The person who made McDonald’s great global brand wasn’t the person who founded the McDonald’s. Shocked? Even I was also surprised when I was told that it was Ray Kroc who made McDonald’s what it is today. Ray noticed that two brothers Richard and Maurice McDonald were running a fast food joint in California and customers were getting high-quality mouth-watering burgers in just a couple of minutes. Visualizing the potential of quick delivery of delicious burger, Ray approached McDonald brothers for franchise rights of the fast-food joint and he managed to convince them at 1.4% profit-sharing agreement.
So, it was Ray who opened the first franchise of McDonald’s fast-food joint with his friend. In just a couple of years, he realized that he isn’t making any money in this deal. The brothers were earring a good amount without even having to do any work and he was the one who had already given the franchise rights for 30 to 40 locations. He took the risk and even mortgaged his house. Once he was in a bank to solve his financial problems and there he met Harry-the man who came up with the idea of global expansion to make a lot more money than the core restaurant operation model.
Harry made a strong pitch before Ray that the real money was in real estate, not in burgers and fries. The core idea Harry shared was to make McDonald’s an owner of the property at new locations and then lease it to the person who is interested in running McDonald’s restaurant. So, technically McDonald’s will remain the owner of the property and make money from leasing them to franchise holders.
That’s not all, depending on the success and value of the location McDonald’s started offering the revenue-sharing model instead of the lease rental. Based on daily and monthly sales projections the company could do a simple calculation to see whether the revenue-sharing or rental income model is more profitable and decide accordingly. So, McDonald’s was in control of all aspects from quality, property, delivery, to customer care of the operation and devised ways to monetize all possible channels. But, it was the real estate that remained at the core of the revenue model of the company.
At the beginning of property sub-leasing operations, McDonald’s was charging franchises an additional 20% which eventually rose to 40%. The success of the brand made it possible to boost sales and power to make money with a higher margin. In addition to that, the franchise holder had to pay their insurance and taxes to McDonald’s Corporation.
So, the owners of McDonald’s were still Richard and Maurice McDonald and they were earring a lot of money from the franchise. And Ray was earring money because he had formed McDonald Retail Corporation to buy properties and lease them to restaurant owners to earn rental money. In 1961, he paid Richard and Maurice McDonald $2.7 million and bought the whole company. So, Ray considered himself to be the founder of McDonald’s as he was the man who helped it make big.
Even today, when the economy goes into recession and the sales drop McDonald’s still earns big money from rentals. If the economy is in good shape and sales booming they make even more money depending on the sales at a particular location.
So, if you still think McDonald's is all about mouth-watering cheesy burgers and fries then it is time to look beyond because it is earnings from real-estate that keep the bottom-line of the global burger giant in green. It doesn’t mean burgers aren’t earning big money because McDonald’s franchisees are also making big money in real-time.
In Ray’s own words, as he said in a University of Texas event, he is in real estate business and not burger and fries business. Business is all about envisioning opportunities and making it big with a healthy revenue channel. Find a problem, solve it innovatively and build a win-win revenue model, you can also be like Ray, one day.
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