The other week I had my first McDonalds in nearly 2 and half years as I flew to Ho Chi Minh city for a few days. If you’ve read some of my previous blogs, you’ll know that I use McDonald’s to help explain many different money topics to my young daughters. These topics include ‘investing in the stock market’, ‘inflation’ and currencies. You might have seen this schematic on social media from my stock market blog:
When using McDonalds as an example, I have focused on them selling burgers to make money as it’s really simple to understand, especially for kids. However, whilst McDonalds makes a lot of money from selling burgers, it’s not how it makes most of its money. In this blog, I go through how I explained to my eldest daughter about McDonald’s business strategy and how they actually make most of their money! (I love that my kids are getting older so I can talk about more geeky money topics).
McDonald's Business Model
When the McDonald brothers first opened their restaurant in 1940, they made most of their money from selling lots of burgers using their new ’Speedee Service System’. This system meant they could cook and sell a lot of burgers for a very low price. The Speedee Service System was very successful and people started to fall in love with their burgers. This started to create demand for new restaurants in other places across the US. It was then their business model changed and they started to make most of their money from the Franchise Model.
McDonald's Franchise Model
I first explained to my daughter that McDonalds, the company, doesn't own most of the stores. In fact, 85% of the McDonald's restaurants are owned by individuals who want to run their own business, these are called ‘franchisees’. The franchisee has to apply to McDonalds to own a restaurant. If McDonalds approves their application then the franchisee pays McDonalds a fee to use their name and is given a restaurant. After a few years, the Franchisee could get more than one restaurant. The franchisee then pays McDonalds for the uncooked food and then gives some of the profit they make back to McDonalds. McDonalds does make money from selling burgers but not directly. The franchisee sells the burgers and McDonalds gets paid by the Franchisee.
This means that McDonalds can open up lots of restaurants without a lot of work, as the real hard work is done by the Franchisee. The McDonald Brothers hired a Franchise Agent called Ray Kroc. His job was to help find and set up franchise restaurants across the US. He liked the model so much that he actually decided to buy out the McDonald brothers in 1961.
Ray Kroc expanded the number of franchised restaurants significantly. This led them to a new strategy, which would make McDonald’s even more money!
McDonalds the Real Estate Company
McDonalds owns most of the land which the restaurants are on and owns many restaurant buildings too. This means that the franchisees don’t own their restaurants, they rent them. They pay rent to McDonalds, the company. The good thing for McDonalds is that they always have franchisees who are going to pay the rent. Have you noticed that there are McDonalds everywhere? The restaurants are in prime locations around the world so they are charging high rents. The Franchisees pay more to McDonalds in rent than they do in franchise fees and % of profits.
The property values of the restaurants have also gone up a lot over the decades in which McDonalds has owned them. So they also have money from capital appreciation (the difference in the amount of what they bought the restaurant for versus what it is worth now). In fact, McDonalds is now one of the largest real estate companies in the world!
McDonalds built such a strong brand in the early days that they now don’t have to sell burgers themselves, there are other people doing that for them (franchisees). Why did I tell this to my kids? I told my daughter how McDonalds really makes money as I want her to understand the power of working smart, as well as working hard. If McDonalds had just focused on selling burgers themselves, they probably wouldn’t have as many restaurants or made as much money. This story reminded my daughter of the ‘Happy Farmer, Sad Farmer’, from my book Grandpa’s Fortune Fables, which is all about working smart, not just working hard. Like McDonalds, I also want my kids to grow up earning money in many different ways and not just relying on a single source of income (salary from a job). I hope you enjoyed this blog - if so, please take the time to subscribe below and check out my book Grandpa’s Fortune Fables. Thank you for reading! Will P.S. a 9-year-old near where I live recently read Grandpa’s Fortune Fables and wanted to start earning money. He asked me if he could get some copies of my book at a discount so he could sell them to his friends and family (a mini-franchisee 😀) …. I’ll let you know how he gets on in future newsletters.
Note: This blog is for education and interest only. I’m not providing a stock recommendation. As you’ll know from other blogs about investing, I believe in owning lots of companies via a low-cost investment fund, rather than trying to pick individual companies.