Although the current pandemic and the following lockdowns hit the restaurant scene heavily, McDonald’s seems to handle the restrictions well. This is also represented in its shareholders' trust, as McDonald’s stock value almost reaches its pre-Covid heights again. The reason for McDonald's fighting chance against the lockdown restrictions is partly grounded in its strongly established takeaway and delivery model. A strong brand combined with the possibility for fast and uncomplicated takeaways and even deliveries is crucial at the moment.
But there is another significant factor keeping McDonald’s in the market: their business model. McDonald’s is not necessarily a food producer, but rather a real estate empire.
McDonald’s and its franchise
If you ever wondered why different McDonald’s outlets vary from excellent to low quality worldwide, the answer is that most outlets are not directly controlled by McDonald’s, but rather by its franchisees. While every branch operates under McDonald's name, most of them are owned by individuals that aren’t heavily influenced by the McDonald’s company itself.
This strategy allows McDonald’s to expand quickly and build new outlets with less risk and effort. Generally, franchises are set up as packages available to buy for franchisees. They will buy a setup plan, the rights to use the brand, and guidance to building a successful business. Next to the initial fee, franchisees usually have to pay a few per cent of royalties on every product sold, or contract closed.
In McDonald's case, the initial fee amounts to 46.000€ in Germany or $45.000 in the U.S. In case the franchisee builds up a location from the ground, the building cost will amount to $1 to $2 million. The royalty fees range up to 5%, excluding further 5% of the net proceeds, which are mandatorily used for advertisements. According to McDonald’s own numbers, up to 93% of all its outlets were owned by franchisees at the end of 2019 (p. 16).
While this deal seems already reasonable for both sides, it’s only the pinnacle of McDonald’s business model. The most crucial factor is yet to come.
Turn franchisees into tenants
McDonald’s manages to keep a relatively low royalty fee as they turn their franchisees into tenants. McDonald’s specialises in picking out profitable locations, buying up the land and then rent it out to their franchisees. The costs of renting are either set up as a flat fee or consist of a percentage of the corresponding outlet's monthly sales. These franchise contracts will last initially for 20 years, providing the McDonald’s company secure payments.
Using this model, McDonald’s owns a significant amount of real estate while still growing its brand and sales. This asset allocation also helped McDonald’s through the early stages of this pandemic, when most restaurants had to close down because of the lockdowns. By relying on rental income rather then burger sells, they aren’t directly affected. However, their franchisees are currently hit. Due to the rental payments being at risk, this is indirectly impacting McDonald’s itself. Yet, the company already announced to seek rent deferrals in order to keep their franchisees financially healthy.