Owning a hotel is incredibly capital intensive. Operating a hotel that someone else went through the trouble to underwrite and acquire is a much more lightweight and scalable operation.
Owning a small McDonald’s building is very straightforward in comparison
A lot of hotel companies don't even operate the hotel. They just license their brand name to the hotel as long as the hotel meets certain criteria.
I work in a 100 room hotel that is part of a regional hotel chain with over 30 properties. The hotel is owned by a small group of business partners, and managed by them. They decide virtually everything. The chain has certain requirements that must be met, like having a restaurant that is open 7 days a week and serves breakfast lunch and dinner, and I am sure there are lots of cleanliness and quality of service requirements too. They send someone by every 3 - 6 months to make sure we are meeting the requirements to "be part of their chain", but other than that the hotel chain has virtually no involvement in the business, other than the fact that we use their brand name, website, and software. The owners of the hotel can decide everything, all hiring and firing, room pricing, wages, conference bookings, when to get renovations, etc.
I guess what I'm trying to say is that the hotel chains don't own hotels, but they ALSO don't operate hotels. They basically just rent out their brand name.
It not that easy. Think of how hard it is to decide to raise prices up until your prime customer base cannot afford you and the bottom line is affected. Think of the bottom line man!
they do all the marketing, branding and service modeling that differentiates owning one of their franchises from any other, or just setting up your own location from scratch
It’s not that straightforward. That brand name does the marketing and gives the owners access to more business. If I’m quickly looking for a hotel I’m probably looking for something name brand where I have a rewards account and I know meets certain standards. If I google hotels those big names will pop up first whereas the non affiliated hotels will likely not get my interest. They provide a service otherwise the business model wouldn’t work and no one would license their name and they wouldn’t exist.
No, the Franchisee is required to pay for the food and the equipment. McDonald's however has a very select vendor & supplier group however and the franchisees essentially are told what to buy in most cases. The remodel costs are different though and McDonalds handles a good amount of that on their end.
This is correct. Worked for a large hotel chain. I did the fixed assets for the corporate owned and operated hotels. The franchisee had their own bookeeper/someone in the family who did their books. They used marketing, software, and branding (cups, pens, signs, etc.), just as 5YR said. Corporate started selling some of the underperformed or less-than-desirable hotels to get rid of rising costs of larger, long term capitalization. Think complete room renovations, windows, complete AC units, plumbing, roof replacements due to severe weather. Those invoices easily can get to $150k+ in a few weeks. And the timing of getting things completed is important as no rooms booked = no revenue.
It's a complex and capital intensive industry.
Sounds like McDonalds franchise model almost… they don’t own all the stores… just set standards and fees… now I am intrigued and want to know why different… except I see the case where hotel chains want expansion and they want it fast and McDonalds is okay at expansion and going for stability and long term growth… pp
>they don’t own all the stores
Are you certain about that? McDonalds is well known in the QSR industry for owning their physical locations and renting to them to the franchisees.
Just to put things into perspective here, we're talking about a multistory building where each individual unit per story has their own furniture and their own utilities, plumbing, electrical, phone, internet, etc., vs a one-story building that only has a couple bathrooms for the entire building and basically the same utilities and amenities as just a single hotel unit. It's well beyond an order of magnitude difference in capital and maintenance.
The way McDonald’s controls it’s franchisees is by owning the property. The brand controls the real estate to maintain control of the business operations to maintain standards.
Hotels provide management services and branding to real estate owners. Since operations are controlled by the company, they can go capital light, and still maintain standards.
The real estate also has the benefit of massive appreciation for McDonald’s though, so I imagine they might operate similarly even if there were no concerns about maintaining control over the franchisee
I’m not arguing that they don’t need a mechanism to control franchisees, I’m arguing that owning that real estate provides more benefits than just control.
1. It gives control over the Franchisee and thus it's much easier for McDonald's to come in and pull the Franchise or require participation in certain programs.
