As a counter argument McDonald's does the same thing and is quite successful at it. When you open a franchise you have to build on the main corp land and pay for rent on it in perpetuity, on top of franchise fees .

McDonalds is also careful to ensure all their franchises are in locations that will make the owner a ton of money (if they run the business well) and so it is a good deal. Not all companies work this way though.

Can someone explain why McD bothers to franchise their restaurants?

Usually franchise contracts are set up in order to transfer most risk onto the franchisee. But the risk is marginal because of due diligence McD does before launching a new venue.

Is this some sort of accounting/tax trick that enhances McD financial figures on paper? Does this allow them to raise more capital for expansion somehow?

Recruiting, managing, and paying people to run those restaurants with the level of dedication that an invested franchise owner has would be challenging. There are a lot of great managers out there to hire, but probably at a higher rate than McDonald's (or any competitor) would want to pay.

But they pay that - or even way higher rate - indirectly, as part of franchise deal.

Why aren’t there any franchising IT companies?

There are, specially on Cloud business. They are called as Cloud Partners who resell AWS and Azure which they bundle it with their consulting solutions. Good examples are Accenture, Infosys ...

Franchise stores and restaurants like McDonalds don't compete with each other as they have a physical attribute to them insuring this. IT Franchises however would be free to compete with each other making this business model pretty much impossible. The only way I see this working is with Franchises limited to one per country/state, who are specialised in regards to language, customer preferences and local laws.

What is there to franchise? As others pointed out software is easy to sell to anyone. Maybe you can franchise onsight support, but the big customers for onsight support mostly want a national company to take care of them, so no franchises as it is all the national number. The little companies maybe, but the little companies don't need the big brand, they learn which local company provides support.

Like in "I sell software for franchisors/franchisees"?

or like in "I sell this IT thing through partners who behave like franchisees"?

More like ”we have this development flow and tooling that just works and everyone knows it so we have a strong brand, let’s lease it to others and avoid taxes by making them pay back appropriate interest on corporate loans to the parent company”, i.e. the McDonalds model.

I think the advantage for a restaurant is the contracts with large scale suppliers. You could do the same with hardware and software perhaps, but the advantages and disadvantages would look different.

So the workers can't unionize across locations because they all technically work for different companies

Some franchisees own multiple locations, so that's not at all clear.

These days it's probably not necessary. Starbucks doesn't franchise and this allows them to do things that make more sense for Starbucks as a whole as it would make for any single location, for instance, the notorious Starbucks across the street from another Starbucks that Lewis Black ranted about. However, it made a lot more sense in the early days of McDonalds because of the sheer organizational complexity of employing people in every medium-sized-and-up town in the United States, and now, franchise holders are an established and vested interest that the company needs to keep happy.

The margins on starbucks are a lot higher though, and the staff needs a lot lower.

Franchising is basically Uber before Uber, when someone is an "owner/operator" they will work a lot harder/do things for free that a salaried manager never would.

Starbucks also does franchise I believe (inside places like safeway and target).

Interestingly, in the US and Canada Starbucks don’t franchise, but elsewhere in the world they do. Here in the UK the majority of Starbucks are franchised.

Same reason banks sell mortgages instead of buying homes and renting them. It’s not their business model to operate thousands of stores. Having many different people operate many different stores to their standard is.

Probably mostly historical reasons. When McD was a small company, franchising was the best way to expand as rapidly as possible.

i see franchising as a form of specialization. The corporate head specializes in branding, sourcing of suppliers and logistics and menus, etc. The franchisee specializes in operations day to day.

Largely legacy reasons related to capital access during founding, because of this McDonald's is mostly a property company that also sells burgers and burger store franchises.

State laws in some places make franchises a better worse deal. I invest in one[unnamed] company that has a few franchises, but they are regional and the state laws where they are makes running franchises not a good deal so they are no longer doing that and looking to buy bake the existing ones. They are looking to expand to new states though where the laws are different and so they may start selling franchises there.

I left McDonalds 25 years ago and I have no idea what is current. Back then about 25% of all stores were owned by the company with the other 75% franchises. The corporate owned stores were for sale if you wanted a franchise (assuming you qualify), and were in a known location so fairly low risk. The company would also buy out your franchise a good deal when you were ready to retire.

McD is the largest property owner, at least it was for a minute.

It’s actually how they make their money, rent.

https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burg...

Didn’t McDonald’s do it by buying the plot of land and using that as leverage on the franchisee? As a way of controlling them.

If you don't sell a franchise, you have to pay your workers. Better for workers to pay you.

> If you don't sell a franchise, you have to pay your workers. Better for workers to pay you.

I mean, trivially, I'll pay a lot of money to work someplaces if a good percentage of that profit goes to me.

How much would you pay Google upfront to manage the adwords on websites in the .uk space if you got to keep 95% of the profits?

