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McDonald's True Recipe for Success: Unveiling a Hidden Goldmine Beyond Burgers and Fries

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Prepare to be astonished if you believe McDonald's primary success lies in flipping burgers and serving fries. 

Not many people know that food sales contribute only a fraction to the fast-food giant's profits, exposing a hidden gem that sets it apart in the competitive market.

In the past, a visit to McDonald's (MCD) after a day on beach, or running errands, was a three-dollar-budget strategic move: two McDoubles and one McChicken. Fast forward two decades, and the nostalgic Dollar Menu has transformed into a pricier affair, prompting many to question if raising prices on classic favorites is just a strategic move.

Interestingly, McDonald's financial success is not rooted in its menu. The company amassed over $7.3 billion in the first three quarters of 2023, and surprisingly, it has nothing to do with hamburgers or french fries. The real star of the show? Real estate.

Harry J. Sonneborn, an early insider at McDonald's, once stated, "We are not technically in the food business. We are in the real estate business." McDonald's stands as one of the largest real estate empires globally, boasting 41,200 locations across 100 countries. Astonishingly, the company itself only operates about 2,100 of these, with the rest owned and operated by franchisees.

Despite its seemingly limited restaurant ownership, McDonald's balance sheet reveals a substantial $42 billion in property and equipment value. The genius behind this strategy lies in owning many locations operated by franchisees, who, in turn, pay monthly rental fees in addition to franchise fees.

This real estate-centric approach has proven highly profitable, contributing a whopping 63.5% of the revenue generated from franchisees in 2023 and constituting 38% of the company's overall revenue. Forget the burgers; the real money is in owning the land.

While the company-owned spots contribute significantly to revenue, as food sales equate to revenue at these locations, the real financial powerhouse lies in what the company makes from its franchisees.

Investors Take Note
McDonald's decision to embrace a 95% franchised model has transformed its revenue stream. Though overall revenue has dipped by about 11% over the past decade, the shift from low-margin food sales to higher-margin franchise fees and rental income has bolstered gross profit and earnings per share. In essence, McDonald's has built a financial moat around its fast-food empire, protecting its cash flows from competition for years to come.

The recent Q3 results showcase McDonald's resilience. While industry traffic saw a decline, the company's global comps rose by an impressive 8.8%, with the US boasting a robust 8.1%. Even in the face of macroeconomic challenges, strategic menu price increases have driven growth, and McDonald's digital platform is creating individualized customer interactions.

In a market where others may be faltering, McDonald's unique business model, anchored in real estate, remains a beacon of stability and profitability. As the saying goes, when you invest in a company with a moat, you're securing a stream of cash flows protected from competition for years to come. For investors eyeing McDonald's stock, it seems like the real treasure isn't found in the burger, but in the land it's served on.

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