The McDonald's Fortune Founded On Real Estate
Warning: Movie spoilers ahead.
Released to cinema audiences in 2016, The Founder is the story of McDonald’s. It has grown from humble beginnings as a single hamburger joint into a global behemoth.
In 1954, hapless salesman Ray Kroc was fascinated by the innovation at a fast-food eatery run by two brothers, Richard and Maurice McDonald. They were affectionately known as Dick and Mac.
Dick and Mac put their success down to a few main factors.
They made the decision to cut non-profitable sales items and limited their menu to products with good margins: burgers, fries and milkshakes.
They introduced a production-line style of preparing food.
Each staff member focused on a particular part of the process. The cooking area was designed for efficient output.
Work areas were placed close enough for staff to assist one another. But they were separated far enough for workers to stay out of each other’s way.
The McDonald brothers were fastidious about the production process. Each burger patty was cooked for exactly the right time. It had two pickles and just the right amount of sauce.
Ray Kroc was impressed. He hatched an agreement to franchise the operation. Dick and Mac agreed, provided they could maintain full control on quality.
The focus of the movie is on the combination of Ray’s ambition, persistence and ruthlessness. This provides entertainment and makes the audience feel empathy for the brothers.
But I found a particular part of the story more compelling.
The initial deal meant that Ray would receive 1.4% of the profits. He had a whole bunch of restaurants creating revenue but not much of it trickled down to him.
Having put up his house to start the business, he fell months behind on mortgage repayments.
There was an argument with a loan officer at the bank. A fellow bank customer named Harry Sonneborn listened in. He approached Ray, telling him that he may be able to help.
Harry suggested the problem with the franchise contract was revenue stream based on other people’s profits. It’s difficult to keep costs down without total control. Revenues were high but profits low.
And here’s what grabbed my attention.
Harry asked about the land on which the restaurants were built.
Serious money to be made in real estate
I should have seen this coming. We hear so much of it from Phil Anderson at Cycles, Trends and Forecasts. I immediately knew Harry would come up with a simple way for Ray to make money. It’s all in the land!
Ray explained that franchisees find land in a prime position, take out a lease, and borrow funds for construction.
Harry suggested they should be in the real estate business. Ray should buy land where restaurants are built. And make it compulsory for franchise operators to lease the land from him and pay rent. This would set up a revenue stream in addition to a portion of the profits.
Regular payments from every new restaurant would provide security for finance to buy even more land. The capital raised would allow new franchises to open all over the country.
The new business model would also give Ray the important element of control. If the franchise operators didn’t maintain the required quality, he could cancel the lease and kick them out.
Soon, Ray appeared on the cover of Restaurant Business Monthly magazine as the founder of McDonald’s. And the rest is history.
Who’d have thought the founder’s success in getting started came not from the sale of burgers but from the value in the land on which the burgers were made?
We don’t quibble about the success of McDonald’s. It’s proven its business model over many decades.
Yet we reckon McDonald’s may have done even better had it known about Phil Anderson’s Grand Cycle Theory. Phil understands the value of economic rent. And he can show you how it drives the global cycle of long-term booms and busts.
The Grand Cycle Theory is the perfect tool in forecasting market moves, especially real estate and global stock markets.
Phil Anderson sums up his theory in a picture that’s worth a thousand words:
Source: Cycles, Trends and Forecasts
[Click to enlarge]
This removes any niggle of doubt about the property market moving in cycles.
Phil has used his theory to accurately predict market moves time and time again.
Imagine the benefit of having such foresight.
Back in 2004, Phil warned of the ‘winner’s curse’ phase that was about to unfold. This proved to be the final couple of years into the peak of the cycle. It was when real estate buyers were leapfrogging each other, chasing higher and higher prices into the peak in 2007. All of it financed by reckless lending from the banks. Maids were able to borrow $1 million without any hope of being able to repay.
Importantly, Phil also forecast the best time for buyers to step back into the market to buy real estate and stocks. Years ahead of the event, he said real estate prices would bottom out in 2010/2011. And that the stock market would bottom out a year or two beforehand.
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