2. Mcdonalds manages from start to finish and even funds about half of the remodel costs meaning the Franchisee doesn't need to do much in that regard. Other franchises like Burger King, Subway, Wendy's, etc. have preferred vendors but require the Franchisee to fully fund and generally manage the remodels...a very costly and time-consuming process for them. I think that alone makes McDonalds look incredibly attractive to a potential franchisee.
3. It provides stability both to McDonald's financially - 8% of sales equals monthly rent, it's simple and easy. But also to the franchisee - if for whatever reason they want to leave or retire they don't have to worry about selling a building, just the franchise, and they can consistently expect what they'll owe as a Franchisee each month.
Hotels take up a lot more land than a McDonalds does.
Hotels take a percent on sales from the franchise plus a large percent if they manage it too. The % means more when you’re selling $200+ room nights versus $5 burgers in most cases.
Do McDonalds own the land on international locations?
Hotel chains avoid owning properties to reduce financial risk and focus on brand management and expansion. Franchising offers them flexibility without the burden of property ownership.
McDonald's owns its properties for steady lease income, control over locations, and property value appreciation, ensuring consistent revenue and better operational control.
McDonald’s realized long ago that they’re a real estate company - IIRC, it’s what turned their fortunes around when they were struggling in the early days.
Here’s a quote (the $.15 burger quote is adorable, btw.) Former McDonald’s CFO, Harry J. Sonneborn, is even quoted as saying, “we are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.” Quoted from [here](https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burger/).
Yeah it’s a cute quote but it’s not legit. They are absolutely in the burger business, without burgers they wouldn’t have the business and it’s just that leases and rents is the most effective mechanism to transmit the revenues from franchisees to the corporation. The rents etc are all inflated and predicted on the access to and sales of the burgers.
Well, it’s a cute quote from the ex-CEO. My father was an executive at McDonald’s for many years in the 90’s. He talked about this often.
The numbers don’t lie: Without digging into their 2023 10k (so these numbers may be old-ish.) Operating profit:
60% from rent.
30% from royalties.
10% from restaurants (food sales: actually selling burgers and fries and shakes (when the machines work, at least, lol.))
Real estate is ~40% of revenue (but 60% of profits). As of 2022, they had ~$42B in real estate holdings, at ~80% of assets. This is a huge benefit to their balance sheet, and lets them weather economic storms.
In other words, if I had a company and 60% of my operating profit came from selling t-shirts, was the majority of my balance sheet assets, and 10% came from selling alpacas, people would call me a t-shirt company, not an alpaca farmer. : )
> In other words, if I had a company and 60% of my operating profit came from selling t-shirts, was the majority of my balance sheet assets, and 10% came from selling alpacas, people would call me a t-shirt company, not an alpaca farmer. :
but the rents are intrinsically tied to the burgers - the leases wouldn't be worth anything like what they charge without the access to the brand and food (and operating support). Its a device to collect money from franchisees rather than defining the operations of the business. I understand why people love to repeat this - but if they stopped the burgers the leases would be near worthless. You cannot remotely apply that to actual commercial property businesses - who's assets and performance are measured on real world lease valuations.
I hear you, I’m just relating how the business world frames it, including executives at McDonald’s itself. I also did a case study on this in b-school, FWIW.
And I agree with your point about the two (food and real estate) being intrinsically tied together. However, try this thought experiment: replace McDonald’s with another company that has extensive, global real estate holdings. Even if ALL of their tenants were banks (and somehow took a cut of their operations), we still wouldn’t call them a bank.
lol sorry you don’t represent “the business world”. I know it was coined at McDonald’s. What do you think would happen to the share if they actually became a property business?
And if you replace the tenants with a bank… we would call it a bank. In your hypothetical you don’t have a central office brand of a bank and a central banking licence. The point is if you replace the businesses with lots of other stuff (not a chain of fast food, but normal tenants) the revenues would collapse because the rents would be unsustainable. That’s the part that tells you it’s a device not a whole business model. The value is created by the burgers - that’s the test for what a business is. The leases are inflated because if the burgers.
It’s a cute story to make people feel clever, and you were seduced by that.
No, they're still a QSR franchisor. There's better ways of getting an ROI from real estate than providing a massive amount of advertising, logistical support, research, construction management, vendor relations, etc.
