Tuesday, May 19, 2015

McDonalds: property, ego and identity

I have just spent a few days in the modern Middle East cities of Doha and Abu Dhabi. This is the only place I have seen which matches China for just sheer excess of the property market. There are beautiful skyscrapers on what should be worthless land surrounded by barren streets and the odd drip-irrigated palm tree.

It's pretty clear what is going on here. These countries see airlines and skyscrapers as symbols of national importance and they build both without regard to cost.

But all in all it made me think of the superiority of our Western liberal system. We have bubbles of course - but nothing like this.

In Abu Dhabi I saw very beautiful skyscrapers with government employees spread at one employee per 120 square metres. You could play cricket inside the building and nobody would notice. Just empty space.

--

So I get to Milan - and 50 metres from the Duomo I am wondering through a very famous shopping arcade in the early morning. Here is the photo.




 Turn around 180 degrees and this is the view:



Yeah, there it is, Mickey D's (NYSE:MCD).

They can't possibly be making money here - just planting the flag amongst all the Italian restaurants.

This is a statement of ego rather than anything else. It doesn't have the grandiosity of Doha, but then McDonalds is not as rich as Qatar. The ego/motivation is the same.

They would be better off closing this and dedicating the savings to keeping the toilets in the US restaurants clean.

But then property has often been a statement of ego - and US mega-corporates are not immune.





John

PS. If Carl Icahn controlled a big stake in MCD this store would close. Carl often brings some rationality to these things.

13 comments:

Anonymous said...

Dear John, Thanks for your contrasting photographs, and interesting comments all year round. This time around, I don't agree with the comment on McDonalds. You are overestimating the price of a prime spot of real estate in old European cities. I've seen many McDonalds all over Europe, and their main criterium for location seems to be the number of people that pass. I'm pretty sure the price of the real estate that they rent is closely correlated to that metric, and not to the view. This post is one that suffers from confirmation bias. Thanks for your work. Best, Jan

Anonymous said...

John,

I think you may find that the economics of McDonalds (especially in Europe) may not be as obvious as they seem at first glance.

Allowing for rapid turnover, not having to pay high salaries to waiters, and prices that can be quite high by US standards yet still quite low for Italy can very possible make that outlet quite profitable in spite of the rent.

Anonymous said...

John, love your blog. First comment.

I lived in Milan for one year in 1999-2000, 5' from the Duomo. The McDonald was always very busy. It might have changed but I doubt they lose money there.

The mall nearby was always empty though. I never understood why.

Eric

Robert in Chicago said...

Before I scrolled down from the picture, I thought your point was going to be that Milan's high-end mall is even more ready for a cricket match than the Abu Dhabi skyscraper -- totally empty.

tigergirl said...

so. long mcd?

icahn does an ABC-VRX style takeover - injecting HLF into the shake machines?

oooh. better than jim beam n deportations i suppose... ...

James said...

How do you know MCD owns the store and it is not a franchise?

Anonymous said...

John, I think you misunderstand how big American corporations work. No one that far down the chain would have the ability to open a store due to ego.

Ego is reserved for the big dogs taking the GV from Chicago to NY for a one hour investor meeting. The people opening stores most likely can't spend a dollar without all sorts of approvals.

The bottom line is, if that store is losing money it will be due to well intentioned bad judgement or bad luck, not due to ego.

Andrew S. Mooney said...

...But keep in mind how McDonalds operates it's restaurants. They do it through their company Franchise Realty Corporation, which owns the land upon which the building is sat.

The franchisee runs the restaurant and pays FRC rent, but FRC no doubt also collects rents from the office space above as well.

http://en.wikipedia.org/wiki/Harry_J._Sonneborn
So it's profitable to them even if the restaurant runs at breakeven or even at a small loss.

FRC is the contractual trick that Ray Kroc came up with to cut the original owners of McDonalds out of their business, who had locked him into too tight a contract.

Andrew S. Mooney said...

John - McDonalds probably owns the land that that restaurant is based.

http://en.wikipedia.org/wiki/Harry_J._Sonneborn

The company that they use is called the Franchise Realty Corporation. It is the method that Ray Kroc came up with to cut the original owners of McDonalds out of their overly restrictive contract with him.

The restaurant probably makes money, yes, but I'll bet that the office complex above it pays rent to FRC as well.

1leone said...

You should go back at around 11.30 till closure. This is one of the busiest Mcds in Milan. It's actually prime location, Vast amount of offices, massive tourist flows and schools....

Anonymous said...

Have you been there at lunch time or saturday/sunday afternoon?

Andrew H., aka "Mindles H. Dreck" said...

Actually, I was in that precise spot two months ago. The McDonald's was PACKED with huge lines. That mall has the infamous bull's balls in it (stop and twirl with your heel in the bull's balls for a year of good luck), and you are right next to the Duomo so there is massive tourist traffic.

I think it is likely quite proftable, despite Milan's shopping district cost.

dlr said...

A little late because I just read this, but this is almost certainly off base. I believe this at the Galleria, which ironically is the site of a well known fight between MCD and Milan, who kicked them out of their location around the corner a couple of years ago to put in another Prada. MCD either sued or threatened to sue for 24m euros because it was so profitable, and said this was their 3rd best performing restaurant in Italy doing over 6m euros of sales. I think this is the replacement restaurant they got in the settlement just a few trots away.

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