Warning: Movie spoilers ahead.
Released to cinema audiences in 2016, The Founder is the story of fast food restaurant chain McDonald’s Corporation (MCD). From its humble beginnings as a single hamburger store, it has grown into a global behemoth.
In 1954, hapless salesman Ray Kroc was fascinated by the innovation at a fast food eatery run by two brothers, Richard and Maurice McDonald. They were affectionately known as Dick and Mac.
Dick and Mac put their success down to a few key factors.
They made the decision to cut non-profitable sales items and limited their menu to products with good margins: burgers, fries and milkshakes. They introduced a production-line style of preparing food.
Each staff member focused on a particular part of the process. The cooking area was designed for efficient output. Work stations were placed close enough for staff to assist one another. But they were separate enough for workers to stay out of each others’ way.
The McDonald brothers were fastidious about the production process. Each burger patty was cooked for exactly the right time. It had two pickles and just the right amount of sauce.
Ray Kroc was impressed. He hatched an agreement to franchise the operation. Dick and Mac agreed, provided they could maintain full control on quality.
The focus of the movie is on Ray’s ambition, persistence and ruthlessness. This provides entertainment and makes the audience feel empathy for the brothers McDonald.
But I found a particular part of the story more compelling.
You see, the initial deal meant Ray would receive 1.4% of the profits.
He has a whole bunch of restaurants creating revenue, but not much of it trickles down to him. Having put up his house to start the business, he falls months behind on mortgage payments. There’s an argument with the loan officer at the bank.
A fellow bank customer, named Harry Sonneborn, listens in. He approaches Ray and says he may be able to help. Harry suggests the problem with the franchise contract is revenue stream based on other people’s profits. It’s difficult to keep costs down without total control.
Revenues were high but profits were low. And here’s what grabbed my attention.
Real estate is where the money was
Harry asks about the land on which the restaurants are built.
I should have seen this coming. We hear so much of it from Phil Anderson at Cycles, Trends and Forecasts. I immediately knew Harry would come up with a simple way for Ray to make money.
It’s all in the land!
Ray explains that franchisees find land in a prime position, take out a lease, and borrow funds for construction.
Harry suggests they should be in the real estate business. Ray should buy land where restaurants are built. And make it compulsory for franchise operators to lease the land from him and pay rent.
This sets up a revenue stream in addition to a portion of the profits.
Regular payments from every new restaurant provide security for finance to buy even more land. The capital raised allows new franchises to open all over the country.
The new business model also gives Ray the important element of control. If the franchise operators don’t maintain the required quality, he can cancel the lease and kick them out.
Pretty soon, Ray appears on the cover of Restaurant Business Magazine as the founder of McDonald’s. And the rest is history.
Who’d have thought the founder’s success in getting started came not from the sale of burgers, but from the value in the land on which the burgers were made?
We don’t quibble over McDonald’s success. The company has proven its business model over many, many years.
The real estate cycle theory
Yet we reckon it may have done even better if it understood Phil Anderson’s Grand Cycle Theory.
The Grand Cycle Theory is the perfect tool to forecast market moves, especially real estate and global stock markets.
Phil Anderson has summed it up in a picture that’s worth a thousand words:
This removes any niggle of doubt about property moving in cycles.
Phil has used his theory to accurately predict market moves time and time again. It flies in the face of conventional wisdom on Collins Street and Wall Street.
Imagine the benefit of having such foresight. Back in 2004, Phil warned of the ‘winner’s curse’ phase that was about to unfold. This proved to be the final couple of years into the peak of the cycle.
It saw real estate buyers leapfrog each other, chasing higher and higher prices into the peak in 2007 — all of it financed by reckless lending from banks.
Maids were able to borrow $1 million without any hope of being able to repay.
Importantly, Phil also forecast the best time for buyers to step back into the market to buy real estate and stocks. Years ahead of the event, he said real estate prices would bottom out in 2010–2011. And that the stock market would bottom out a year or two beforehand.
History proves this foresight was remarkable.
Go here for a brand-new video demonstration of how you can use the theory to predict market moves.
For Markets & Money