McDonald’s is often called a real estate company dressed up as a fast-food chain.
It's def true: McDonald's real estate holding is worth $42B and 35% of its $20B in revenue is from franchisees paying rents.
Here’s a breakdown🧵
1/ There are 39k+ McDonald's restaurants in 100+ countries w/ the company owning:
◻️ 55% of LAND under the locations (+ long-term leases for the rest)
◻️ 80% of buildings
Its $42B real estate holdings are 80%+ of total assets and can be thought of like apartment buildings.
2/ The McDonald's story is most associated with Ray Croc (who had a contentious relationship with the founding McDonald brothers).
However, it was Harry J. Sonneborn -- McDonald's President from 1955-1967 -- who created the lucrative real estate model for the fast food chain.
3/ Croc's initial model extracted money from franchisees by:
◻️Charging an initial franchise fee
◻️Escalating royalty payments
◻️Selling them marked up supplies
Unhappy franchisees could balk at the demands. So Sonneborn pitched a way for more control: become a landlord.
4/ Croc and Sonneborn launched McDonald's Franchise Realty Corp in 1956.
It started buying real estate and leasing it to franchisees at a 40% markup.
Here was the control catch: if franchisees ignored McDonald's guidance, it was breaking its lease and could be evicted.
5/ Sonneborn would tell Wall Street investors that:
"We are not basically in the food business. We are in the real estate business. The only reason we sell $0.15 burgers is because they are the greatest producer of revenue from which our tenants can pay us rent."
6/ While Kroc disliked Sonneborn's blunt framing, the model remains true to this day.
In 2020, McDonald's made $10.7B in revenue from franchisees. Rent was 64% ($6.8B) of that figure (rent is 35% of TOTAL revenue).
At the individual level, 8-15% of franchisee sales go to rent.
7/ Overall, McDonald's made $19.2B in 2020 split between:
◻️ Franchisee-run stores (55% of sales)
◻️ Company-run stores (45%)
The Franchise model is *much more* profitable for McDonald's, with 79% operating margins (vs. 14% for company-owned stores which it has to run itself).
8/ Unsurprisingly, McDonald's weights its stores towards high-margin franchisees, which account for 93% of all its locations.
McDonald's uses company-owned locations to test new ideas/products before rolling them out to franchisees, which typically sign 20-year lease agreements.
9/ To identify good real estate locations, McDonald's uses traffic analysis, walking patterns and census data.
An ideal location has:
◻️50k+ sqft
◻️Corner or corner wrap with signage on two major streets.
◻️Signalized intersection
◻️Build height of 23ft
◻️Parking lot potential
10/ Here is the model's secret sauce: McDonald's finances property at a fixed rate but -- because royalties are 4% of sales (+ a fee for ads) -- its take from franchisees are variable.
As sales and prices rise, McDonald's makes more while its largest financial outlay is fixed.
11/ In the early-2010s, investors were clamouring for McDonald's to spin off its real estate biz into a REIT (real estate investment trust).
That pitch never made sense. The Sonneborn model is an incredible business.
(And McDonald's can now fulfil its destiny as a crypto firm)
12/ If you enjoyed that, I write interesting threads 1-2x a week.
Since August 2018, Apple's market cap has grown from $1T to $3T. Despite delivering huge results, Tim Cook's product strategy is often misunderstood.
Users are going deeper into its ecosystem and Apple is positioned to win the next computing platform: AR.
Here's a breakdown 🧵
1/ The best way to highlight the success of Cook's product strategy is cash. Over the past 3 years, Apple's *free cash flow* has totalled an absurd $225B.
Apple has the world's most profitable:
◻️ smartphone
◻️tablet
◻️ laptop
◻️ desktop
◻️ smartwatch
◻️ wireless headphones
2/ Apple analyst Neil Cybart explains why the company's product line is unmatched:
"Computers small and light enough to be worn on the body are sold next to comps so large that built-in handles are required. All these products are designed to work seamlessly together."