I think it would lead to some antitrust issues to be honest. McDonalds sells you the cups, the bags, the beef, etc. They are really a business-to-business business and you the franchisee are the business that is actually consumer facing. McDonalds owning the store at that point would be like movie studios owning the theaters.

>McDonalds owning the store at that point would be like movie studios owning the theaters.

Why would that ever be an issue ?

Historically, because it hindered the ability of independent movie productions to get access to audiences: https://constitutioncenter.org/blog/the-day-the-supreme-cour...

Which is not an issue for independent beef or paper suppliers.

I wouldn't say a ton of money. This article [1] says it averages 150k/yr profit but it costs between 1-2mil to start.

[1] https://www.mashed.com/178309/how-much-mcdonalds-franchise-o...

Take 5 million in loans, start 3 and then you have 450k - .05*5 million = 250k free cash flow. Not a bad deal at all in an inflationary environment, but a rough deal in an environment with rising rates.

They won't allow you to franchise if you need a loan to come up with the money. You need to demonstrate "unencumbered liquid assets." They might allow a certain percentage to be borrowed, but it's likely rather low.

That's what, ten percent in profits? Sounds pretty good to me!

"franchise owner" usually means managing the restaurant, not passive income.

Usually means hiring a GM and checking the books / visiting once a month.

Like all investors / business owners income is the resukt of actively managing something. In the case of McD franchise owners, there are at least people working for you to whom tasks can be delegated

That's pretty good.

That's why a lot of people own 2 or 3.

I'll take a 10 cap any day of the week right now.

Surely any successful company, and even most any failing company, has a system for identifying and quantifying optimal locations for new builds. It’s not like Amazon is just taking whatever real estate it can get. There are at least some parameters.

Win-win - corporate ends up with prime RE and reliable rents; franchisor ends up with business pumping cash

in my city we had the first closed store of McDonald's in the world! great achievement

Yes it is very rare. In most cases it is probably due to general economic decline of the area, but every once in a while they were just wrong about the potential of the location.

What town, and when was this? I remember noting that two closed in seattle in the early 2000’s and thinking that was pretty unusual.

It was in the early 90s

Out of curiosity, what’s the typical profit or value of a McDonalds franchise?

I'm sure there's a ton of resources, but if you want to be entertained as well, this came up in a Last Week Tonight episode about Subway, this last May. It may have been a web special.

> many may be too young to remember but Eddie Lampert did this with Sears in the 80s and 90s

Eddie Lampert didn't start ESL Investments until 1988 (and he was only 25 then). ESL didn't start destroying Sears / itself until 2004 (https://www.investopedia.com/news/downfall-of-sears/ "Kmart announced it would buy Sears for $11 billion in Nov. 2004..." It was via the Kmart merger that ESL came to control Sears, ESL having taken control of Kmart after Kmart's bankruptcy in 2002).

Anyway, you might be remembering a different company or different "business genius"?

Amazon is buying land piecemeal, lot by lot—probably roughly at market value, then. I don't think it's really comparable to someone buying Sears because they think Sears's land holdings are undervalued.

At worst, they're exposing themselves to the whims of the commercial real estate market as a whole. Not like Sears, where the value of their holdings depended on a pretty niche market—the value of malls.

A lot of businesses sell and lease back their real estate. That way their capital isn’t tied down in non core competencies. Also they can insulate themselves from real estate booms and busts.

Eh, if you are cash rich you might as well.

Owning land isn’t something that requires a great deal of skill/competence compared to leasing land - in fact if you want to stay in a property for a long time, there is more complexity in managing a lease if you have capital tied to it once the lease period is up and you are forced to renegotiate the deal.

IMO this idea that a giant logistics operation shouldn’t own it’s own warehouses just because owning warehouses isn’t a “core competency” is questionable. In reality this decision just depends on your corporate perspective on the cost of capital (eg the WACC).

lol, most of amazon's money comes from things that weren't the core competency that they figured out how to do at scale.

The 'focus on your core competency' is for small companies on tight budgets with tight human resource capacity. When you have a few mil employees, email is a core competency, when you have a dozen, it's a pain in the ass. The same goes for AWS. def wasn't a core competency, but a huge part of the reason we can tell businesses to focus on core competencies is because amazon made SaaS, IaaS, PaaS a thing.

IDK about real estate. It probably makes sense to own your office buildings and warehouses at scale. They probably have a real estate team that's bigger than most companies that are 'focusing on core competencies' and it probably doesn't look too different than any super focused brokerage.

Once you hit scale, the money is in doing it in house. When you're paying by seat, it becomes a core competency about the time the cost to run a team of pros to do the same job is <= to paying per seat.

This may have been a misstep assuming that their pandemic growth would continue. I believe that's what they said in their last earnings call, something to the effect that they scaled quickly to address additional market capacity that was short lived.

Would assume they'll be just fine. Probably read the tea leaves wrong but I don't think this is getting off track and forgetting what they do to make money.