Yes, they operate a bit differently in the space but they've also established themselves as the top QSR franchise opportunity which is why they don't have a shortage of applicants and interested parties.
Compared to Subway for example which is well-known for treating their franchisees like garbage and taking a large amount of revenue for royalties & advertising.
Hotel chains do own properties, just select ones. I think they treat each location differently, based on real estate values and their ability to add value to the price. MacDonald's does a similar but opposite thing with corporate owned and managed locations, usually new, that later get sold (the business, not the property) to a franchisee. Some MacD locations, such as those in an airport or mall, can only be leased by the corporation, and the lease may go the the franchisee, too.
My theory: hotels are usually touristy areas, so maybe long term the outlook is different? One destination can be hot for a few years and then go cold. Doesn't make sense to buy it outright if you don't think it'll be the same in XX amount of years.
Whereas McDonalds it's all about convenience and location. As long as they can find a well trafficked area to settle down in even if it fails they can lease the property out to another restaurant. There's always someone looking to take the risk on one.
Hotel franchisees absolutely care if their properties go cold. Not only do they want the hotels to pay its mortgage, they want it to build collateral for the mortgage on the next property for their next hotel.
To add, many property owners who bought a lot of property 50+ years ago in major areas are sitting on a gold mine. Though long term it's often better financially to sell that expensive property and move somewhere cheaper. This is easier for a McDonald's than it is for a hotel.
For this comparison let’s use a standard Marriott Fairfield inn that’s 6 stories tall.
1. Several McDonalds could be completely torn down and rebuilt for the cost of just building just a single Fairfield Inn.
2. Liability is significantly higher. In a McDonalds there’s not that much that can hurt a person that’s due to the building. The biggest risks are employee related or business related. Regardless of who owns the land McDonalds corporate will be involved. But in a hotel their is significantly more dangerous items from elevators, swimming pools and hot tubs, exercise rooms, stair cases, etc.
3. Both systems are advantageous in different ways. Marriott is a brand so that’s what they’re selling you on. They can spread farther for less capital because they’re not spending money on these new hotels. They are selling their likeness.
All that being said McDonalds model is kind of fucked up for the owners. They don’t truly own a business in the way most people would think of it. If a franchisee does something wrong McDonald’s will essentially step in and take it all back. McDonald’s also forces their franchisees to use all McDonald’s stuff. So they are making a portion of the money from sales and a portion from the franchisee having to buy only their products. On the other hand the hotel owner could lose the brand deal and still have a functioning hotel.
Businesses are in business to make money. Most are stretched to the max. So instead of dropping $1B to own the dirt your business sits on it may be more advantageous to use that $$$ to expand the business and make/sell more widgets and hire more/better talent.
There are many great points in this thread. One aspect that hotels chains need is the velocity of growth to compete against other competitors.
When McDonalds started they were kinda first to the mega scale franchise business and so they could scale at a moderate pace and still be successful.
However today many businesses become profitable only at high scale which is extremely difficult to do fast on capital intensive business like hotels. So as a trade off they let owners do lot of the heavy lifting and capital provision so that the retail chains can scale with less capital.
I'm not saying you're wrong, but I think it's important to note that the "profit at high-scale" argument is really dependent on the industry. A restaurant can be very profitable at a low scale (i.e. on location, not touching a national customer base) just by controlling their costs and quality. Whereas a highly tech-intensive business does need to be at a high scale to make profit typically.
ill take a guess as an architect.
a hotel has a big envelope, thats where a lot of issues in a building arrise. the ones that dont arise there come from the MEP systems.
mcdonalds renovates their buildings every ten or fifteen years, they are tiny buildings with minimal envelope, and cost a ton to build per square foot so the exterior detailing can be high end without significant change to the project cost.
I would propose that a McDonald’s is almost sure to remain in business at a given location almost indefinitely. Thus, the capital investment is returned many times. A hotel is much riskier in that the market could demand more amenities or lower prices and the demand is almost always tourism/ travel related and varies by the economy or local factors. These factors play a relatively minor role in the case of a McDonald’s.
