Although McDonald’s is one of the world’s most extensive fast-food restaurants, there are several claims that it is more of a real estate business than a restaurant due to its high revenue.
Therefore, you may then wonder- how does McDonald’s make its money? If you’d like to find out, keep reading to see what I learned!
How Does McDonald’s Make Money In [currentyear]?
McDonald’s makes money from fees, rent, and royalties paid by franchisees as well as the sales made by operating company-owned restaurants in[currentyear]. Due to a huge dependence on its franchising business model, Mcdonald’s generates most of its revenue from franchises run by independent business owners. Thus, the McDonald’s company is a renowned franchisor.
If you’d like more information on how Mcdonald’s makes money, including its revenue streams, keep reading this article for useful and interesting facts!
Where Does McDonald’s Revenue Come From?
McDonald’s uses the following mechanisms to make money:
1. Revenue From Restaurants Operated by the Company
A small percentage of Mcdonald’s revenue is generated by the restaurants run and operated by McDonald’s parent company, selling food and beverages at competitive prices as a food service business.
This American fast-food restaurant specializes in hamburgers, although it diversifies its product mix into the following main product lines:
- Hamburgers and sandwiches
- Breakfast/all-day breakfast
- Chicken and fish
- Snacks and sides
- Salads
- Beverages
- Desserts and shakes
- McCafé
The company has adapted its menu internationally to suit different markets and attract more customers for high company revenues and revamp its menu from time to time in order to maintain customer loyalty within different markets.
For instance, McDonald’s US stores include beef in most products, such as hamburgers, whereas India’s restaurants tweaked their menu and included more vegetarian and chicken products.
To maximize company profits from the sale of food products in the restaurant’s, McDonald’s uses different pricing strategies, including the following:
- Bundle Pricing Strategy:
McDonald’s sells several food items together at a slightly affordable price in bundle pricing.
The prices of food items in ‘bundles’ are normally lower than the food items bought separately. Consequently, McDonald’s encourages customers to buy combos, hence more profits for the company.
- Optional Pricing Strategy:
The optional pricing strategy by McDonald’s is a strategy to increase sales once a customer starts to buy food items.
Ideally, the optional items suggested by Mcdonald’s intend to increase the overall price of the product purchased by the customer. Hence, the customer ends up paying for the main item and the additions.
- Psychological Pricing Strategy
In psychological pricing strategy, McDonald’s uses prices that appear to be affordable, i.e., $0.99, instead of rounding the figure to the nearest dollar.
This way, customers perceive affordability and make purchase decisions based on the figures.
The company also enhances its product offerings by building an omnichannel presence.
Thus, customers can purchase food and beverages from company-owned outlets and through the company’s website.
More importantly, customers can order food and receive deliveries at the convenience of their remote locations.
Mcdonald’s also uses different media channels such as print, hoardings, TV, and online ads to increase the company’s visibility, sales, and revenue.
2. Revenue From Conventional Franchising
McDonald’s earns much of its revenue from conventional franchising. The idea of Mcdonald’s franchising business model is to allow a company to operate under McDonald’s brand name and trademark while adhering to set terms and conditions.
In conventional franchising, McDonald’s obtains a lease or owns the land and the building where the franchising restaurant is located.
Hence, the franchisee is tasked with paying for the décor, seating equipment, and signs.
Ideally, the agreement is considered the best of its kind as it accounts for the highest operational performance standards.
Conventional franchising with McDonald’s is set to a 20-year term period. After that, the franchisee pays a minimum rent to the company, and royalties cumulated from a particular percentage of sales.
Additionally, the franchisee is supposed to deposit a certain amount during the signing of the agreement to increase the company’s cash flow.
Once a McDonald’s franchisee sets up their restaurant under its trademark, they work to re-invest with time.
In the course of business operations, the parent company provides the necessary support, such as the implementation of innovative ideas as well as operational assistance.
With such support, the McDonald’s parent company increases its value as the functional restaurants accumulate revenue for the company.
3. Revenue From Developmental Licensing
The McDonald’s parent company does not make any initial investments in developmental licensing as witnessed in conventional licensing.
With developmental licensing, an individual or company is given the McDonald’s license and invests in the entire capital.
The licensed franchisee is also responsible for catering to operational costs and real estate charges.
As a result, the licensed franchisee owns or secures all assets, including building and property, and has the right to open new McDonald’s restaurants across a province or other geographical areas.
However, as part of the licensing agreement, McDonald’s receives a royalty from a percentage of the franchise sales.
McDonald’s also receives a certain amount for every license issued to a franchisee.
McDonald’s has gained high revenues from developmental licensing in more than 80 countries, with approximately 6,900 restaurants operating under this agreement.
4. Revenue From Affiliates
McDonald’s also makes money from affiliate companies, where the agreement accounts for equity investment.
In this type of agreement, McDonald’s receives a royalty from a percentage of sales.
With a total of 5,800 affiliated markets, China and Japan are McDonald’s largest affiliated markets with 2,600 and 2,900 affiliated restaurants, respectively.
Generally, the McDonald’s franchising system helps the company maintain a consistent and reliable revenue stream.
According to recent 10-K filings, McDonald’s parent company operates about 2,636 restaurants with other 36,059 restaurants franchised.
Through this system, McDonald’s earns much of its revenues from leases, royalties, and total sales returns by the company.
Instead of setting up independent restaurants, other business owners can earn huge profits by gaining licensing and agreement with the parent company and operating as McDonald’s.
Furthermore, the system saves McDonald’s money and offloads some responsibilities since the franchisee assumes full responsibilities from payrolls to purchasing food supplies.
To know more, you can also check our related posts on McDonald’s business model, McDonald’s competitive advantages, and McDonald’s statistics & facts.
Conclusion
McDonald’s makes money from operating company-owned restaurants and franchisees spread across the globe.
McDonald’s enters into agreements with the franchisees to operate under the company’s trademark and, in return, adheres to some sets of financial and operational standards.
Franchising can be in the form of conventional franchising, developmental licensing, and affiliations.
