🍟 2/27/2023 – McDonald’s Ventures
A few weeks back I told the story of Ray Kroc, and how McDonald’s was founded.
I’d bet 100% of recipients of this email are familiar with the McDonald’s brand, and even if you aren’t a frequent diner there, you know they sell burgers & fries, among other menu items.
As a company McDonald’s has primarily focused on just these core operations, while expanding via franchising. This includes domestically, where they have nearly ~13,000 locations, and internationally, in which they’ve grown to ~25,000 locations.
But there was a time period where they strayed far from their core competencies, and at one point were competing directly with Taco Bell, Pizza Hut, Netflix, and Costco.
The Wandering Years
Via 4 separate endeavors, McDonald’s at one point:
- Had a 90% stake in a burrito chain
- Acquired a regional pizza franchise
- Launched their own DVD kiosk business
- Bought a rotisserie chicken brand out of bankruptcy
Two of the 4 companies they were involved with have become publicly traded companies today, that McDonald’s now has zero ownership in.
In 1998, McDonald’s made a minority investment in a 14-unit restaurant chain based in the Denver area.
Using their restaurant operations expertise and expansion experience, they helped this brand grow to 500+ locations by 2005, which gave them a 90% stake in the business.
The chain was Chipotle, and it went public in January 2006!
The relationship proved problematic, as they had disagreements over adding drive-thru’s, serving breakfast, and whether they should franchise.
McDonald’s ultimately sold all the stock for ~$1.5B in October 2006. Today that Chipotle stock would be worth over $35 billion.
In 1989, McDonald’s tried bolstering its dinner time offerings with pizza.
Despite investing in remodeled kitchens and inventing a patented oven, the order took ~11 minutes to prep for customers. This was far too long and the initiative fell flat on its face.
But McDonald’s wasn’t giving up on being in the pizza business. Eventually, in 1999 they’d acquire the 143-unit pizza franchise, Donatos.
Just like Chipotle, it proved to be too much of a distraction, and they ended up selling it back to the owners in 2003.
Today Donatos has 375 locations and an average unit volume of $1.1M
This one may be the most surprising.
In 2003, McDonald’s was looking for ways to further monetize customers walking through their doors. Sure, customers were buying burgers, fries, and other menu items.
But McDonald’s execs knew that with millions of customers walking through their doors everyday, why couldn’t there be a way to upsell that captive audience while they were inside their buildings?
Thus, they settled on setting up vending machines inside their stores. But to avoid cannibalizing food sales, they wanted something other than food in the vending machines.
This experiment was so wide ranging that at one point, they had vending machines for diapers!
Eventually though, they settled on DVD vending machines…
They called each vending machine a “red box”, and soon found themselves going head-to-head with Blockbuster and Netflix!
Given the success they had, McDonald’s started expanding beyond their own locations & began cutting deals with supermarkets.
By the end of 2005, there were 800 Redbox’s nationwide. While the success was fantastic, the business was becoming a distraction as it is very far from their core competency.
After unsuccessful attempts to sell Redbox to Blockbuster, Mickey D’s sold 47% of the company to Coinstar for $32 million.
Then in February 2009, Coinstar paid McDonald’s ~$170M for the remainder of the company.
Redbox eventually hit peak revenue of $1.76 billion in 2015 off of ~45,000 kiosks – and it all started from good ol’ Mickey D’s!
Bonus: Rotisserie Chicken
In 1999, Boston Market was struggling with a debt burden due to rapid expansion, which wasn’t backed up by foot traffic at every store.
Costco had also begun selling $5 rotisserie chickens, which was hurting demand for Boston Market as well.
So in 1999 – McDonald’s acquired the brand for $173.5 million. The thought was that they would either
- Turn around struggling Boston Market locations
- Convert the failed locations into McDonald’s (i.e. a real estate play)
But just as with the other ventures above, it became a distraction, which they divested of completely in 2007.
Since these exploratory years for McDonald’s, they have doubled down on their core operations, and has increased their own market cap by nearly $140 billion since then.
Stick to your strengths, and they can compound rapidly over time
Subway Still Pushing For Sale
Subway is actively pitching private equity firms on a sale, now rumored to be in the 7-$8.5 billion range. The domino effect from this acquisition search is that franchisees are being used to make Subway look as attractive as possible, whether it’s via store upgrades, or being blocked from closing unprofitable locations.
Wendy Eyeing Aggressive Aussie Expansion
Wendy’s is planning to roll out hundreds of restaurants in Australia, where it has a minimal footprint. To do so, they’re having conversations with potential master franchisee candidates, and are even entertaining the idea of royalty discounts, and co-investment on locations to speed up it’s bid for more market share.
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