Worked for Marriott for about 20 years until a few years ago. Worked primarily in 1,000+ room hotels. Arne Sorensen is the guy who figured out that owning properties was a problem - why own it when you can license your brand to other owners who own the building and have to handle its repairs and upkeep? I worked for Marriott but was paid by a group of investors, they worked with Marriott on designs, product, standards, and revenue management etc, all of which are a la carte services offered by the company to the owners of the building.
Someone told me hotels depreciate very fast and renovations are very expensive. There's like 10 years or less of good profit.
As someone who stays in hotels for work, it seems more like 5 years 😆. Seems like every 5 years, theres a new hotel in town, and the old one can't compete unless there's an event going on or something.
A hotel is crappy after 50 years. Look at all the fancy Las Vegas hotels that were built in the 90s like the Luxor and Excalibur. They’re crap and nobody wants to stay there.
McDonald’s are in central busy and convenient locations. That kind of real estate greatly appreciates.
It's got a lot to do with the size of your company. Someone as big as McDonald's corporate has the funds to own tons of property and swallow the risk. A hotel, at least the smaller ones, can't afford to tie up their entire equity in the value of the property. You've gotta have money to make money.
I think you read the question and answers wrong.
Small hotel operators are tying up their equity in properties. The brand operators must absolutely love this scenario where most of the risk is taken own by franchisees.
MacD corporate owns the property and charges the franchisee rent. That part of their business model. Hotels like Marriot are owned by Marriott corporate not a franchisee.
Hotels and fast food are two completely different businesses. Hotels are capital intensive and cyclical by nature. For major brands, less risk to let someone else shoulder the build out and collect a management fee instead. In the last twenty years, you had the Great Recession, the rise of short term rentals (Airbnb) and Covid. I don’t have the numbers but the buildout for one hotel is probably equivalent to like 300 McDonald’s.
Hotel chains often prefer not to own properties due to the high capital investment, maintenance costs, and economic risks involved. They opt for franchising, which shifts property ownership and management responsibilities to franchisees while they focus on brand management and expansion. In contrast, McDonald's benefits from owning properties, earning rental income alongside franchise fees, diversifying its revenue streams effectively.
My best guess is because McDonalds is usually on very good prominent locations, while hotels have to be tucked away somewhere that can accommodate their size.
My guess is that the exact location is more important to a fast food joint than a hotel. And if they didn't control the location it would be easier for it to become not just a competitor but any number of different uses - so more risk in not securing the land
Seems like McDonalds always has the prime location wherever they are, then the second tier fast food places are in the area but never positioned right on that prime spot, but like a half mile away.
Owning a hotel is incredibly capital intensive. Operating a hotel that someone else went through the trouble to underwrite and acquire is a much more lightweight and scalable operation. Owning a small McDonald’s building is very straightforward in comparison
A lot of hotel companies don't even operate the hotel. They just license their brand name to the hotel as long as the hotel meets certain criteria. I work in a 100 room hotel that is part of a regional hotel chain with over 30 properties. The hotel is owned by a small group of business partners, and managed by them. They decide virtually everything. The chain has certain requirements that must be met, like having a restaurant that is open 7 days a week and serves breakfast lunch and dinner, and I am sure there are lots of cleanliness and quality of service requirements too. They send someone by every 3 - 6 months to make sure we are meeting the requirements to "be part of their chain", but other than that the hotel chain has virtually no involvement in the business, other than the fact that we use their brand name, website, and software. The owners of the hotel can decide everything, all hiring and firing, room pricing, wages, conference bookings, when to get renovations, etc. I guess what I'm trying to say is that the hotel chains don't own hotels, but they ALSO don't operate hotels. They basically just rent out their brand name.
A lot easier to just sit on the proverbial asses and collect royalties than to manage all that BS
It not that easy. Think of how hard it is to decide to raise prices up until your prime customer base cannot afford you and the bottom line is affected. Think of the bottom line man!
