In my Business Management 101 class, my professor said the most profitable items at McDonald’s are not burgers, but French fries.
My dear professor was talking about the margin between cost and price, but he forgot to say that French fries, as well as drinks, usually come as part of a regular order of Big Mac or any other Extra Value Meal, and therefore are not priced separately.
The correct answer, however, is none of the above.
Last month, the world’s No. 1 fast-food chain operator sold 80 percent of its Hong Kong and mainland business to a CITIC-led consortium for US$2.08 billion or HK$16.22 billion.
Most of us knew that McDonald’s was left with a 20 percent stake in the business, but only a few were aware the deal also involved a rather lucrative rental business.
According to Ming Pao Finance, McDonald’s retained at least 15 rental contracts out of its 240 outlets, and the deal with CITIC and buyout firm Carlyle Group also involves a 20-year lease of those premises that could yield a total rental of HK$1.9 billion.
That’s certainly not chicken feed. In terms of hamburgers, how much are we talking about here?
According to a deal between McDonald’s Restaurants (Hong Kong) Limited and MCD Real Properties Limited (also owned by the US hamburger giant), the monthly rent of 12 outlets in the first five years is HK$6.93 million.
That amounts to an annual rent of HK$83.2 million. Translated into Bic Mac sales, and assuming that each burger is priced at HK$20, that amount is equivalent to 4.16 million orders of the popular item.
Assuming there are no rent adjustments in the 20-year lease, the total rental would be about HK$1.66 billion – that’s at least 83 million Big Macs! – on top of the income from three other stores where the details of the lease have not been disclosed.
The most expensive shop is at Star House near the Star Ferry Pier in Tsim Sha Tsui, which commands a monthly rental of HK$880,000, followed by an outlet at McDonald’s Building on Yee Wo Street in Causeway Bay, which is leased for HK$844,000 a month.
Probably the most profitable outlet is at the Tsuen Wan Wet Market, which McDonald’s acquired 30 years ago for HK$8 million, according to Ming Pao. The place is now being leased for HK$8.28 million year, or an annual return of 103 percent!
McDonald’s is a perfect example of how a fast-food chain, which undercuts local rivals with its HK$24 set meal, rode on the whole cycle of the property boom in the last half decade.
We’re also reminded of a story about the McDonald’s business.
After a talk before a group of MBA students, the chain’s founder, Ray Kroc, had a few drinks with them at a nearby pub. There he asked them what business they thought he was in.
Many thought the answer was obvious: Hamburgers, of course.
No, Kroc said. It’s real estate.
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