Food Theory: McDonald's is NOT a Restaurant!

Hello, I would like to start a McDonald's franchise, so this says that you agree to pay an upfront franchise fee, a Mick franchise fee if you're kind, and you'll have to pay us a percentage of all your mixed sales. Okay, we get that too. to choose the location of your

restaurant

we own the mcbuilding and you can only rent it from us this is a little more intense than I expected. I owe my mixed soul to the company. If we do this another time you look mcflurrious. Hello Internet. Welcome to

food

theory

the channel which is just a front for a thriving cat herding business it's no secret that I'm a fast

food

enthusiast in fact and

mcdonald

's was my comfort food growing up my diet was a daily rotation of mcburgers mcfries and mixed soda, I realized that may not be the healthiest option.

I tried including their salads for a while, the mixers, but to be honest, the mixes sucked over the years. I've watched how McDonald's has changed and evolved, classifying its dining spaces and expanding into specialty coffees. Seriously introducing video games into their gaming spaces when McDonald's first put Nintendo 64 consoles in the gaming area blew my mind, and yet despite all that change, McDonald's has been a constant. I know what I'm going to get. I know what it will taste like. I know the ice cream machine is going to break. I know McDonald's and you and we too.

About five years ago, when I was looking for my first home, our real estate agent told me something that completely blew me away. No joke, it was one of those. Moments you have in life when your perspective completely changes on the world around you, like when you discover that the Illuminati is real. I mean, no, I forgot I said that anyway, our real estate agent told me that McDonald's is not a food company. is a real estate company, you heard that, the most famous and highest earning fast food chain in the world actually makes more from real estate efforts than from selling food, food is a secondary business to purchasing and property of buildings. and land in the five years since this little fact appeared on many different lists, but in all honesty, this was one of the reasons why I wanted to create this channel in the first place to tell you guys mind-blowing things like this, I mean to have Multiple income streams are smart business, but this goes far beyond mere diversification.

McDonald's is arguably the most successful

restaurant

chain in history, and yet it's somehow even more successful in a completely different industry, so that's what we're getting to the bottom of, according to today's theorists. Is

mcdonald

's primarily a real estate company or is it just a click based distortion of the numbers and if mcdonald's is a real estate company why how do you put your business socks on people because it's a business it's time to do business, let's start at the beginning? McDonald's was founded in California in the 1930s by McDonald brothers Richard and Maurice. The first version of the restaurant that served hot dogs and barbecue didn't really resemble what we know as McDonald's today except for one thing: getting food to its customers quickly.

McDonald's brothers were very efficient and optimization

theory

for another day and their fast service system caught the attention of smoothie mixer salesman Ray Kroc, who partnered with the brothers and in 1955 began building McDonald's franchises from California to a feverish rhythm; However, Crocs's fortunes didn't really take off until he met an investor named Harry Sonneborn who introduced Crocs to a new way to make money in the restaurant and real estate business. This clip is from the 2016 movie, The Founder, a movie I highly recommend if you haven't seen it, it really gets to the heart of the matter.

You don't seem to realize what business you're in. You're not in the burger business. You're in the burger business. real estate you don't build an empire on a 1.4 cut of a 15 cent hamburger you build it by owning the land that hamburger is cooked on spoiler alert the soniborne idea proved to be wildly successful and definitely much better than Dunder Mifflin Infinity and with the help of Sonneborn, Ray Kroc implemented changes that would alter the course of McDonald's history making him an incredibly rich and worthwhile man. more than $600 million when he passed away in 1984. So that's how the new system today known as the Sonoborn model worked.

Suppose it's the late 1950s and Joe, a regular guy, wants to open a McDonald's. To do so, he needs to buy a franchise. basically permission to open a restaurant from ray kroc croc is happy to sell a franchise to joe after all his job is to build a network of mcdonald's franchises across the united states however croc and sonoborn have now joined in a trap To get a McDonald's franchise Joe the regular guy must agree to operate out of a building Croc chooses on land the company now owns This new type of deal accomplishes a couple of things first: It gives McDonald's greater control over its franchises, allowing them strategically locate the different franchises at an appropriate distance from each other and to ensure that their locations are in ideal areas of the city; secondly, it allows mcdonald's to collect more money than ever from their franchises, not only does mcdonald's get to collect a one time fee of 45,000 per franchise and a percentage of sales from each of those franchises, but they also receive rental checks from their franchises , that's true, McDonald's also owns Regular Joe and when you know statistically, a new McDonald's opens every 14 and a half hours somewhere in the world, that will add up.