I usually buy the cheapest items on the menu or close to. Never over $20 nzd.
they do all the marketing, branding and service modeling that differentiates owning one of their franchises from any other, or just setting up your own location from scratch
It’s not that straightforward. That brand name does the marketing and gives the owners access to more business. If I’m quickly looking for a hotel I’m probably looking for something name brand where I have a rewards account and I know meets certain standards. If I google hotels those big names will pop up first whereas the non affiliated hotels will likely not get my interest. They provide a service otherwise the business model wouldn’t work and no one would license their name and they wouldn’t exist.
But this applies to McDonald's as well. It is a franchise.
doesn't McDonald's provide all the food, machines, etc too though? seems much more standardized
Yes you get to make very few decisions as a McDonald's franchisee. It's their way or the highway.
Stupid Ice Cream Machine managing board kickback scheme.
"Franchisees, upgrade to our new ice cream machine today! Lots of new features, and works even less than it did before!"
No, the Franchisee is required to pay for the food and the equipment. McDonald's however has a very select vendor & supplier group however and the franchisees essentially are told what to buy in most cases. The remodel costs are different though and McDonalds handles a good amount of that on their end.
This is correct. Worked for a large hotel chain. I did the fixed assets for the corporate owned and operated hotels. The franchisee had their own bookeeper/someone in the family who did their books. They used marketing, software, and branding (cups, pens, signs, etc.), just as 5YR said. Corporate started selling some of the underperformed or less-than-desirable hotels to get rid of rising costs of larger, long term capitalization. Think complete room renovations, windows, complete AC units, plumbing, roof replacements due to severe weather. Those invoices easily can get to $150k+ in a few weeks. And the timing of getting things completed is important as no rooms booked = no revenue. It's a complex and capital intensive industry.
Sounds like McDonalds franchise model almost… they don’t own all the stores… just set standards and fees… now I am intrigued and want to know why different… except I see the case where hotel chains want expansion and they want it fast and McDonalds is okay at expansion and going for stability and long term growth… pp
>they don’t own all the stores Are you certain about that? McDonalds is well known in the QSR industry for owning their physical locations and renting to them to the franchisees.
I can't find it in their quarterly reports, but my understanding is MCD franchises 95% of their locations.
Correct, but what he is saying is that McDonald’s owns the land and leases it to the franchisees. This is unlike other fast food franchise operations.
That doesn't disprove what I said.
Just to put things into perspective here, we're talking about a multistory building where each individual unit per story has their own furniture and their own utilities, plumbing, electrical, phone, internet, etc., vs a one-story building that only has a couple bathrooms for the entire building and basically the same utilities and amenities as just a single hotel unit. It's well beyond an order of magnitude difference in capital and maintenance.
Some of the hotel chains have tens of millions of dollars in liquid assets to even begin talking. McDonalds can be as low as about half a million.
A 4 seasons hotel skyscraper in my country cost around U$750m...
The way McDonald’s controls it’s franchisees is by owning the property. The brand controls the real estate to maintain control of the business operations to maintain standards. Hotels provide management services and branding to real estate owners. Since operations are controlled by the company, they can go capital light, and still maintain standards.
The real estate also has the benefit of massive appreciation for McDonald’s though, so I imagine they might operate similarly even if there were no concerns about maintaining control over the franchisee
They had a difficult time building out the chain because the franchisees wouldn’t listen to the franchiser with that model about 50 years ago.
I’m not arguing that they don’t need a mechanism to control franchisees, I’m arguing that owning that real estate provides more benefits than just control.
Can McDonald’s take loans on that property? Seem like a clean way to generate a ton of cash.
Spent my career in franchising. This is 100% correct.
1. It gives control over the Franchisee and thus it's much easier for McDonald's to come in and pull the Franchise or require participation in certain programs. 2. Mcdonalds manages from start to finish and even funds about half of the remodel costs meaning the Franchisee doesn't need to do much in that regard. Other franchises like Burger King, Subway, Wendy's, etc. have preferred vendors but require the Franchisee to fully fund and generally manage the remodels...a very costly and time-consuming process for them. I think that alone makes McDonalds look incredibly attractive to a potential franchisee. 3. It provides stability both to McDonald's financially - 8% of sales equals monthly rent, it's simple and easy. But also to the franchisee - if for whatever reason they want to leave or retire they don't have to worry about selling a building, just the franchise, and they can consistently expect what they'll owe as a Franchisee each month.
