McDonald's Corporation: The World's Leading Fast Food Chain [Case Study]
Mc Donalds: The untold truth
Imagine that you are a modest salesman wake up in the morning pick up the goods and sell goods to people from place to place. But you also go to the place people refuse to buy goods from you tried a lot, but nothing was sold the condition became very bad. So bad that just a few more days and after that the house will have to be mortgaged what will you do is there any way do not understand anything Anxiety is happening, feeling scared what will happen next, do not know where to go, do not know if nothing is done soon then everything will end.
Ray Kroc The mastermind behind the largest food company McDonalds Very late but this opportunity came in his life when he turned 52 no one even though in his dream that a 52-year-old modest salesman who used to sell milkshake making machine by wandering from door to door. One day create the world's biggest fast-food company but what if i tell you this is only half truth.
Not in the business of selling burgers Rather, McDonald's real business is real estate and we know this long ago, but you are wrong because real estate is only a part of McDonald's. Intern, There are so many things that have made McDonald's a multi-million-dollar empire today things that no one knows.
Back-Story
Summary of The Founder:
Ray Kroc The founder of McDonald's started with nothing The story begins in 1952. Ray kroc to the salesman of a milkshake machine Ordered 4 Milkshake Machines from St. Bernard Restaurant and he was shocked Because where people did not even buy a milkshake making machine from them At the same time, a restaurant has placed an order for 4 milkshake making machines on the phone itself and when Ray reaches to deliver the machine. Again, he was shocked There is so much crowd outside a burger restaurant and he decides to eat the burger. Ray can't believe Richard and Morris McDonald's how these two brothers together are able to make such a great burger with such speed. Well, when he asked this question to McDonald's brothers then they have simplied showed him the superfast kitchen such an efficient system in which a restaurant was able to make burgers in less than 2 minutes And yes He had to believe this the taste was amazing thinking over weeks Ray Approaches McDonald's Brothers Again and this time he had a very big plan Franchise In the beginning, McDonald's brothers Wasn't Too Happy with This Decision.
But eventually they are agreed on it According to this deal Ray Kroc gets the license to sell the McDonald's franchise to other people and he gets a 0.5% commission on sales of every restaurant Everything was going great For ray, things started to change in just 5 years Ray Kroc got 228 new McDonald's opened but there was a big problem Cash crunch, Ray was going to open outlets at the outlets but still he was not making any money rather he had got so much debt that he had to buy mortgage till his house.
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But suddenly Accidently, one day he met with the lawyer named harry And this was the place where everything was about to change forever harry gives an idea to ray that all the making 0.5% on burger sales He should acquire the land on which the burger in being cooked and this was where McDonald's Corporation began which was basically a real estate arm and fast forward to today McDonald's is one of the largest real estate companies in the world and as most of us know. But interestingly, this is only half of McDonald's story. |
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Why don't those people ever sell things like sushi, noodles, or pizza? Why only burgers Well, it's all about one thing And that is Cashflow Now look at this very-very carefully
McDonald's is divided into 3 different divisions
Number 1, Frontend
Number 2, The backend division
Number 3, Support division
if you only look at the frontend division. The Frontend division operates within the Structure franchise model and this is how it works McDonald's currently sells the franchise to anyone. The person who is buying that franchise has to do these 2 payments
Number 1, Franchise Fee
Number 2, Security deposit
which stays with McDonald's as long as he is owning the franchise So as soon as McDonald's signs its franchise agreement McDonald gets cash which is revenue before the burger is being cooked after which the property on which McDonald's is to open that franchise, Gets that property constructed and because those people have been doing this thing for so many years they can get it at an optimized cost.and at a very good speed done the site is built And finally, the site is handed over to the franchise but after all, what else does McDonald's do?
