Real Estate and Franchising

It is often discussed in Business Management Program or MBA School history books that Ray Kroc's McDonalds was successful due to the fact that they controlled the real estate underneath every store, and the appreciation was their true asset. There is some truth to this, but that is not the only thing that made Ray Kroc successful.

Nevertheless, a business-person who can control their costs thru owning the real estate and their business location, has a huge advantage and franchisors know the value of being able to control the real estate. Most franchisors, which sell franchised outlets that include locations, at minimum want to have a master lease, which allows them to terminate a franchisee, kick them out and control the location, until they put in a new franchisee.

Franchisors often have site selection teams, and now there are tools used by Commercial Real Estate people, along with ESRI software, can give location intelligence in a heartbeat. Smaller Franchisors just starting out use all sorts of strategies, some use very simple solutions, as all you need is someone who knows how to run it, in a room with a computer, online, even a stay at home mom, former Real Estate person. Then quick overview of the area or territory from locals. Large franchisors of course, have large real-estate departments.

Not all Franchised businesses need locations, those that do, well their franchisees can use help in securing funding, but owning the real estate does not "Always" make sense. When it does, it pays to have a real-estate person to be a go-between with franchisees, franchisors and locals who understand the market. Real Estate is a big part of modern day franchising for many franchised companies.

McDonalds Owns the Real Estate - Starbucks Generally Does Not

Many think that McDonalds and Starbucks are very similar due to their branding strategies and number of outlets. Actually, this is not so. Many believe that McDonald's success was much about the real estate and not the hamburgers, that is not exactly the entire case either.

If you will read Howard Schultz's book; "Pour Your Heart Into It" you might change your judgment on Starbucks, as they are vertically integrated own their own coffee fields, whereas, Ray Kroc did not own the potato fields or beef. Simplot became one of the most wealthy people during his day and ended up basically running all of Idaho.

Starbucks is the gem tenant of all retail shopping centers, almost considered an anchor tenant, their stores are in extremely small spaces and they are selling a "Drug" basically, they draw in waves of customers. Many companies wish to be next to a Starbucks, like Quiznos, Subway, hair cut places, travel agencies, insurance offices, etc. Starbucks owns their own stores, they are not a franchise system like McDonalds.

In some regards, they can control the quality, consistency, cleanliness, customer service better, in some ways McDonalds has done an unbelievable job of training and systems management, most franchisors never reach that level of "cookie cutter'ism"

Regarding Ray Kroc's comment on the real estate to the Harvard MBA class that "We are in the real estate business, not the hamburger business," well, if you believe this statement as the whole truth then you might want to rethink some of that. You see Ray Kroc's partner was a real-estate guy and Ray Kroc got in a little over his head and went thru a bit of turbulent times.

It is not that the real estate was not a good play, it saved his butt, however there is much more to the McDonalds story than simplifying it with a real estate story and those Harvard Professors who try are in my opinion, somewhat incompetent and have obviously never run a franchise company before.

Beware what they teach about McDonalds, there is a lot more to franchising than real estate. One should not simply assume that McDonalds success is due to real estate or that because Starbucks does not own its locations, it is out in the cold, as both serve hot coffee and have lots of customers to prove they have successful models.