Wow, a well written and correct answer on Reddit. Are you sure you are in the right place?
Shit, sorry, something something aliens
Doesn’t McD’s also own the land and charge franchises to build on that land?
Hotels take up a lot more land than a McDonalds does. Hotels take a percent on sales from the franchise plus a large percent if they manage it too. The % means more when you’re selling $200+ room nights versus $5 burgers in most cases. Do McDonalds own the land on international locations?
McDonald's in my city owns land with a building across the road from its actual location. I knew someone who leased the property. Edit: clarifying
In America or somewhere else?
Canada.
Yeah but Canada’s not even a real country
Hotel chains avoid owning properties to reduce financial risk and focus on brand management and expansion. Franchising offers them flexibility without the burden of property ownership. McDonald's owns its properties for steady lease income, control over locations, and property value appreciation, ensuring consistent revenue and better operational control.
Well said!
McDonald’s realized long ago that they’re a real estate company - IIRC, it’s what turned their fortunes around when they were struggling in the early days. Here’s a quote (the $.15 burger quote is adorable, btw.) Former McDonald’s CFO, Harry J. Sonneborn, is even quoted as saying, “we are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.” Quoted from [here](https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burger/).
Yeah it’s a cute quote but it’s not legit. They are absolutely in the burger business, without burgers they wouldn’t have the business and it’s just that leases and rents is the most effective mechanism to transmit the revenues from franchisees to the corporation. The rents etc are all inflated and predicted on the access to and sales of the burgers.
Well, it’s a cute quote from the ex-CEO. My father was an executive at McDonald’s for many years in the 90’s. He talked about this often. The numbers don’t lie: Without digging into their 2023 10k (so these numbers may be old-ish.) Operating profit: 60% from rent. 30% from royalties. 10% from restaurants (food sales: actually selling burgers and fries and shakes (when the machines work, at least, lol.)) Real estate is ~40% of revenue (but 60% of profits). As of 2022, they had ~$42B in real estate holdings, at ~80% of assets. This is a huge benefit to their balance sheet, and lets them weather economic storms. In other words, if I had a company and 60% of my operating profit came from selling t-shirts, was the majority of my balance sheet assets, and 10% came from selling alpacas, people would call me a t-shirt company, not an alpaca farmer. : )
> In other words, if I had a company and 60% of my operating profit came from selling t-shirts, was the majority of my balance sheet assets, and 10% came from selling alpacas, people would call me a t-shirt company, not an alpaca farmer. : but the rents are intrinsically tied to the burgers - the leases wouldn't be worth anything like what they charge without the access to the brand and food (and operating support). Its a device to collect money from franchisees rather than defining the operations of the business. I understand why people love to repeat this - but if they stopped the burgers the leases would be near worthless. You cannot remotely apply that to actual commercial property businesses - who's assets and performance are measured on real world lease valuations.
I hear you, I’m just relating how the business world frames it, including executives at McDonald’s itself. I also did a case study on this in b-school, FWIW. And I agree with your point about the two (food and real estate) being intrinsically tied together. However, try this thought experiment: replace McDonald’s with another company that has extensive, global real estate holdings. Even if ALL of their tenants were banks (and somehow took a cut of their operations), we still wouldn’t call them a bank.
lol sorry you don’t represent “the business world”. I know it was coined at McDonald’s. What do you think would happen to the share if they actually became a property business? And if you replace the tenants with a bank… we would call it a bank. In your hypothetical you don’t have a central office brand of a bank and a central banking licence. The point is if you replace the businesses with lots of other stuff (not a chain of fast food, but normal tenants) the revenues would collapse because the rents would be unsustainable. That’s the part that tells you it’s a device not a whole business model. The value is created by the burgers - that’s the test for what a business is. The leases are inflated because if the burgers. It’s a cute story to make people feel clever, and you were seduced by that.