What they could also do, if they don't want to ride commercial property prices, is bundle the property in a fund, and have it owned/managed by selling shares, but with the caveat that Amazon is effectively on 'rent control' and gets an infinite lease, until it decides to bail out.

What they will likely do, is stop buying property for a while and just wait it out until the need for the capacity is there.

They don't really need tricks, they can just keep growing the business or just sell it at a loss, write it off and move on.

> That way their capital isn’t tied down in non core competencies.

That nonsense of "non core competencies" has to stop. All that mindset does is exchange marginal cost savings (by going for the lowest bidder) for resilience.

Yes, it may not be a "core competency" of a rocket company to build valves, but now they are in complete control and not reliant on the valve builder company to not fudge with test results. Yes, it may not be a "core competency" of a logistics company to build and maintain their own warehouses, but that way they don't have to keep a landlord happy to not lose their location.

"Sale and lease back" is only one thing: foolish and dangerous, particularly when the thing that was sold and leased back were the stores.

Another advantage is real estate investment trusts have favorable taxation so it makes sense to disaggregate.

But in a place like california why would you do it? You have movie studios who have owned their lots for almost a hundred years now. Tax on those assets are probably pocket change a year thanks to proposition 13. Now when you sell those backlots back to the holding companies to lease back for your own use, they get reassessed at todays market rate, and who knows how favorable of leasing terms the holding companies will offer you when there is a demand for soundstages from every production company in socal?

Amazon isn't really cash starved. Seriously, where else but in real estate can they invest their cash without people banging the antitrust drum?

Meanwhile, every grocery chain does it, Walmart does it (Successfully!), Mcdonalds does it, and more.

The later is more interesting because it's a franchise model, and if a franchisee is successful, there's usually nothing in the franchise agreement to stop corporate from setting up shop nearby. Maybe not across the street or a block down the road, but yes.

Also quite common w/ lapsing leases with walmart and such, they take out 15-25 year leases, and if it fits their margins, they will build nearby and ride the lease out.

I'm not sure how to investigate who owns lots of lands, but I think the Walmart near me did the same. They used to be in a big building, but then after some time cut down the forest literally nextdoor and built a bigger Walmart there. The original building still stands but is leased by another brand.

Property apprisor office, look up owner/who pays the tax bill. Very simple. Google your county name + property apprisor website and have fun!

I use to work in a conglomerate that I did not associate with real estate. After working there for a few years and becoming friends with some people in the corporate real property division, I realized they randomly own a ton of land everywhere and that real estate is just a useful core part of any conglomerate. It's a nice place to park assets, obtain rent, and to rent for offices yourself.

I imagine a lot of conglomerates and large companies do this, because at a certain scale, it's more of a "why not?" question.

...or like a business intelligence and reporting software vendor buying up Bitcoin

Is this a reference to something? I don't see how they're similar.

Reference to https://en.wikipedia.org/wiki/MicroStrategy

Ouch:

  On the company’s quarterly earnings call on May 3, 2022, MicroStrategy CFO
  Phong Le stated that the company would face a margin call if bitcoin’s price
  fell to about $21,000.

According to Coindesk, the price for Bitcoin dropped to $20,087.90 last night:

https://www.coindesk.com/price/bitcoin/

Wonder how that's playing out for them...

Lampert bought Kmart out of bankruptcy (or so) in 2002-2003 and then bought Sears a couple years later.

The flameout of those companies under his direction has been much more spectacular than a grinding down since the 80s!

> being bled dry by VC style profit chicanery

Don't you mean PE, not VC?

correct! PE was more of a fever dream at sears as well. capex and opex was the most visible and agonizing part of his "vision" but certainly the 5bn in stock buyback he instituted makes harley davidson look like a food truck in comparison. under Eddie, sears made money by selling the idea and concept of sears on paper, not tangible products at the malls it occupied.

the whole thing devolved from a value trap to many people outright calling Lampert a thief who orchestrated the downfall of Sears intentionally. three years ago he even threatened to stop payment of sears and kmart pensions during bankruptcy proceedings.

I recall and interview where they spoke of returns as a profit center. I’m sure there was some sort of accounting bullshit that make 1+1=5, but in the end it’s bullshit.

What happened with Sears is very different. Somehow, Eddie Lampert got Sears to divest itself of its real assets and was then going to lease them. Some other company of Eddie Lampert's ended up owning the real estate. That company never had issues.

Bill Gates bought tons of farmland in the USA and he’s doing just fine

https://amp.theguardian.com/commentisfree/2021/apr/05/bill-g...

Also, McDonalds became a real estate play long ago

https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burg...

I don't think buying of real estate was their downfall - it was the other practices - as you point out. The real estate portion may have actually delayed the inevitable downfall.

"serves to this day as a textbook example of ideology eclipsing principled, well researched business decisions." ...sounds satirically like a lesson the Vatican is learning harshly right now.