McDonald’s Business Model and How It Makes Money
The McDonald’s business model is the combination of strategies and operating processes that enable the company to operate efficiently and achieve profits. McDonald’s is the world’s largest restaurant chain by revenue. This post will introduce you to McDonald’s business model and help you understand how the company has achieved success by becoming the world’s second largest private employer with 1.7 million employees (behind Walmart with 2.3 million employees). So let’s get started right now.
Introduction to the McDonald’s Business Model
Richard and Maurice MacDonald moved to California from New England in search of opportunities. In 1948, these brothers launched a fast food service with hamburgers for 15 cents each. As they gained popularity over time, they adopted their concept of franchising. Their first franchise agent was Ray Kroc, who opened the first McDonald’s franchise back in 1955. He bought the rights to their business for US$2.7 million in 1961, foreseeing what their business model might become. As you understand McDonald’s follows a franchise business model.
McDonald’s Franchise Business Model
Kroc bought the franchise rights from McDonald’s and became the architect of a hitherto unseen business model. The idea of franchising fast food restaurants was not new. By that time, several such networks were already actively developing. But most owners of such restaurants were primarily interested in selling a franchise license or supplying related products and equipment. They didn’t care about the success of their franchisees. As a result, franchisees had no clear competitive advantage and were often victims of the inefficiency of other restaurants within their chain. In addition, the business models that existed in the industry did not provide a consistently high quality of customer service.
Kroc proposed a different approach. He took as a basis the position that there are two main consumers: the end client and the franchise buyer. The success of the new business model was to depend on the loyalty and growth of both groups.
To create value for the end user, he first focused on scale. McDonald’s restaurants were required to offer a ten-course menu at a low price. Kroc’s limited menu not only satisfied the desire of Americans to buy decent quality food at a low price, but it also created value for franchisees who could reap many benefits by concentrating on a limited range of products.
But the most significant innovation of Krok was the revolutionary system of production he proposed. McDonald’s has optimized every step of the food preparation process, from growing potatoes to packing hamburgers, in order to increase the profitability of its franchisees.
How does McDonald’s Make Money?
Although the McDonald’s business model is primarily franchising, they also generate income in other ways: Activity licenses; Traditional franchising; Branches; Restaurants operated by the company.
- Activity license
Under this type of franchising, the franchisee invests their own capital to open their restaurant, which includes operating expenses and real estate expenses. McDonald’s supplies the products and receives a percentage of the sales. The company also charges a predetermined amount for each franchise that wants to get a license. This type is the exact opposite of traditional franchising and is used by over 6,950 restaurants in over 80 countries.
2. Traditional franchise
Traditional franchising is the most efficient business model of McDonald’s. The company either receives a long-term lease or owns the land on which the restaurant is built, and the franchisee pays the company a minimum rent for a 20-year period and a permanent royalty. The franchisee also pays for the signage and interior decoration of the restaurant, receiving innovative and prompt assistance from its parent company. This structure ensures McDonald’s’ revenue stream is stable and predictable while maintaining profitability at low operating costs.
3. Branches
Branches are the type of franchise that receives the lowest investment from McDonald’s and takes into account equity investments. It is mainly used in China and Japan, where companies pay a percentage of sales as royalties on McDonald’s products. These foods include hamburgers, french fries, milkshakes, soft drinks, salads, coffee, and desserts.
4. Restaurants operated by the company
McDonald’s has several restaurants they own and operate, hiring employees and ordering their own merchandise. However, the company’s goal is to have 5% percent of its restaurants owned by the company and 95% owned and operated by franchisees.
McDonald’s most lucrative business model structure, the traditional franchise, allows them to earn up to 82% of their franchises’ revenue, as opposed to company-operated restaurants that only earn about 16% of their revenue. The success of their strategies in the international market led to the emergence of the term “McDonaldization”.
Over the years, McDonald’s has developed and improved its marketing strategies to increase the profits of its franchisees and parent company. Such strategies include improving the customer experience by focusing on people, products, price, location, and promotion, all of which work in tandem with the company’s mission. McDonald’s is also working on its strategies for growth, retaining existing customers, regaining lost customers. This was the company’s plan in 2017 — a plan for continuous growth, defined in the following words: Retain; Restore; Convert.
Conclusion
McDonald’s is one of the best examples of a balanced and polished business model based on bold and visionary positions. With a unique recruitment and promotion policy, an innovative supply chain, and a well-established uniqueness based on quality and value for consumers, McDonald’s has been able to create a coherent system that competitors have been unable to copy. The growth in value of this business model continued for 30 years, during which it created $ 24 billion in capitalization.
McDonald’s owes its success not to new technologies, but to the invention and continuous improvement of its business model. This is an outstanding example of creating incredible economic power by building an innovative system of vertical relationships (down through the franchising system and up through suppliers).
