If McDonald’s Is A Real Estate Business, What Business Are You In?

Peter Tanham
Oct 25, 2016 · 3 min read

In 1954, aged 52, Ray Kroc joined McDonalds as a franchise manager. 10 years later he bought the entire business for $2.7m.

He was an incredibly successful businessman, building McDonalds from a small chain into the most successful fast food operation in the world.

A story is told about some advice he once gave to a class of Harvard MBA students. He asked them all, “what business is McDonalds in?”

“Restaurants!” “Hospitality!” “Supply Chain!” “Franchising!” “Entertainment!”

“No!” Ray laughed and replied to each student.

“Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”

His response was oversimplified to make a point, I’m sure, but it’s one that McDonald’s CEOs have made repeatedly since — real estate is the core of their business.

If you imagine a great retail location. Something with a lot of natural traffic or footfall nearby, in a well populated area, not too remote or off the beaten track.

There’s a cost to buying or renting premium retail space like this. A $ per square foot per month.

What McDonald’s has at it’s core is an ability to make more productive use of this real estate than almost any other business in the world.

They can produce more revenue-per-square-foot than almost anyone else. Therefore, they can also afford to pay more $ per square foot than most competitors, while still making the same profit.

Great retail location is a key gateway to fast food customers. Because McDonald’s could afford to outbid any competitor for location, they had the better market access than any competitor.

Put another way, every location has a certain amount of footfall that walks by — a catchment area of nearby people. The McDonalds business model is an engine can convert that footfall into dollars better than almost any other business that might occupy the same location.

If Ray Krok Ran A Tech Company

Although it may not seem it, this business lesson is incredibly applicable to modern consumer tech companies.

The truly best tech companies are building similar business model engines, but they’re not in the real estate business like Kroc’s McDonalds, they’re in the attention business.

A 43 year old housewife is going to view 5 ads on Facebook today, just like she might walk past 5 key retail spaces. So what company gets to occupy these spots? Who can afford her attention?

Those who can best turn that attention into revenue can continuously pay Facebook for it. (For her, this is probably the likes of Clash of Clans or Farmville).

High converting ads. Frictionless onboarding. Quality product. High conversions to premium. These are all parts of the engine that Farmville build to convert attention into revenue more effectively than others.

The term “mortgage insurance” will be searched hundreds of times this hour, and the company who can profitably bid the highest price with Google is the one that can convert those clicks into the most revenue.

Ad copy. Landing pages. Conversion funnels. Lifecycle messaging. Churn reduction. These are the digital equivalent of Ray Kroc’s supply chain, brand advertising and “would you like fries with that?” upselling.

He was in the real estate business. You are in the attention business.

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