and definitely a lot better than dunder mifflin infinity and with sonneborn's help ray kroc implemented changes that would alter the course of mcdonald's history making him an insanely wealthy man worth over 600 million dollars when he passed away in 1984. so here's how the new system today referred to as the sonoborn model worked let's pretend it's the late 50s and joe regular guy wants to open up a mcdonald's to do it he needs to purchase a franchise basically permission to open a restaurant from ray kroc croc is happy to sell a franchise to joe after all it's his job to build out a network of mcdonald's franchises across the usa however croc and sonoborn have now added themselves a catch in order to get a mcdonald's franchise joe regular guy must agree to operate out of a building that croc chooses on land that the company owns now this new type of arrangement accomplishes a couple of things first it gives mcdonald's increased control over its franchises allowing them to strategically place the different franchises at appropriate distance away from each other and to ensure that their locations are in the ideal parts of town secondly it enables mcdonald's to collect more money from its franchises than ever before not only does mcdonald's get to collect a one-time 45 000 franchise fee and a percentage of sales from each of those franchises but they also get rent checks from their franchises that's right mcdonald's is also joe regular guy's landlord and when there's you know statistically a new mcdonald's opened every 14 and a half hours somewhere in the world that's gonna add up mcdonald's along with many of the other fast food chains that you know and love use the sonoborn model of real estate ownership within their franchises to this very day and hey when the restaurant doesn't work out they can always just sell the land but wait there's more the real estate benefits to mcdonald's don't end there in addition to collecting rent there's also tax benefits to be had there's a lot of upside if you own a commercial building and know what you're doing and boy howdy does mcdonald's know what it's doing first the use of commercial land is a tax write-off meaning that whatever it costs you in a year to buy and keep that land is going to come out of your income before you pay taxes and this is important businesses that earn a lot of money want as much to come out of those earnings as possible so there's as little left to tax at the end because taxed money isn't coming back to you or your business so they buy equipment they give away bonuses they invest that money all of it to get it off the books before it gets taxed so sure you might not need that extra camera or whatever but by spending money on it you're basically getting a 20 discount on it the 20 that would otherwise be handed over to the government through taxes as any accountant will tell you you want your business to basically look like it's earning zero dollars at the end of the year by spending that money on things that help the business but can also function as tax write-offs i'm not saying this is wrong or right by any means by the way i'm just saying that it's legal and so smart business people looking to hold on to their money try to exploit this for all it's worth and the sonoborn model really works that system they own the land and land is a really weird category of business because unlike other things you buy like say your car or your phone land isn't expected to expire or deteriorate in accounting this is called depreciation and you feel it if you've ever tried to sell an old car that you've driven down into the ground by the end of its life it's worth practically nothing well it turns out that you can use depreciation to your advantage with taxes and accountants can spread out the cost of large purchases over the lifespan of that item for a concrete example let's say i buy a new burgerbot 2000 which is capable of pumping out hamburgers all by itself and i expect it to churn out those burgers for the next five years before it starts to break down if it cost me a hundred thousand dollars to buy i can choose to amortize the cost which is to say i can incrementally take its depreciation into account on my taxes when i do this i would be telling the irs that instead of deducting the full hundred thousand dollar purchase for my burgerbot this year i want to instead deduct twenty thousand dollars every year for the next five years same amount but now it's just spread out this might just seem like a silly difference but when you're dealing with way bigger numbers and tricky tax brackets that kind of distributed long-term cost can massively reduce how much you owe each year here's how let's say burgerbot and i are able to earn 50 dollars in a year if i deduct the full hundred thousand dollar cost of buying the bot on my taxes in the first year i'd be showing the government that i wound up with a net loss of fifty thousand dollars in that year i would pay zero dollars in tax because i've shown the government i didn't earn any money but then for the next four years i'm paying 21 on my full 50 000 earnings that's 10 500 each year for a grand total of 42 000 paid in taxes across all five years that is in scenario one deducting everything up front but now let's look at scenario two where i spread out the cost of burgerbot deducting 20 000 from my earnings every year instead of that minus 50k on year one and plus 50k every other year now i'm telling the irs that i earn 30 000 every year the 50k that i do earn minus the 20 000 distributed costs of the burgerbot i'm still paying that same 21 each year in taxes for five years but now it's off of 30k instead of 50k which winds up being 6 300 a year or 31 500 over the five years that burgerbot is expected to function that translates to an extra ten thousand five hundred dollars that i get to keep over that five year period just because of some funny tax work with depreciation schedules even if you didn't follow any of that example the tldr here is that spreading out costs can save you huge bucks in the long run and when you're a company like mcdonald's with a massive 21 billion dollars in revenue in 2019 alone those sorts of cost savings are gonna add up but how do they do that why is any of this relevant i just said that land doesn't depreciate and while that's true anything you build