When we think about a business like McDonald's (NYSE: MCD), we picture greasy grub being pumped out and served to the masses. In fact, McDonald's is one of the most ubiquitous fast-food chains, with close to 13,800 U.S. locations. But while you'd think the burger and chicken nugget giant would make the bulk of its money serving up Happy Meals, its core revenue source is actually none other than real estate.
How the McDonald's franchising system works
Like many other restaurant chains, McDonald's allows individual business owners to open up franchises. But what McDonald's does is buy out different locations and rent them to franchisees. Those franchisees not only pay fees to start the franchise, but they also pay rent to McDonald's, calculated as a percentage of restaurant sales (typically, 10.7% of sales in the U.S. market). And given the popularity of McDonald's, that rent can be substantial.
Of course, in owning its physical locations, McDonald's takes on the risk that all real estate investors incur -- structural damage, maintenance, and property repairs. But the company's vast resources make that risk less of an issue.
In fact, former McDonald’s CFO Harry J. Sonneborn has previously told investors that the company is not, in fact, in the food business, but rather, the real estate business. And while the company's winning recipes for burgers and fries have no doubt contributed to its success, ultimately, its greatest asset is the real estate it owns.
An opportunity for investors
Are you surprised to learn that real estate generates more revenue for McDonald's than food? You're no doubt in good company. But it just goes to show that the opportunities to invest in real estate are endless.
When we think about real estate investing, we imagine buying commercial buildings, rental properties, or vacation homes. Or, we think about buying real estate investment trusts (REITs) to avoid the risks of owning actual properties. But as you can see, it's possible to take part in what we'll call secondhand or indirect real estate investing -- investing in companies that trade like any other stock but derive a large portion of their revenue from their own real estate holdings.
In fact, if you don't consider yourself a real estate investor but have McDonald's in your portfolio, then guess what -- you're a real estate investor. You just didn't know it. The next time you walk into a McDonald's and order some food for the road or perhaps a happy meal to appease your hungry children, think about the way your $12 tab is contributing to the company's profits -- and allowing it to maintain a real estate empire that ultimately sets it apart from the competition.
Incidentally, the McDonald's model is something new business owners can strive to emulate. Since real estate has the potential to appreciate in value over time, owning land and buildings will often prove more profitable than the products being sold in those buildings. As such, anyone who sells consumer goods has the potential to mimic McDonald's. And any business that enjoys even a fraction of its success is a venture worth investing in.