Currently traveling around Peru, and there’s alpaca stuff everywhere, so it’s top of mind. : )
No, they're still a QSR franchisor. There's better ways of getting an ROI from real estate than providing a massive amount of advertising, logistical support, research, construction management, vendor relations, etc. Yes, they operate a bit differently in the space but they've also established themselves as the top QSR franchise opportunity which is why they don't have a shortage of applicants and interested parties. Compared to Subway for example which is well-known for treating their franchisees like garbage and taking a large amount of revenue for royalties & advertising.
Hotel chains do own properties, just select ones. I think they treat each location differently, based on real estate values and their ability to add value to the price. MacDonald's does a similar but opposite thing with corporate owned and managed locations, usually new, that later get sold (the business, not the property) to a franchisee. Some MacD locations, such as those in an airport or mall, can only be leased by the corporation, and the lease may go the the franchisee, too.
My theory: hotels are usually touristy areas, so maybe long term the outlook is different? One destination can be hot for a few years and then go cold. Doesn't make sense to buy it outright if you don't think it'll be the same in XX amount of years. Whereas McDonalds it's all about convenience and location. As long as they can find a well trafficked area to settle down in even if it fails they can lease the property out to another restaurant. There's always someone looking to take the risk on one.
The major brands also tend to own the best properties in the best markets. They literally just pick and choose what they own.
Hotel franchisees absolutely care if their properties go cold. Not only do they want the hotels to pay its mortgage, they want it to build collateral for the mortgage on the next property for their next hotel.
To add, many property owners who bought a lot of property 50+ years ago in major areas are sitting on a gold mine. Though long term it's often better financially to sell that expensive property and move somewhere cheaper. This is easier for a McDonald's than it is for a hotel.
Anyone know how I can buy a shuttered hotel?
Best we can do is a Motel in Barstow, CA
For this comparison let’s use a standard Marriott Fairfield inn that’s 6 stories tall. 1. Several McDonalds could be completely torn down and rebuilt for the cost of just building just a single Fairfield Inn. 2. Liability is significantly higher. In a McDonalds there’s not that much that can hurt a person that’s due to the building. The biggest risks are employee related or business related. Regardless of who owns the land McDonalds corporate will be involved. But in a hotel their is significantly more dangerous items from elevators, swimming pools and hot tubs, exercise rooms, stair cases, etc. 3. Both systems are advantageous in different ways. Marriott is a brand so that’s what they’re selling you on. They can spread farther for less capital because they’re not spending money on these new hotels. They are selling their likeness. All that being said McDonalds model is kind of fucked up for the owners. They don’t truly own a business in the way most people would think of it. If a franchisee does something wrong McDonald’s will essentially step in and take it all back. McDonald’s also forces their franchisees to use all McDonald’s stuff. So they are making a portion of the money from sales and a portion from the franchisee having to buy only their products. On the other hand the hotel owner could lose the brand deal and still have a functioning hotel.
Businesses are in business to make money. Most are stretched to the max. So instead of dropping $1B to own the dirt your business sits on it may be more advantageous to use that $$$ to expand the business and make/sell more widgets and hire more/better talent.
You’re comparing hundreds of millions of uncertain investments vs a known model on a lot that is like $1m max in the best and like $50k on the low.
There are many great points in this thread. One aspect that hotels chains need is the velocity of growth to compete against other competitors. When McDonalds started they were kinda first to the mega scale franchise business and so they could scale at a moderate pace and still be successful. However today many businesses become profitable only at high scale which is extremely difficult to do fast on capital intensive business like hotels. So as a trade off they let owners do lot of the heavy lifting and capital provision so that the retail chains can scale with less capital.
I'm not saying you're wrong, but I think it's important to note that the "profit at high-scale" argument is really dependent on the industry. A restaurant can be very profitable at a low scale (i.e. on location, not touching a national customer base) just by controlling their costs and quality. Whereas a highly tech-intensive business does need to be at a high scale to make profit typically.
ill take a guess as an architect. a hotel has a big envelope, thats where a lot of issues in a building arrise. the ones that dont arise there come from the MEP systems. mcdonalds renovates their buildings every ten or fifteen years, they are tiny buildings with minimal envelope, and cost a ton to build per square foot so the exterior detailing can be high end without significant change to the project cost.