on that land does pave the lot that's now improved land built a building you can depreciate that and there's a really weird loophole that helps mcdonald's here in a big way because rented land can be depreciated and almost all of mcdonald's land is rented only seven percent of mcdonald's locations are actually owned and operated directly by the company the remaining 93 of locations are franchises thanks to all of those locations in 2019 mcdonald's reported 1.39 billion dollars in total depreciation which accounts for roughly 292 million dollars in a single year of tax savings which is a lot a lot of money but with annual revenue of 21 billion dollars it's barely a rounding error and that's why it's now time for us to talk about revenue versus earnings revenue is the total amount of money you pull in period you don't subtract costs you don't subtract taxes you just count up all the money that you collected in the year and that is your revenue your earnings are different that is what you actually made at the end of the year after you factor in all of your costs when you look at mcdonald's their revenue and their earnings tell totally different stories remember how i said mcdonald's only owns and operates seven percent of its locations well that seven percent makes up a whopping 47 of its revenue that's right the seven percent of company-owned locations make almost the same amount of money as the 93 of franchises combined but owning the locations comes with a lot of costs so when it comes to earnings the script actually gets flipped the company-owned locations need to pay all their expenses from equipment and staff to the land costs that means that despite pulling in 9.42 billion dollars from their company-owned locations in 2019 they only kept 1.5 billion of those earnings meanwhile mcdonald's barely has to do anything to keep its franchises running since that's the franchisees job as a result mcdonald's gets to keep about 86 of the franchise revenue is earnings meaning that of the 11.6 billion dollars that they made in 2019 they got to keep over 10 billion of that so what percent of all that is rent as opposed to money from you know actually selling hamburgers you remember from way back when you thought that that was what this company did well mcdonald's doesn't break it down in their financial reports but we can make use of the numbers we have available to make a reasonable guess we know mcdonald's 2770 company-run locations make 9.42 billion dollars or 3.4 million each on average if we assume that their company-owned locations make close to the same as franchised locations it means each franchise would be paying four percent of that or about 136 thousand dollars to mcdonald's in franchise fees every year for its 35 925 franchise locations that's roughly 4.9 billion dollars off of franchises for the food for a total of 6.4 billion in food mcdonald's reported 13.15 billion dollars in 2019 earnings so the remaining 6.75 billion that's left is going to be new franchises and finally all that real estate 6.4 billion in food versus 6.75 billion in all the rest we have ourselves a close race my friends but we can say that mcdonald's makes more in non-food earnings than direct food earnings so there you have it friends what was true and ray crock's day is still true today mcdonald's makes more money from real estate than they do from hamburgers and what's more mcdonald's has been leaning even harder into real estate in recent years from 2015 to 2019 mcdonald's sold off over half of its company-owned locations in many cases making a tidy profit off the land that they were invested in and shifted more of their reliance away from running an actual restaurant and more towards being a real estate firm that happens to build all its buildings with golden arches out front and who can argue with this approach at least from a business standpoint their massive commercial real estate portfolio has allowed them to weather the 2020 insanity with relative ease mcdonald's corporation stock has fully recovered from kovid and as of the making of this video is trading near an all-time high it's a similar story with other major restaurant chains too like starbucks and wendy's who took a page from sonoborn's book and have gotten into the real estate game themselves in fact the practice of collecting rents from your own franchises has pretty much become par for the course for major restaurant chains meanwhile smaller restaurants who don't have the luxury of being their own landlords have been hit real hard this year and i mean real hard it's estimated that 85 of all independent restaurants in the united states could permanently close by the end of this year so let me leave you with this thought theorists especially those here in the us where kovit is still surging and where many small businesses missed out on the limited number of paycheck protection program or ppp loans that were made available to american companies if you happen to be in a position where you're able to choose between local restaurants and national chains consider ordering local more now than ever before oh and uh if you happen to be in a position to start a restaurant consider becoming the landlord too but hey that's just a theory a food theory bon appetit well well you made it to the end of a mcdonald's themed food theory episode might i interest you in another mcdonald's theme food theory episode we recently took a deep dive into the world of fast food fries crunched the numbers and figured out which fries are objectively the best for your spending dollar that is what food theory does here folks we tackle the big questions so be sure to subscribe hit that bell for more and i'll see you all next week for something a little less mathy but just as fun

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Keywords: mcdonalds, ronald mcdonald, mcdonald's, mcdonald's fries, fast food secrets, restaurant, restaurant secrets, burger king, wendy's, wendys, chick-fil-a, chick fil a, fast food, eat the menu, french fries recipe, french fries, fast food challenge, fast food hack, matpat, food theorists, food theory, film theory, game theory, game theorists, film theorists, rosanna pansino, binging with babish, mcdonalds fries, mcdonalds drive thru, making my own mcdonalds

Id: mYx3gyS-pAg

Length: 15min 53sec (953 seconds)

Published: Thu Nov 05 2020