What Do Burgers and the Recession Have In Common?
If you’ve been watching the news lately, you’ll see the ominous word “recession” being tossed around more lately. There are a ton of reasons for this and, if you’re a business owner or entrepreneur, you know full well that the market is predictably unpredictable. But maybe you can take a cue from McDonald’s – they are almost recession-proof.
Your best defense against the inevitable fluctuations in the market and consumer spending habits is to make sure you have a plan in place to float you when things aren’t going so well. McDonald’s serves as a great example of a company that found ways to earn money, and even grow, when the market conditions have suggested otherwise. And the reason why might surprise you: they’re in the real estate business.
No, Ronald McDonald isn’t moonlighting as a real estate agent, but with the amount of revenue McDonald’s brings in for owning land, you might think he does. First, a quick breakdown on how McDonald’s does business. First and foremost, they are a fast food burger company. But most of their locations are not owned and operated by McDonald’s.
Instead, most McDonald’s locations you’ve been to are owned by franchises - separate, privately-owned companies that cut a deal with McDonald’s to operate their stores at a cost.
Right off the bat, it serves as a relatively recession-proof form of making money. McDonald’s recoups a fee in exchange for giving you the keys to running a part of their empire. Whether burgers are flying off the grills, or a down economy has people eating more PB&J sandwiches at home, McDonald’s will earn the same amount as per whatever agreement they made with the franchise owner.
Now, here’s where it goes to the next level for McDonald’s: though they don’t operate or own the franchises that it works with, by and large it owns most of the land and the buildings that these franchises exist within.
In theory, that is an entirely separate revenue stream for McDonald’s, one that for a variety of reasons is designed to be recession-proof.
Not only is McDonald’s earning money by selling the burgers these franchises sell, and money as part of their franchise agreement, they’re also earning money on rent. Those are two incontrovertible and relatively fixed costs. It puts the onus entirely on the franchisee to find ways to move burgers and fries in their location.
McDonald’s doesn’t really need to see much of a direct profit from those things in order to still come away with a pretty comfortable margin.
Plus, if the economy takes a turn for the worse, it’s possible that land-prices drop. McDonald’s can take advantage of a buyer’s land market in a very unique way. When the economy recovers, they’ll have a bunch more locations ready to turn cheap property into new jewels in their fast food crown. There are a bevy of provisions and loopholes in the US tax code that help landowners that McDonald’s can take advantage of, and since land does not depreciate the way that other assets do, McDonald’s always has an emergency escape hatch of sorts.
If they need a quick influx of cash, they can unload some of their property to another landlord. And they would still earn money off of that land as long as the new landowner continues to allow it to run as a McDonald’s franchise.
Not every business will have as obvious of a secondary stream of income as McDonald’s. But, always be aware of secondary and tertiary ways in which your business can expand - especially ways that could help you ride the waves of the economy.