Well, As McDonald's signs its franchise agreement McDonald's gets these 2 things
Number 1, deposit fee
Number 2, franchise fee
using this entire amount, McDonald's purchases land over a high-street location. The same land where that franchise is supposed to open and this thing gives McDonald's 2 very powerful advantages
Number 1, High Rent
If you see, the any franchise also spends 6 to 8% of its sales in its rent where the McDonald's franchise opens. McDonald's comfortably charges 8.5% to 15% of the amount as rent from its franchise And number 2, 20 Year Lease Whenever there is a high street location since the franchise will get a lot of benefits from that location That's why McDonald's is able to give it to that franchise on a 20-year lease due to which they will keep getting rent for 20 years. And McDonald's helps this franchise with training, management, speed and accuracy. And also, inside how to manage the crisis But how does a McDonald's franchise owner affording such high franchise fees and such high rentals?
(Pic-high rent)
Well, the answer to this thing is hidden inside the McDonald's backend station These 3 Very Powerful and Important Elements Come Inside McDonald's Backend Station The things that make McDonald's more profitable than any fast food and normal restaurant you see,
You see, if you analyze the McDonald's menu very closely you will see these 3 things
Number 1, Simple
there are only 9 to 10 items inside the menu which are put in different ways by placing them in combos.
This thing does 2 very good things
Number 1, Avoid decision paralysis
McDonald's wants it to sell out as quickly as possible so, it designs its menu that way. Since they keep only 9 to 10 items this thing also saves their inventory cost a lot And because of the place inside combos the customer who is there feels like he has a lot of variety In reality, McDonald's doesn't keep more than 9 to 10 items
Number 2, Self Service, Which helps McDonald's avoid two things like time and employee cost
Number 3,Wide Target Market McDonald's targets a very wide target. Because they have to sell fast, they have to sell at affordable prices, and they have to make sure that their taste is consistent. But this second element of McDonald's backend is very strong And that is the selling strategy McDonald's uses a lot of selling strategies
Like Psychological pricing If you look very carefully, the pricing that is inside the menu of McDonald's will be something like this 99, 249, 59, 39, Because this thing is psychologically very affordable in the mind of the customer in addition, McDonald's is trying to increase its sales. use bundle pricing also All these combos you see they are all part of bundle pricing but if I do not take combo goods, then Well, in that case McDonald's will do this to you if you just go to the counter and order a burger you'll always be asked this Whether you want fries or cold drinks And that is the reason you will always see the cold drink counter in front and the fries counter always on the left corner On the very front side as soon as he asks you you see the counter there is a smell, you think of buying And you know what! As soon as you think of ordering any of these two fries or cold drinks They will offer you a meal He will tell you that sir if you are already doing this thing then you get converted to a meal you will get comparatively cheaper. And you take the meal but have you ever thought that whenever you eat a burger at McDonald's you end up getting the same thing every time? Well, this thing brings us to the third and most powerful element of the backend And that is, Highly efficient Process McDonald's has streamlined the process of manufacturing each item due to which their output is always the same. And since the output is the same every time then those people are able to sell more in less time I know, what are you thinking? That franchise model and very super-efficient process This is something every fast-food company has from McDonald's to Burger King, from KFC to Subway Every company has it but why still no company has been able to beat McDonald's And interestingly, Where at the time of recession every fast-food company shuts down its outlets and fires its employees to cut down its losses. at the same time, if you look very closely there has not been a single recession Where McDonald's has not expanded itself but where everyone is getting ruined but what does McDonald's do after all? that it never runs into losses Well, this brings us to McDonald's secrets that most people don't even know. Have you ever wondered how actually McDonalds makes so much money Well, one word, The support work these 3 more very powerful things come inside McDonald's support work
Number 1, Whole selling McDonald's currently has over 39,000 outlets and if you look inside each McDonald's So, buns, patties, sauces Even the paper inside which your Burger wraps the straws, the glasses everything that franchise has to buy out of that McDonalds So, you see, McDonald's buys everything in wholesale and then sells it to their franchise. Because under the franchise agreement You can't even buy it from outside So, invery simple words McDonald's does local sourcing under each area buying in bulk from there, keeping your margin in the middle sells all his franchisees to that item So, once again it makes money before the burger is being cooked But how does McDonald's afford such a tremendous expansion during its recession time? Now look at this very-very carefully McDonald's is a real estate corporation with more than $53 billion in real estate assets. And This Real Estate Gives McDonald's 2 Very Powerful Advantages
