The McDonald’s Success Story—From a Small Diner to a Global Fast-Food Giant

Dear Readers

This week’s Business Bulletin dives into one of the most iconic brands in the world: McDonald’s. Beyond the Big Mac and golden arches, McDonald’s is a fascinating case study of innovation, branding, and strategic growth. Whether you’re in the food industry or not, McDonald’s journey offers valuable lessons for any entrepreneur. 🍟🍔

Let’s take a look at how McDonald’s grew from a single restaurant into a global fast-food empire, dissect its revenue model, and explore the entrepreneurial takeaways from its success.

The Humble Beginnings: A Small Drive-In in San Bernardino

McDonald’s story starts in 1940, when Richard and Maurice McDonald, two brothers from New Hampshire, opened a small drive-in restaurant in San Bernardino, California. This original McDonald’s served a menu of 25 items, which was typical for a drive-in at the time.

However, the brothers quickly realized that the real money lay in speed and efficiency. By 1948, they closed down for a few months to re-engineer the restaurant into a “Speedee Service System.” They simplified the menu to nine items, focused on burgers, fries, and milkshakes, and optimized their kitchen for speed. This decision reduced customer wait times and allowed McDonald’s to serve food faster than any other restaurant.

This “Speedee Service System” would later become the foundation of the modern fast-food industry.

The Ray Kroc Factor: Taking McDonald’s to the Next Level

In 1954, Ray Kroc, a Multimixer milkshake machine salesman, visited the McDonald brothers’ restaurant and was impressed by their efficiency. Kroc saw potential in their business model and proposed a franchise agreement. While the McDonald brothers were content with a few local stores, Kroc had a much bigger vision.

In 1955, Kroc opened the first McDonald’s franchise in Des Plaines, Illinois, under the newly-formed McDonald’s Corporation. He focused on rapid expansion and standardised operations. Kroc bought out the McDonald brothers in 1961 for $2.7 million, giving him full control of the company and the brand.

Lesson in Vision: Ray Kroc’s story highlights the power of recognising potential and the willingness to think bigger. Without Kroc’s vision, McDonald’s might have remained a small regional chain.

Building a Global Brand: Key Milestones in McDonald’s Expansion

McDonald’s expansion journey is marked by key milestones that shaped it into a global powerhouse:

1. International Growth: McDonald’s opened its first international location in Canada in 1967, followed by Puerto Rico, Japan, and the Netherlands. Today, McDonald’s operates in over 100 countries, with more than 38,000 locations worldwide.

2. Standardised Operations: Kroc established strict standards for consistency across franchises. The idea was simple: no matter where you go, a Big Mac should taste the same. McDonald’s implemented this consistency through rigorous franchise training programs at Hamburger University, founded in 1961.

3. Adaptation to Local Markets: Despite its standardisation, McDonald’s adapted its menu to suit local tastes. For example, in India, it serves the McAloo Tikki (a vegetarian patty), while in Japan, seasonal items like the Teriyaki Burger are popular.

4. Marketing Mastery: McDonald’s iconic marketing campaigns like “I’m Lovin’ It” and “You Deserve a Break Today” have been instrumental in brand building. These campaigns focus on the emotional aspect of the dining experience, creating a lasting connection with customers.

McDonald’s Revenue Model: More Than Just Burgers

While most people associate McDonald’s with food sales, a significant portion of its revenue comes from real estate.

1. Franchise Royalties and Fees

McDonald’s operates on a franchise model, with approximately 93% of its locations being owned by franchisees. Franchisees pay initial fees, ongoing royalties (usually a percentage of sales), and contribute to marketing funds. This model allows McDonald’s to grow rapidly without directly investing in each new location.

2. Real Estate

Ray Kroc famously said, “We are not technically in the food business. We are in the real estate business.” McDonald’s Corporation often owns the land and building of its franchise locations, which are then rented to franchisees at a premium. This structure ensures a steady stream of revenue from rent, making McDonald’s one of the largest commercial real estate owners worldwide.

As of 2023, real estate accounted for over 30% of McDonald’s revenue. This unique revenue model provides stability, as the company earns both from sales and property rentals, ensuring profitability even in slower sales periods.

3. Directly-Owned Stores

While most locations are franchised, McDonald’s still operates some company-owned stores. These locations allow the company to test new ideas and maintain direct control over select markets. Sales from these stores add to the company’s revenue but constitute a smaller portion compared to franchise and real estate earnings.