WATCH: The Real Way McDonald’s Makes Their Money Might Surprise You
When you go to McDonald's you know you're going to get great fries and milkshakes, Happy Meals with a prize inside to keep the kids smiling, and enough food to hold you over to your next home-cooked meal—all for just a few bucks. While every hangry person, hurried office worker, and harried parent appreciates the low prices on the McValue Menu, how does McDonald's afford to keep their prices so low? They are a business, after all, and a very successful one, but how do they turn a profit on $1 cheeseburgers? Turns out that the secret to their success isn't on the menu at all. McDonald's main profit making tool isn't cheeseburgers or chicken nuggets, but real estate.
McDonald's sell plenty of burgers to make its bottom line. "McDonald's will make money selling burgers for a buck if it can make the burger for less than $1 and sell lots and lots of burgers," Patricia Smith, a professor at the University of Michigan, told the BBC, especially if they can convince customers buying those dollar burgers to also buy fries, drinks, and Shamrock shakes. However, McDonald's really turns a profit thanks to its franchise structure. The company makes a lot more from its real estate assets each year than it does from its Dollar Menu. As Quartz put it, "McDonald's isn't just a fast-food chain—it's a brilliant $30 billion real-estate company."
Using real estate as the backbone of the business dates back to the 1950s, according to How Stuff Works, when founder Ray Kroc hired Harry J. Sonneborn as the fledgling fast food chain's chief financial officer. He realized that the company needed something to help balance the books between burger sales. His idea of buying land and restaurants and renting it to franchisees became standard operating procedure for the company. "We are not basically in the food business," former McDonald's CFO Harry J. Sonneborn reportedly told investors. "We are in the real estate business. The only reason we sell 15 cent hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent."
Here's how it works: McDonald's only owns about 15% of the restaurants that bear its golden arches, according to the investment blog Wall Street Survivor. The other 85% of the company's locations are owned by franchise operators who pay for the opportunity to sell Big Macs and Shamrock Shakes while licensing McDonald's branding. According to Quartz, McDonald's makes the majority of its revenue by buying the physical restaurants and then leasing them to franchisees, often at a large mark-ups.
The franchisee is responsible for all the costs of running the restaurant—food, staff, paper cups, water bill, etc.— while also paying McDonald's for rent (which adds up to an average of 10.7 percent of the individual restaurant's sales), a $45,000 franchisee fee, and a monthly service fee equal to 4 percent of gross sales, Business Insider reports.
It's a system that really works for Mickey D's, as they reportedly have more than $30 billion in real estate assets, while their annual profits float around $4.5 billion, according to Quartz. It's a clever strategy, because as Southerners' taste in food fluctuates—it is hard to compete with Bojangles, barbecue, or Chick-Fil-A—McDonald's has a little secret sauce to help it stay afloat.