McDonald’s: Russia’s Unseen Real Estate King – Capital Raising – Private Equity

By Natu Myers

Hold on to your hats, because we’re about to dive into a truth stranger than fiction. The corporate enigma that has had Wall Street puzzled for decades. McDonald’s isn’t just a fast food giant, it’s a real estate powerhouse. And no, this isn’t just another stale corporate cliche. Picture this. Russia is still reeling from the brutal invasion of Ukraine.

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In a dramatic plot twist, McDonald’s calls it quits on the Russian market. The fast food juggernaut sells off 850 of its restaurants, employing 62, 000 people to a local franchise who happens to be a Siberian oil baron. The company takes a hefty 1. 4 billion charge against its earnings for the deal, as reported by CNN, the rebranded chain.

Tasty. And that’s it. Logo change? Nope. They’ve got an M there designed to mirror a burger flanked by two fries. Cheeky. Let’s travel back in time to January 31, 1990, a date etched in fast food lore. It’s the grand opening of the first McDonald’s in Moscow, marking an unprecedented leap toward the end of the Cold War and the embrace of Western capitalism by the East.

This single location served up two mammoth lessons for McDonald’s global strategy. Lesson 1. Control of franchisees. Private businesses were scarce on the ground in communist Russia. Unable to supply the 300 odd distinct ingredients needed for a McDonald’s outlet. The solution? A 50 million dollar factory.

Christendom complex. Located on the outskirts of Moscow. This powerhouse churned out everything from buns to frozen fries. Beef to lettuce. Only in 2010, did McDonald’s completely outsource its Russian supply chain. A decision that enabled the current franchisee to take over the brand smoothly. Lesson 2, The Real Estate Magic.

Keen on getting a slice of American culture, Russia agreed to a ludicrous deal. McDonald’s secured its prime Moscow location for a mere one ruble per square meter per year. for 49 years. Yeah, you read it right. And despite efforts, renegotiations fell flat. The initial years weren’t a gold rush for McDonald’s in Russia.

The nation was economically frail, and a meal at McDonald’s, although 50’s cheaper than in the US, cost half a day’s wage for the average Joe. Yet, the golden arches saw the rubles pouring in, not from burger sales, but from real estate perks. Enter the McDonald’s Tower, a swanky 15 million dollar downtown office co owned with the Moscow City Council, opened in 1993.

This was leased out to Western corporations eager to penetrate the Russian market. Think Coca Cola, a Max Yota. Quite literally, McDonald’s had become a real estate enterprise in Moscow. Flash forward to the present day, and McDonald’s real estate holding clocks in at a colossal 42 billion, with 36 of its 23 billion in revenue sourced from franchises paying rents.

The real mastermind behind this lucrative model, Harry J. Sonneborn, McDonald’s president from 1955 1967. Founder Ray Kroc had his way of extracting money from franchises, but Sonneborn had a stroke of genius. McDonald’s wouldn’t just be a franchiser, it would also be a landlord. The master plan was simple yet ingenious.

Buy real estate, lease it to franchises at a 40 markup. If they ignored the company’s guidance, they’d be evicted. A clever, ironclad control mechanism. Sonneborn’s candid confession to Wall Street investors still echoes. We are not in the food business. We are in the real estate business. In the year 2021 alone, McDonald’s raked in 13 billion in revenue from franchisees, with 64% coming from rents.

Add it all up. and rent accounts for a staggering 35% of McDonald’s total revenue. The franchise model is a goldmine for McDonald’s, boasting an 82 operating margin, while company run stores manage a mere 18s. It’s no surprise that franchises account for 93s of its 40, 000 plus location. They’re also the company’s guinea pigs, testing out new ideas and products before a full rollout.

Strategically placed on corners or wraps with signage on two major streets, McDonald’s locations are carefully chosen for their traffic patterns and census data. But the secret sauce? A fixed property financing rate with variable takes from franchises. As sales and prices rise, McDonald’s pockets get deeper, while its financial outlays remain unchanged as the final frames of our narrative unroll.

It’s time to take a closer look at a situation that took the financial world by storm back in the early 2010s. The clamor of investors echoing through the boardrooms of McDonald’s. Pressing for the spin off of their gargantuan real estate assets into a shiny new REIT. A real estate investment trust.

The picture. was painted vividly. McDonald’s would be not just a burger joint, but a formidable property magnate. The year 2015 brought a twist in the tale. The golden arches revered by many decided against the formation of the rate. The reason? An intricate web of complications associated with the deal, including shifts in the tax code that made the spin off a less tantalizing prospect.

Consider a reit, a majestic portfolio of towering buildings, each one a veritable gold mine. Now imagine one of these buildings hosting a store. The reit collects rent, yet it doesn’t get a dime from the store’s profit. On the other hand, McDonald’s… The home of the Big Mac operates a little differently. It owns the land, reaps the rent, but there’s an extra cherry on top.

It also bags a percentage of the profits from every burger sold. It’s a simple, yet robust business model. They possess the asset and the cash flows, the best of both worlds. A savory combo. And there you have it, the end of our riveting tale. But don’t think for a moment that the journey ends here. For those of you captivated by this narrative and yearning for more, there’s an opportunity for you.

Until next time, stay curious, stay inspired. And remember the secret of great fortunes is often hiding in plain sight behind the boring.