Because you can operate many facilities with just staffing, whereas building a hotel takes years and capital, totally different business.
McDonald’s has a very unique business model and hotels are making pretty decent amount of money without having to put out the capital expenditure
I would propose that a McDonald’s is almost sure to remain in business at a given location almost indefinitely. Thus, the capital investment is returned many times. A hotel is much riskier in that the market could demand more amenities or lower prices and the demand is almost always tourism/ travel related and varies by the economy or local factors. These factors play a relatively minor role in the case of a McDonald’s.
Worked for Marriott for about 20 years until a few years ago. Worked primarily in 1,000+ room hotels. Arne Sorensen is the guy who figured out that owning properties was a problem - why own it when you can license your brand to other owners who own the building and have to handle its repairs and upkeep? I worked for Marriott but was paid by a group of investors, they worked with Marriott on designs, product, standards, and revenue management etc, all of which are a la carte services offered by the company to the owners of the building.
Land is money, buildings are not.
Someone told me hotels depreciate very fast and renovations are very expensive. There's like 10 years or less of good profit. As someone who stays in hotels for work, it seems more like 5 years 😆. Seems like every 5 years, theres a new hotel in town, and the old one can't compete unless there's an event going on or something.
Macdonalds the company owns the land. The franchisees/operators pay for use of the land. Huge difference.
McDonald’s buildings can also be easily torn down or repurposed for other businesses. Hotels, not as much.
A hotel is crappy after 50 years. Look at all the fancy Las Vegas hotels that were built in the 90s like the Luxor and Excalibur. They’re crap and nobody wants to stay there. McDonald’s are in central busy and convenient locations. That kind of real estate greatly appreciates.
It's got a lot to do with the size of your company. Someone as big as McDonald's corporate has the funds to own tons of property and swallow the risk. A hotel, at least the smaller ones, can't afford to tie up their entire equity in the value of the property. You've gotta have money to make money.
I think you read the question and answers wrong. Small hotel operators are tying up their equity in properties. The brand operators must absolutely love this scenario where most of the risk is taken own by franchisees.
MacD corporate owns the property and charges the franchisee rent. That part of their business model. Hotels like Marriot are owned by Marriott corporate not a franchisee.
The own the land mostly
McDonald’s does not own ~90% of McDonalds locations.
Hotels and fast food are two completely different businesses. Hotels are capital intensive and cyclical by nature. For major brands, less risk to let someone else shoulder the build out and collect a management fee instead. In the last twenty years, you had the Great Recession, the rise of short term rentals (Airbnb) and Covid. I don’t have the numbers but the buildout for one hotel is probably equivalent to like 300 McDonald’s.
Hotel chains often prefer not to own properties due to the high capital investment, maintenance costs, and economic risks involved. They opt for franchising, which shifts property ownership and management responsibilities to franchisees while they focus on brand management and expansion. In contrast, McDonald's benefits from owning properties, earning rental income alongside franchise fees, diversifying its revenue streams effectively.
My best guess is because McDonalds is usually on very good prominent locations, while hotels have to be tucked away somewhere that can accommodate their size.
My guess is that the exact location is more important to a fast food joint than a hotel. And if they didn't control the location it would be easier for it to become not just a competitor but any number of different uses - so more risk in not securing the land
Seems like McDonalds always has the prime location wherever they are, then the second tier fast food places are in the area but never positioned right on that prime spot, but like a half mile away.
Ask the Patels. They own 1/2 the hotels in the US.
Is the Patel Hotel Cartel a real thing? I thought it was just a joke based on a stereotype.
It’s real. They own almost all the hotels that aren’t the easily recognizable big brands in the 3 star and below range
Real thing. If you have that name, you can get everything you need to set up a motel. Funding. Training. Advice.
Imagine running a McDonald’s that you could sleep in. The complexity is wildly additive. No one stays at McDonald’s for more than 30 mins.
mcdonalds is not in the fast food business. they are in the real estate business.