Curious about how McDonald’s makes money? You might think that’s a ridiculous question. It’s a fast-food restaurant, so it makes money from selling burgers, fries, and other foods… right?
A closer look reveals something surprising: the beloved burger joint makes a surprising amount each year, not from fast food but from real estate rentals. What is McDonald’s, really? A fast-food restaurant or a real estate company?
Here’s a look at how McDonald’s makes money.
The Evolution of an Empire
In the beginning, McDonald’s implemented a more or less standard franchise program as it expanded across the country (and eventually the world). The corporation would charge an initial franchise fee, sell supplies to franchisees at a markup, and continually escalate royalty payments to grow corporate revenue.
Not surprisingly, franchise owners weren’t happy with these demands and were hesitant to fall in line with what the company asked.
To keep the profits coming in, the corporation needed to find a way to achieve greater control of individual franchises. McDonald’s president Harry J. Sonneborn came up with a plan in 1956: Purchase the franchise locations and then rent them to franchisees at a 40% markup.
⚠️ Rent came with a caveat: If franchise owners didn’t follow corporate guidance, McDonald’s could simply evict them and rent the property to a more compliant franchisee (or just sell the property for a profit). This change would revolutionize McDonald’s revenue model for decades to come.
McDonald’s might seem to blur the line between a fast-food chain and a real-estate company. To Sonneborn, that line was anything but blurry. He described the business arrangement this way:
We are not technically 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.
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McDonald’s by the Numbers
Franchisee-operated restaurants bring in massive amounts of revenue for McDonald’s: the company keeps roughly 82% of revenue from franchisee-operated restaurants, compared to just 16% of revenue from company-operated locations. Here’s a revenue breakdown from 2021:
- McDonald’s had total revenue of $23.22 billion.
- Operating profit from company-owned restaurants was $1.741 billion (revenue was $9.788 billion).
- Operating profit from franchises was $10.750 billion (revenue was $13.085 billion).
As you can see, franchises don’t just bring in more revenue. Their profit margins are also astronomically higher. However, the above are global statistics. Here are the profit margins for locations in the United States in 2021 (just to keep it consistent):
- Total revenue from US locations was $8.71 billion.
- Operating profit from company-operated US restaurants was $511 million.
- Operating profit from US franchises was $4.906 billion.
Even someone with virtually no background in finance can see that both revenue and profits from company-owned restaurants pale in comparison to those from franchised locations. It’s no surprise that currently, 93% of McDonald’s locations are franchises.
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An Unconventional (but Effective) Business Strategy
Casual consumers know McDonald’s as a fast food company. But those familiar with the business world see it for what it is: a real estate company that draws in franchisees with the promise of fast-food revenue. After all, even with the cost of rent, McDonald’s franchise owners make an average profit of $150,000 per year.
Even excluding the cost of rent (which varies based on location), McDonald’s earns a hefty sum from each franchise that opens:
- A $45,000 franchise fee.
- A 4% marketing fee.
- A 4% royalty fee.
- Franchisees typically sign 20-year lease agreements.
Increased income isn’t the only way how McDonald’s makes money and benefits from a franchise-heavy business model. This model helps the corporation in several different ways:
A successful business is a resilient business. Any fast food corporation has to worry about fluctuating sales. For instance, in times of heavy inflation, consumers tend to cut expenditures where they can. That might lead to sales that are lower than predicted.
The COVID-19 pandemic also had an impact: the total operating income in 2019 was $4.069 billion, which dropped to $3.789 billion in 2020.
How McDonald’s makes money by renting properties to franchisees provides the company with a robust strategy to withstand periods of low sales. A given franchise’s sales might vary from month to month or year to year, but that franchise still has to pay rent to McDonald’s. And in a time when the company is struggling a bit, that resilience can make a major difference.
2. Increased Profit from Sales
You saw above that the McDonald’s marketing fees and royalty fees are in the form of a sales percentage. That’s by design. The combination of fixed (rent) and variable (sales) income lets McDonald’s take advantage of two kinds of income.
Thanks to inflation, the prices of burgers and fries continually rise, and so does the corporation’s profit.
3. A Diverse Portfolio
If you’re familiar with the investment world, you know that having a diverse portfolio is critical if you want to insulate yourself from market downturns. Portfolios work similarly for corporations. By being significantly invested in both the fast food and real estate industries, McDonald’s stands a better chance of protecting itself from market losses.
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4. Scaled Growth
Real estate accounts for the bulk of McDonald’s revenue. But to continue making money, that business model has to be scalable. Fortunately, it is.
By continually opening franchises, McDonald’s is able to expand its brand with minimal cash outlay. The franchisees are the ones who cover operating costs. And while McDonald’s does need the capital to purchase the locations, the high rent the company charges franchisees eventually makes the new locations pay for themselves.
Because McDonald’s is a large company with strong finances, it can pay for its real estate purchases in cash or finance them at attractive rates. This makes real estate purchases cheaper than they would be for a buyer with less financial clout.
This type of substantial, scaled growth has another benefit for the company: protection against losses. While name recognition sets franchisees up for success, franchises can and do fail. If a large number of franchisees close down their businesses at once, McDonald’s may suffer a significant revenue hit.
How McDonald’s makes money is also influenced by the growing number of franchises being opened, which reduces the impact of occasional franchise closures on the corporation. Thanks to the many other financial benefits franchises offer, McDonald’s regards the occasional closure as just a risk of doing business.
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Why Not Just Form a Real Estate Trust?
It’s clear to investors that real estate is how McDonald’s makes money. So logically enough, in 2015, investors wanted the company to create a real estate investment trust. At first, the corporation considered it. But after a closer look, executives determined it wasn’t worth the hassle.
Pete Bensen, the company’s chief administrative officer, told investors that the REIT posed “significant financial and operational risks” that outweighed any benefit the company would have gained.
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An Ingenious Model that Has Stood the Test of Time
The McDonald’s real-estate-heavy business plan has been around since the 1950s. And in a business world where innovation reigns, that seems unusual.
The truth is that when it comes to profit and guaranteed control over franchises, this model simply can’t be outdone. Other restaurant franchises would do well to emulate how McDonald’s makes money if they aren’t doing so already.