McDonald's, along with many of the other fast food chains you know and love, use the Sonoborn model of real estate ownership within their franchises to this day and hey, when the restaurant is down, they can always sell the land, but wait, there are Furthermore, the real estate benefits for McDonald's do not end there, in addition to collecting rent, there are also tax benefits to be obtained. There are many advantages to owning a commercial building and knowing what you're doing, and boy, how does McDonald's know what that is? Making commercial land use first is a tax write-off, meaning that whatever it costs you in a year to buy and hold that land will come out of your income before paying taxes, and these are big, big-earning businesses.

Money wants to get as much of those profits as possible, so there is very little left to tax in the end because the taxed money doesn't come back to you or your company, so they buy equipment, they give away bonuses, they invest all that money. get it off the books before it's taxed, so sure you won't need that extra camera or whatever, but by spending money on it you basically get 20 off the 20 that would otherwise be given to the government through of taxes. As any accountant will tell you, you want your business to basically look like you're making zero dollars at the end of the year by spending that money on things that help the business but can also function as tax deductions, I'm not saying this is okay. or wrong either way by the way I'm just saying it's legal and smart businessmen looking to keep their money try to exploit this for all it's worth and the Sonoborn model really works with that system, they own the land and the Land is a really strange category of business because unlike other things you buy, say your car or your phone, land is not expected to expire or deteriorate in accounting, this is called depreciation and you feel it if any Maybe you're trying to sell an old one.

The car you've driven into the ground at the end of its useful life is worth virtually nothing. It turns out that you can use depreciation to your advantage with taxes and accountants can spread the cost of large purchases over the life of that item. For a concrete example, let's say I buy a new Burgerbot 2000 that is capable of producing burgers on its own and I expect it to produce those burgers for the next five years before it starts to break down if it costs me a hundred thousand dollars. To buy, I can choose to amortize the cost, that is, I can progressively take its depreciation into account in my taxes.

When I do this, I would be telling the IRS that instead of deducting the entire hundred thousand dollar purchase of my burger this year. Instead I want to deduct twenty thousand dollars every year for the next five years, the same amount, but now it's spread out, this may seem like a silly difference, but when it comes to much larger numbers and complicated tax brackets, that kind of long-term distribution. Term cost can greatly reduce what you owe each year. This is how, say, Burgerbot and I can make $50 in a year if I deduct the entire hundred thousand dollar cost of purchasing the robot on my taxes in the first year. show the government that I ended up with a net loss of fifty thousand dollars that year.

I would pay zero dollars in taxes because I proved to the government that I didn't earn any money, but over the next four years I will be paying 21 of my 50,000 total earnings, that's 10,500 each year for a grand total of 42,000 paid in taxes over the years. five years, in scenario one, deducting everything up front, but now let's look at scenario two where I spread the cost of Burgerbot deducting 20,000 from my profits each year instead of minus 50,000 the first year and plus 50,000 every two years years. Now I tell the IRS that I make 30,000 each year, the 50,000 I make minus the 20,000 distributed costs of The Burgerbot I'm still paying the same 21 each year in taxes for five years, but now it's 30,000 instead of 50,000, which which ends up being 6,300 a year or 31,500 over the five years that the Burgerbot is expected to operate. ten thousand five hundred extra dollars that I can keep over that five year period just for some fun tax work with depreciation schedules, even if you didn't follow any of those examples, the tldr here is that spreading the costs can save you a lot of dollars in the long run and When you're a company like McDonald's with a massive $21 billion in revenue in 2019 alone, those kinds of cost savings will add up, but how do they do it?

