McDonalds Is A Tech Company That Makes Burgers
"We are not technically in the food business. We are in the real estate business."
If you’ve ever watched The Founder, you probably know a little bit about the origins of McDonalds. The beauty of the business is that McDonald’s is not a fast food restaurant, but rather, one of the largest real estate moguls in America. The company ingeniously earns revenue from franchised restaurants in a two-pronged approach: 1) minimum rent payments and 2) variable rent payments based on a percent of sales for the period.
Exhibit 1 - McDonald’s FY23 10-K
If you take a peek at McDonalds’ balance sheet, a couple figures should pop out immediately. Long-term debt and long-term lease liability. Combined, it's a whopping $50 billion in debt! For reference, Wendy’s total debt sits at $4 billion and the entirety of Yum Brands (KFC, Pizza Hut, and Taco Bell) only at $38 billion. This makes complete sense if you’re actually operating a real estate company. The company owns 70% of the buildings and 45% of the land at its locations. For most of its history, McDonald's has just been a greasy version of Blackstone.
Consequently, the company has been thriving to the tune of a 30% year-over-year increase in profit. This growth in profit is fueled by an proportional increase in revenue as the fast food chain sits atop the industry with revenues hitting $25.5 billion last year. While this bodes well for McDonald’s shareholders, the stakeholders have long been getting the short end of the stick. Particularly, operators are finding it tougher and tougher to breakeven given higher operating costs and large investments to renovate locations.
Cut it any way you’d like, but a problem for operators will inevitably affect McDonald’s. Who’s gonna run all those locations for them to collect rent on?! Today, the famed fast-food chain faces a problem: how can it digitize in a way that optimizes cost for operators and incentivizes them to keep their shops open?
First, let’s explore the woes faced by operators nationwide. If you like what you’re reading and have not subscribed it super easy! Just hit the button below and enter your email!
High Costs For Operators
McDonald’s has long been a proponent of efficiency, standardization, and simplification. Core to the early days of their business was the “Speedee Service System”, which Dick and Mac developed themselves. These operational efficiencies enabled them to keep menu items less than a quarter and increase the number of sales per hour.
Recently, these efficiencies haven’t been lending to the same level of profits. In 2015, the company announced that it was closing 700 stores. Numerous owners have closed stores since then, with a recent announcement of 8 locations in Pittsburgh closing.
Can anything be done about it? Here’s a breakdown of common “controllable” expenses for an average franchisee:
Exhibit 2 - Estimated Financial Breakdown for a McDonald’s Franchise
Notice the odd one out? That’s right, “crew payroll” trumps all other expenses combined by $70,000! In fact, labor is reported to be the single largest operational expense for any fast food location. To add fuel to the fire, locations nationwide soon plan to pay higher wages for labor. Back in 2020, employees in Phoenix were pushing for a $15 wage. Even last month, California increased the state’s minimum wage to $20 bucks. In essence, higher costs across the board.
As a general rule of thumb, it takes $1 million in investments to open a McDonald’s and the average location pulls in around $3.5 million in revenue. Owners expect to retain $150,000 a year. Now - McDonald’s is not deaf to these higher costs. Seeing renovation costs pile up to as much as $1,000,000 per location and sky-high operating costs, McDonald’s corporate has long been working towards using technology to curtail high costs.
Digitizing The Arches
Digital is a primary driver to improve the customer experience, reduce complexity, and drive profitability
In 2022, McDonald’s premiered a fully digital location in Fort Worth, Texas. The point being, you order on the app, pull up to the “Order Ahead Lane”, pick up your food from a robot, and drive home to eat your Big Mac all while not interacting with a single person.
This push for digitization is not new at all. McDonald’s launched their mobile app back in 2015, slowly adding features like menu browsing, coupons, customizing orders, re-ordering previous items, and earning rewards points. To consummate their push towards digitization, McDonald’s opened up “Speedee Labs” in 2023. This innovation hub, located at their headquarters in Chicago, began its journey by announcing McDonalds’ partnership with Google late last year.
McDonald’s Corporation and Google today announced plans for a new multi-year, global partnership to connect Google Cloud technology across thousands of its restaurants worldwide. This partnership is a significant step for McDonald’s in advancing its restaurant technology platform to become the most sophisticated and productive in the industry. McDonald’s plans to leverage a wide range of Google Cloud’s hardware, data, and AI technologies to implement innovation faster and create even better experiences for its customers, restaurant teams, and employees.
To enable this, the company plans to utilize an Edge computing framework, connecting each location to the cloud through a shared digital framework. By using Google’s Cloud platform and knowing location-level data, McDonald’s can aggregate data points from every system in every store. Ultimately, the hope is that the company can gather performance data about equipment, software systems, and kiosks. This would eventually spill into their AI strategy - the more data that can be gathered, the more data that is available to train models on how to more effectively manage a location.
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.
Above is the second part of the quote in the subtitle, said by a former McDonald’s CEO. In my opinion, this perfectly encapsulates why McDonald’s is investing so heavily in digitization, cloud migration, and eventually - AI. Simply put, by creating ways to reduce cost at the restaurant level, corporate can entice operators to open locations or renovate existing ones.
The thing is - demand can only be projected, not guaranteed. However, investing in ways to expand margins at locations creates a predictable way of convincing operators that running a location is still as lucrative as it used to be. To me, this push for digitization displays that McDonald’s has figured out how to keep their rent payments coming amidst financial troubles for franchises. What do you think about how this crisis and how operators will respond? Drop a comment to share your thoughts!
That’s all for this one folks! As we develop the newsletter, I’ll try to expand the diversity of topics and angles we cover. If you’re interested in more content related to how legacy companies are digitizing their business, let me know by liking this post or dropping a comment. If you enjoyed reading, please feel free to share with your friends. Reach out to us at logicallyanswered@substack.com if you have any insider opinions or leave a comment on our Substack page!