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Franchise + Real Estate

McDonald's operates as a real estate company that sells burgers. This hybrid model combines real estate investment with franchising to create multiple revenue streams and long-term asset appreciation.

This strategy was pioneered by Harry J. Sonneborn, who stated: "We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent."

The Model​

ComponentHow It Works
AcquirePurchase prime real estate in high-traffic locations
DevelopBuild or improve the property to brand specifications
LeaseRent to franchisees at markup (typically 20% above cost)
CollectDual revenue: franchise royalties + rent payments
AppreciateProperty value increases over time

Revenue Streams​

StreamDescription% of Revenue
RentMonthly rent or % of sales (whichever is higher)~33%
RoyaltiesPercentage of franchisee gross sales~40%
Franchise FeesInitial fees for new franchisees~5%
Company-OwnedSales from company-operated locations~22%

McDonald's collected over $7.5 billion in rent from franchisees in 2023.

Strategic Advantages​

AdvantageWhy It Matters
Financial StabilityRental income buffers against economic downturns
Risk InsulationFranchisee struggles? You still collect rent. Location fails? Find new tenant or sell.
Asset AppreciationProperty values increase, compounding net worth
Operational ControlProperty ownership gives leverage over franchisees
CollateralReal estate secures favorable financing terms

Site Selection Criteria​

The model only works with the right locations:

CriterionSpecification
TrafficHigh-traffic intersections, traffic lights
VisibilityCorner locations, major thoroughfares
AccessEasy ingress/egress, parking
Size~50,000 sq ft lot, ~4,500 sq ft building
DemographicsPopulation density, income levels
CompetitionAnalyze nearby competitors

The Economics​

For the Franchisor (McDonald's):

MetricValue
Property markup~20% above acquisition cost
Rent collectionMonthly base + % of sales
ControlFull ownership, can terminate lease
AppreciationLong-term asset value growth

For the Franchisee:

MetricValue
Initial investment$1-2.3M total
Rent8.5-15% of gross sales
Royalties4% of gross sales
Operating costsStandard restaurant operations

Scale​

MetricValue
Total locations39,000+ worldwide
Franchised~95% of locations
Real estate value$30+ billion estimated
Annual rent collected$7.5+ billion

When This Model Works​

Good fit:

  • Consumer business with predictable, recurring visits
  • Locations are critical to success
  • Brand standardization matters
  • Long-term capital available for property acquisition
  • Franchisees willing to pay premium for proven system

Poor fit:

  • Business doesn't require physical locations
  • Low-margin operations that can't support rent markup
  • Rapidly changing location requirements
  • Limited capital for property acquisition

How to Implement​

  1. Prove the concept - Run company-owned locations profitably first
  2. Identify location criteria - What makes a site successful?
  3. Acquire properties - Purchase or long-term lease in target locations
  4. Develop standards - Create build-out specifications
  5. Franchise the operation - License the business, lease the property
  6. Scale systematically - Reinvest rent into new properties

Modern Applications​

This model applies beyond fast food:

IndustryExample
FitnessGym chains owning facilities, franchising operations
AutomotiveDealership networks with property ownership
HospitalityHotel brands owning select properties
HealthcareMedical office buildings with practice franchises
RetailShopping center ownership + tenant franchises

PropTech Opportunities​

Leverage technology to enhance the model:

Context​