August 8, 2017

Nobody Builds Any Equity Without Real Estate Tenure

If the Lake Forest IL store is only 20 years old that means it would have been developed
and opened during the "Convenience Strategy", a misguided effort to impress Wall Street 
by building too many new stores in all the wrong places.

In the 1970s and 1980s McDonald's Corp. did an excellent job of negotiating the
purchase of new sites or obtaining long term leases. Leased sites always had the initial 
20 years set in stone with decades of options after the first 20 years. If management 
couldn't be sure there would be a McDonald's at that location in perpetuity there was 
no deal.

The idea that a store would be built with an opened ended rent number at the end of 
20 years was extremely rare or unheard of.

But that changed during the Convenience Strategy - deals were rushed, inexperienced
real estate people were hired, and uniformed brokers became involved. Many deals 
were, in a word, sloppy.

I don't know anymore about this store's lease than what's contained in this article but
McDonald's Operators should be wary of stores opened in the mid-1990s and should 
become educated on the exact status of each store's real estate. And don't accept the 
verbal representations of McDonald's corporate employees. They won't know a top 
lease from a ground lease.

High rent pushes out Lake Forest McDonald's
.

9 comments:

Anonymous said...

I feel his pain, but hard to feel sorry for an operator who had 46 stores. Moral of the story: caveat emptor!

Richard Adams said...

Let the buyer beware? Darn right, that's exactly my point. Do some due diligence on the real estate side of the deal and don't assume corporate knew what they were doing when that put that store there.

As for the Operator - I'm sure he'll survive this but what would this do to a two or three store Operator?

Anonymous said...

He'd be down to one or two stores.

Anonymous said...

Concerned about new direction of the company and the way they are putting the pressure
on Owner/Operators to sign documents. You are either In or Out.

Anonymous said...

The cash flow is down, and every week more money is requested for better tech
equipment upgrades in building & interior, which is reducing our equity and consideration
for more borrowing to pay for what your cash flow can’t handle. The outlook from where I sit
is very scary.

Anonymous said...

", and every week more money is requested for better tech
equipment upgrades in building & interior"

It is NOT a request.

Raise sales through operations if possible, lower costs however possible, raise prices if you can and you can refinance and/or do something else wacky with debt if allowed. I did a few years also. Foolish? Maybe. But business is back and strong and we will see. A good relationship w/finance person in region is VERY helpful- especially if you ARE doing all that is possible. Keeping this stuff a secret or at least not talking to finance is not a good strategy- they're the first place that leadership calls...maybe the second behind ops. I despise my field svc person but she'll never know it and she's a loud fan. This helps.

That said, I personally think that this plan will work- at least in the sense that McD's WILL be "cool" again. I believe this will help raise sales but I am concerned about too much discounting.

I have been and am highly critical of a lot. I don't know- they don't either if this will work. They're betting their careers and we are betting our financial future. I have strongly considered selling out but am not at my number nor will I be for awhile.

I've been there- shrinking sales and cash flow. It happens. Tough when debt heavy. Tough but survivable if you want it, are creative and have those relationships. At least it was for me. So far.

Anonymous said...

The bigger issue is McDonald's keeps closing restaurants doing $2million as it is a "low volume restaurant" it is amazing all other chains would love to even have AUV's at $2mil but McD's and franchisees cannot make money at that sales volume.

Anonymous said...

What will MCD do when the Banks start refusing to lend Operators money???

Anonymous said...

"What will MCD do when the Banks start refusing to lend Operators money??"

Meltdown.

All are either being shown the door or are buying more and everyone has limits.