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.

Follow @TrungTPhan to catch them in your feed.

Here's one you might like:
13/ PS. I also write a weekly newsletter packed with interesting media, tech and business nuggets trungphan.substack.com
15/ As usual, this Wall Streets Bet posts succinctly explains why McDonald's is better than a REIT:
16/ And here is McDonald’s HQ reacting to Bitcoin memes
17/ In the film about Ray Kroc (“The Founder”), Sonneborn is played by none other than @bjnovak
18/ Some interesting stats on McDonald's franchisee
19/ One major reason McDonald’s didn’t go the REIT route

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More from @TrungTPhan

Jan 23
when its 3am after the club and you trying to get the squad into the Uber
how long it’s been since I was actually at a club until 3am
me looking at my credit card bill the morning after being out to the club until 3am
Read 4 tweets
Jan 19
Netflix is known for its cutthroat culture and willingness to pay top dollar for superstar talent.

The approach -- first outlined in a famous 2009 slide deck -- is about managing people in creative industries (eg. media, tech) while scaling fast.

These 7 slides explain it 🧵
1/ Netflix competes in media + tech (knowledge work that often requires creativity).

High-performers in these fields can be 10x better than the average.

In a "procedural" field (manufacturing), the best may only be 2x better (industries that deal w/ atoms are naturally capped).
2/ Most businesses get more complex as they grow.

To deal with this, companies introduce processes (and bureaucracy), which has the adverse effect of driving out creative talent.
Read 16 tweets
Jan 12
The @Wendys “Roast Me” day is getting off to a very strong start
😂😂😂
relentless
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Jan 9
Some of the worst tech and business predictions were made by people most-informed on the industries.

THREAD: Here are 10 quotes with the rational behind them (and sources).
Internet Prediction (1995)

“I predict the Internet…will soon go spectacularly supernova and in 1996 catastrophically collapse.

Robert Metcalfe (Ethernet inventor) wrote this in Infoworld Magazine. In 1999, he put the column in a blender and "ate" his words for being wrong.
Mobile Computing Prediction (1992)

The idea of a wireless personal communicator in every pocket is "a pipe dream driven by greed."

Intel CEO Andy Grove at the '92 Mobile Conference
Read 18 tweets
Jan 6
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."
Read 19 tweets
Jan 3
Tim Cook has been Apple's CEO since Aug. 24, 2011. Over this span, Apple's market cap has jumped from $340B to -- just today -- $3T.

Despite this massive gain, Cook is only worth $1.5B.

LESSON: You don't get rich being an employee. Image
For more timeless business lessons, check out my Saturday email: trungphan.substack.com

Side Note: when Jobs approached Cook to join Apple in 1998, many thought he should have stayed at Compaq. Apple was in a bad place.

His starting salary: $400k + $500k signing bonus (CNBC). Image
People, the Cook tweet was a joke. Let's talk about the actual biggest $AAPL winner: in absolute dollar terms, Buffett.

Between 2016-2018, Berkshire bought ~1B shares (adjusted for 4-1 stock split) for $36B.

That's now worth $150B+: Image
Read 7 tweets

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