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Premium. During recessions, consumer behavior tends
to change in fairly predictable ways. The hardest-hit businesses are, of course,
the most unnecessary. Travel and tourism, leisure and hospitality,
and manufacturing. Other companies actually stand to benefit. Like, fast food. Stomachs donât respond to economic downturns,
but smaller bank accounts do opt for cheaper alternatives, which is why chains like Burger
King and Wendyâs often perform better than average during recessions. From 2008 to 2010, for example, while other
businesses closed or downsized, Subway, added nearly 6,000 new locations. KFC added around 300 in roughly the same period. One company, however, stands out as the clear
fast food winner of 2008: McDonaldâs. That year, it continued its 55-month long
streak of same-store sales increases with even better performance than before the recession,
while opening 600 new locations, and with an impressive 29% return on equity. Some of this is for obvious reasons: During
that time, consumers were simply eating cheaper food. But thereâs also another reason McDonaldâs
is what some analysts call ârecession-proofâ: McDonaldâs is, first and foremost, a real
estate company. Glancing at its 2019 balance sheet, one number,
in particular, should grab your attention: $39 billion. Thatâs the current value of all its property
and equipment before it reports depreciation. That would technically make it the fifth-largest
real estate holder in the world, measured by total assets. Cover the name âMcDonaldâsâ, and this
might look like the financial statement of any other boring big-name real estate developer. Like Burger King and Subway, the company was
able to grow so fast and reach so many countries around the world through franchising. 85% of its restaurants are owned by someone
who essentially âleasesâ the McDonaldâs name and brand, in exchange for a considerable
fee. What makes the company so unique is that,
unlike other similar fast-food giants, McDonaldâs makes the majority of those franchise revenue
from rents, not burgers. To be more precise, in 2019, 7.5, or 64%,
of its 11.6 billion dollars in franchise fees came in the form of rent. Hereâs how it works: Because McDonaldâs has decades of experience
buying and selling properties, it knows the precise ingredients of a successful location. It shops around usually for intersections
between two high-traffic roads and buys space in whichever corner has the most parking. The ideal space is around 50,000 square feet,
4 and a half thousand for building space. The intersection should also have traffic
lights. It then buys the property with long-term fixed
interest rates. Its huge existing property holdings provide
it with the most favorable deals. Then, when someone applies to operate their
own McDonaldâs location, they sign with the company a Franchise Agreement â stipulating
nearly every detail of how the business will operate â from how the burgers are cooked,
to the hours of operation. For example, they can only purchase from an
approved supplier, who may or may not be the best or cheapest option. The franchisee â that is, the local owner
â generally makes a total upfront investment of $1-2 million for a single location, including
an initial down payment paid in cash, one-time franchise fee of $45,000, and a percent royalty
of every monthâs revenues. These, usually 20-year contracts, also have
the unusual but highly consequential stipulation that the restaurant be located at that specific
address â the one McDonaldâs, the corporation, just bought. In other words, McDonaldâs instantly has
a tenant, and one who will always pay above-market rates. Depending on the value you attribute to good
location scouting, you might characterize this as a valuable service, or, a ruthless
business tactic. Indeed, one franchise union found that the
average franchise tends to pay an average of 6-10% of its sales in rent, while McDonaldâs
franchisees pay 8.5-15%. And if a location fails to perform as expected,
McDonaldâs can simply find a new franchisee for that location after the contract has expired,
or sell the land to someone else entirely, likely at a significant profit. So, why do franchisees agree to these stringent
requirements? Simply put: because itâs seen as an incredibly
safe investment. The advantage of this model is that while
the absolute numbers are abnormally large â the fees, the initial startup costs, and
even the annual revenues â the odds of success are relatively high. For example, the average location makes $2.7
million in sales every year, with a respectable but not incredible, all-things-considered,
$154,000 in final take-home profit. But precisely because McDonaldâs is so demanding,
can it be such a solid investment. Sure, applicants have to meet high standards
to become franchisees and once they do, they have little control over their own business,
but all these factors also reduce their risk. While other franchises may have fewer requirements,
they also come with greater risk. The owner of a McDonaldâs can be pretty
sure theyâre qualified for the job, have a good location, and are meeting customerâs
standards, because otherwise, they wouldnât be allowed in the first place. McDonaldâs trains its franchisees in what
it calls âHamburger Universityâ â the companyâs internal system of teaching business
owners all the skills and knowledge they need. For McDonaldâs, the benefits of owning property
are far greater than just an additional source of revenue. Itâs no exaggeration to call it an entirely
different business model: It understands that real estate is a far better business than
hamburgers. The first reason is just a function of American
tax law â which offers heavy tax breaks for depreciation, even while that same property
may increase in value over time. The biggest advantage is the long-term stability
of property prices. Along with Walmart, McDonaldâs was one of
the only two stocks in the Dow Jones Industrial Average to increase in value in 2008. Itâs also one of the 60 or so members of
the so-called âDividend Aristocratsâ â stocks that have increased their dividends annually
for 25 consecutive years. Recessions are only a welcome opportunity
to buy up discounted properties. When things are truly catastrophic â like
during a pandemic â the real estate model outsources risk to franchisees â who are
contractually obligated to pay a minimum amount of rent regardless of sales. All of this is reflected in the upward trend
of franchised McDonaldâs locations and downward trend of the few remaining company-operated
locations. If anything, McDonaldâs is actively trying
to remove itself from the fast food industry. But this naturally raises a question: If McDonaldâs
makes a huge portion of its profits in the form of rent, and managing real estate is
a fairly separate skill from creating new McThings, why not split-off the real estate
holdings into a new company? Do that, and you have a very stable, active,
and profitable real estate investment trust â one immune from the variability of fast
food and/ changing consumer appetites. A group of investors suggested this very idea
in 2015. The company, however, decided not to, believing
that its property model is what makes it unique, and that its remarkable efficiency is a function
of doing both. Now that you know the secrets of how one of
the worldâs great companies truly makes its money, you might be interested in putting
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the idea of owning the land under the restaurants is what made ray kroc rich. "the founder" is a really great movie about this starring michael keaton.
https://old.reddit.com/r/trashpandas/comments/jnrtcj/he_is_above_all/
Add them to the list of NOT-Capitalists. Like Microsoft, Amazon, and banks. They're all rentiers. The collect fee by way of ownership