It sounds like the dream of every entrepreneur. The one decision, the one thing you do in a moment of despair that would change the outcome of your game completely.
Ray Kroc, known for his burger empire with the big M in its name, had such a moment in 1955. In that year, he was still owning only a handful of his own restaurants and was collecting tiny franchise fees from his three franchisees. Kroc wanted to start building his restaurant system with a unified marketing & operations approach and he needed the necessary funds for this idea. The tiny fees from his few franchisees (1.9% of gross sales minus 0.5% that he had to pay to the original McDonalds brothers) were too low to cover all of his expenses.
But there was a stroke of luck. Kroc’s financial advisor and second employee Harry Sonneborn came up with the glorious idea to buy or lease the property from a landlord for any new restaurant and lease it back to the franchisee.
Boom. That was the real game-changer. Under the name “Franchise Realty Corporation”, Kroc’s organization suddenly became a restaurant real estate developer. This obviously solved the financial problem as the rent payments of new franchisees not only covered his mortgage payments to banks but also left a surplus that he could put in the development of his franchise system.
Obviously, the property ownership also gave him a lot more power and force to control the quality standards in every restaurant. In the case of non-performing, franchisees would just be switched behind the scenes within the same location. Owning the property protected the foothold and acquired dominance in a geographical area for the brand “McDonalds”.
This ultimate control over the restaurant properties gave Kroc a huge and finally important long-term advantage over his competitors and helped him to buy the company and brand name from its original founders, the McDonalds brothers in 1961.
The idea contributed to a large degree to what McDonald’s is today – A multi-billion company with still the same basic business model. Until today, revenues from rents have been adding up to 30% of the company’s yearly total revenue (see their annual reports).
Of course, this ‘leverage point’ idea was a decisive but not the only factor in McDonald’s overwhelming success. Over time Kroc and his colleagues found the perfect mix of control vs. autonomy for their franchisees. While the headquarters controlled the property, brand, menu & product quality, the franchisee had autonomy over the procurement of ingredients, human resources, staffing & organization, and local marketing.
The perfect combination of freedom and force has revolutionized the franchise restaurant industry for years to come. Actually, until today most franchise businesses have been operating in a version of that old, original model.
It’s a business story worth exploring. If you want to learn more about the full story behind McDonald’s foundation and success, I recommend reading the book “Grinding it out” (the autobiography of Ray Kroc), or watch the movie “The Founder”.