Number 1, real estate is a appreciating assets That is, with over the period of time its value will must be increase And you know what It also provides a constant cash flow to real estate McDonald's
Number 2, That real estate is also a depreciating asset that is, you can use the balance sheet in accounting terms. You can depreciate the real estate that you have bought that is, you have depreciated it within accounting. But actually, you are not paying anything in cash McDonald's makes ensure that each of its franchises performs very well when it performs well So, the McDonald's stock price automatically starts shooting upwards After what McDonald's is about to start selling its shares to people in the market But when the recession comes Then McDonald's does this thing whenever the recession comes you will always notice these 2 things
Number 1, That people are selling their shares why? because they feel that the market is going down now and they don't to loose money And second, The banks that are there at the time of the recession lower their interest rates So that people borrow more money and it spends a little more money So that maximum economy can come out of the recession and because McDonald's is sitting on top of a very big real estate empire So, McDonald's mortgages the real estate it holds to the bank within such a time period why? Because the interest rates of the bank are very low at this time so, McDonald's gets debt at a very low rate.There was a recession in 2008 and 2014 has been a very bad year for McDonald's but if you look at the debt So, McDonald's debt was only $ 15 billion in 2014 which increased to $ 32 billion in 2019 Why? Because at this time the bank had lowered its interest rates very much once the cash comes to McDonald's by mortgaging its property. So, after that McDonald's does these 3 very powerful things
Number 1, repurchase of shares at a low price because people are selling their shares at the time of recession. So, at that time McDonald's gets its own shares very cheap so, McDonald's buys back its shares. Second, Buy lots of real estate
McDonald's buys the most real estate at such a time Why? because at this time the bank's interest rate is very low so, get the loan easily. And it is available at a very good rate And second, at this time there is a recession going on so, people are also selling their properties. So, McDonald's again gets real estate for a very low price And third and most importantly, Refinancing no one buys real estate always in one go And this thing McDonald's too does They always use debt capital that is, he takes a loan from the bank to purchase real estate Now See How Refinancing Works Like McDonald's When Time Was Running Well buys a property at that time to take a loan from bank A on the annual interest rate of 4 to 5% now as if the recession has come the bank interest rates come down very much at the time of the recession Close to 1 to 2% In such a case, McDonald's will approach Bank B to refinance the same loan and take a loan from Bank B to refinance and repay the loan to Bank A. Above which he was paying an interest rate of 4 to 5% and here he refinanced his loan and raised the interest rate of 1 to 2%. In the case where this margin of interest rate of 2 to 3% is also saved by McDonald's And you know what it creates a huge difference of 2 to 3% When this thing is done on Billions of Dollars real estate if it is on small amount then it doesn't matter But McDonald's owns billions of dollars' worth of real estate and it saves a margin of 2% to 3% when on top of such a huge amount. so there also millions of dollars And not just that McDonald's also uses this debt capital to buy back its own shares Why? Because took money at very low interest rate Money is not his own and buy back my own shares from general public when the price goes up then again sold that stock to the public and this thing no other fast-food company can't do. And that is the reason Where each fast-food company shuts down all its outlets and fires its employees to cut down its losses at the time of recession. At the same time, McDonald's expands itself at the time of most recession have you ever wondered that why Pepsi is not available even under McDonald's? Why only coke, Fanta and sprit Well, the answer to this thing is Strategic Partnerships McDonald's is the biggest coke customer in this world and the reason you don't find Pepsi in McDonald's Because McDonald's is prohibited from keeping any other company beverage in their outlets and same goes with coke. According to strategic partnership agreements coke is not allowed to sell their drink to any other restaurant at a cheaper price than McDonald's very few people know it But Coke maintains a separate McDonald's division within its company Which is headed by Javier C Goizeuta The son of Coke CEO this partnership, McDonald's and Coke Both of these can make a very powerful recession proof business. Because you see in good time Coke expands and in bad time McDonald's expands So, you see, no matter how the time goes These company always make money we all want to earn money but there are some such people in this world. Those who take advantage of your compulsion make you dream, promise to make you successful, sell you such a thing. Anyone who doesn't like to take it for free This is dangerous these people are ruining your life at such a level that you can't even imagine But how?
Conclusion
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