Why is all this relevant? I just said that. the land does not depreciate and while that is true, anything that is built on that land paves the lot that is now improved land, a building was built, it can depreciate and there is a really strange loophole that helps a lot to McDonald's here because the rented land can depreciate. and almost all of McDonald's land is leased, only seven percent of McDonald's locations are actually owned and operated directly by the company, the remaining 93 locations are franchises thanks to all of those locations in 2019, McDonald's reported a total depreciation of $1.39 billion, which represents approximately $292 million in a single year of tax savings, which is a lot of money, but with annual revenues of $21 billion it is hardly a mistake of rounding and that's why now is the time to talk about income versus profits: income is the total amount. of money you make in the period, you don't subtract costs, you don't subtract taxes, you just count all the money you collected in the year and that's your income, your profits are different, that's what you really earned at the end of the year. the year after taking into account all of its costs, when you look at McDonald's, its revenue and profits tell totally different stories.

Remember I said that McDonald's only owns and operates seven percent of its locations, and that seven percent accounts for a whopping 47 percent of its revenue. That's right, seven percent of company-owned locations make almost the same amount of money as all 93 franchises combined, but owning the locations comes with a lot of costs, so when it comes to profits, the script really flips. - Company-owned locations need to pay all their expenses, from equipment and staff to land costs, meaning that despite raking in $9.42 billion from your company locations in 2019, they only They were left with 1.5 billion of those profits, while McDonald's barely has to do anything to keep its franchises in business.

Since that's the franchisees' job, as a result, McDonald's keeps about 86 percent of the franchise's revenue in profits, meaning that of the $11.6 billion they made in 2019, they kept more than 10 billion of that, so what percentage of all that is rent? As opposed to money from, you know, selling hamburgers, you remember from a long time ago, when you thought that's what this company did well. McDonald's doesn't break it out in its financial reports, but we can use the numbers we have available to make a reasonable assumption: We know that the 2,770 locations run by McDonald'sThe McDonald's company earns 9.42 billion dollars or 3.4 million each on average.

If we assume that company-owned locations earn about the same as franchised ones, it means that each franchise would pay four percent of that or about $136,000 to McDonald's in franchise fees each year for its 35,925 franchise locations. that is, approximately 4.9 billion dollars of discount on food franchises for a total of 6.4 billion on food. McDonald's reported $13.15 billion in 2019 profits, leaving $6.75 billion remaining. are going to be new franchises and finally all that real estate 6.4 billion in food versus 6.75 billion in everything else, we have a close race, my friends, but we can say that McDonald's makes more in non-food revenue than in direct food income, so there are You already have it friends, which was true and Ray Crock day is still true today.

McDonald's makes more money from real estate than it does from hamburgers, and what's more, McDonald's has leaned even more into real estate in recent years, from 2015 to 2019. McDonald's sold more than half of its McDonald's-owned locations. the company, in many cases making a tidy profit on the land they had invested in and shifted greater dependence from running an actual restaurant to a real estate company that builds all of its buildings with golden arches in front and who can argue This approach at least from a business standpoint, their huge commercial real estate portfolio has allowed them to weather the madness of 2020 with relative ease.

Shares of McDonald's corporation have fully recovered from Kovid and as of the making of this video are trading near an all-time high. It's a similar story with other major restaurant chains, such as Starbucks and Wendy's, which have taken a page from Sonoborn's book and have gotten themselves into the real estate game — indeed, into the practice of collecting rent. Their own franchises have become practically normal for major restaurant chains, while smaller restaurants that don't have the luxury of being their own owners have been hit hard this year, and I mean, hard, it's estimated. That 85 of all independent restaurants in the US could close permanently by the end of this year, so let me leave you with this thought, theorists, especially those here in the US, where Kovit is still rising and where many small businesses missed out.

The limited number of the Paycheck Protection Program or PPP. loans that were made available to American businesses, if you're in a position where you can choose between local restaurants and national chains, consider ordering local more now than ever, oh and uh, if you're in a position to start a restaurant too consider becoming an owner, but hey, that's just a theory, a food theory, bon appetit, well, you've made it to the end of a McDonald's-themed food theory episode. Might you be interested in another episode of McDonald's-themed food theory? We recently took a deep dive. In the world of fast food fries, I crunched the numbers and found out which fries are objectively the best bang for your buck, that's what food theory does here folks, we tackle the big questions, so make sure you Subscribe, hit the bell for more information and I will.

See you all next week for something a little less mathematical but just as fun.