And that’s it! A burger from the grill to the counter in less than 30 seconds!
You and I may not find anything special in this statement, but for Ray Kroc, a traveling salesman who sold milkshake machines to fast food restaurants, it was like music to his ears. His eyes lit up when he walked into the first-ever McDonald’s outlet in Pasadena, California.
The Birth of Fast Food
In the 1940s, the drive-in restaurant culture was booming. People would drive into their favorite joints, order a burger and milkshake, and enjoy it from the comfort of their cars. However, the long wait times were a major drawback. Ray Kroc despised this aspect of the customer experience and saw an opportunity to change it.
Ray had spent his life traveling across America, selling milkshake machines. He would tell his customers that people didn't want to wait 20 minutes for a milkshake. He demonstrated his machine, which could make 8 or more milkshakes at once, but most people didn't see the need for such a high-capacity machine.
One day, Ray received a request for four of his milkshake machines. Intrigued, he drove hundreds of kilometers to see this unique restaurant called McDonald's.
When he arrived, Ray witnessed a sight that would forever change his life. There was a long line of people outside McDonald's, waiting for their food. The average wait time was less than 5 minutes. Ray decided to join the line, got a burger, and tried it. It was amazing!
The Birth of a Real Estate Empire
Ray met with the McDonald brothers, Dick and Mac (the real McDonald's), who showed him their super-fast burger supply chain. The process was efficient and standardized, ensuring each burger had the same taste and flavor. This revolutionary concept sparked an idea in Ray's mind.
He convinced the McDonald brothers to sell their concept and expand it as a franchise model. Ray would handle the selling and recruiting of new partners, while the brothers would lend their brand name and receive a 0.5% cut of sales. The agreement included a strict quality control clause.
Over the next 5 years, Ray opened 228 McDonald's restaurants across America. He aimed to make McDonald's the quintessential American family dining experience. However, despite the growing popularity, Ray wasn't making much money. He was in deep debt and had even mortgaged his home.
A smart lawyer opened Ray's eyes to the real business he was in. "You are not in the business of selling burgers," the lawyer told him. "You are in the business of real estate." And that's when everything changed.
Ray founded the "McDonald's Real Estate Corporation," which acquired land and leased it out to franchise partners. This new strategy transformed McDonald's into a real estate empire worth $53 billion and counting.
The Power of Owning Real Estate
McDonald's high profitability stems from owning the land and buildings at most of its locations, with franchisees paying rent to the company. Initially, McDonald's charged a 20% markup on leases, but they increased it to 40%. The company also had an agreement that if an outlet performed well, the markup would go up. Franchisees paid either the lease markup or 5% of sales, whichever was higher.
As McDonald's expanded domestically and internationally, their real estate business thrived. By the 21st century, they had over 35,000 outlets in more than 100 countries, with a new McDonald's opening every 5 hours.
Lessons for Entrepreneurs
McDonald's success story offers valuable lessons for entrepreneurs:
- Find a growth model with minimal liabilities. McDonald's didn't have to pay rent but became one of the largest fast-food chains.
- Create alternate sources of income. McDonald's diversified into real estate, providing strength when their original business faced challenges.
- Focus on building real assets. Owning real estate can provide stability even when other aspects of the business are uncertain.
As of 2020, McDonald's is valued at over $129 billion. Each franchise costs an average of $1.5 million to launch, with net revenues ranging from $150,000 to $175,000 annually.
In conclusion, even if people stop eating burgers tomorrow, McDonald's is not going down, thanks to its massive real estate empire. This story teaches us valuable lessons about building sustainable business models. Let us know your thoughts in the comments below.