McDonalds and Infosys

What connects McDonalds and Infosys...

Both are in the Real Estate Business...

"We are in the real estate business. The only reason we sell hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent." ... Ray Kroc, CEO and Founder of McDonalds.

Unfortunately, its very difficult to get a similar statement out of Nandan Nilekani, the astute, "wicked-smart" CEO of Infosys.I pray that one day, he ends up in a lonely highway with a flat tyre and then reminds himself of a FLAT-World...


While McDonald's does not generally outright advertise this -- although inferences to it can be found on the corporate website -- perhaps one of the most negelected points people seem to miss, when talking about McDonald's, is the fact that the corporation is a real estate powerhouse.

The largest commercial real estate landowner in the United States, McDonald's property portfolio was estimated to be valued around eight billion dollars, as of 2001. The origins of McDonald's real estate empire begin much earlier than this, however.

Although McDonald's first opened its doors in 1954, it wasn't until 1956, after courting many an investor, did Ray Kroc consider and implement an idea put forth by Sonneborn, to tap into the real estate market. Shortly after Sonnenborn made his pitch to the investors (the same audience to whom he purported made the statements above), the Franchise Realty Corporation, McDonald's real estate subsidiary, was born.

In simplified terms, McDonald's makes money on real estate via two methods. First, it buys and sells properties, as one might suspect. Often these are restaurant lots, but such is not necessarily always the case. McDonald's will buy properties that it feels are, or will be, hot locations, and it of course sells properties that are underperforming or otherwise not doing so well. Again, all of this seems pretty orthodox.

Secondly, on top of the franchise fees which McDonald's charges its franchisees to use the "McDonald's" name, it charges rent to the franchisees to use the corporately-owned properties. According to their August, 2003 reports, McDonald's had approximately $1.6 billion dollars in earnings available for fixed charges, for the six months prior to June 30, 2003. Of those earnings, $141.6 million -- nearly ten percent -- came from "rent charges...considered to be representative of interest factor"



Infosys has become the Indian land-gobbler grabbing lands, left right centre all over the country, some of which include controversial wet marsh-lands( crucial for sustaining and replenishing the watertable and also for birds who use these as migratory homes). There is also an active proposal to build a 4 star hotel with a golf-course to pamper global CEO's who land up in Bangalore so that they can continue to sing paeans in praise of the Indian IT industry..

The reason given by Narayana Murthy for this goes like " Most star hotels in Bangalore get booked in peak season and rates for rooms are as high as $ 250-300 per day. ". so, this move to build hotels is to insulate them from unavailability of hotel-rooms as well as to save them from sky-rocketing prices. In Business parlance, this strategy is termed as " Backward Integration" where, a product manufacturer starts producing the raw materials himself so that his dependance on the market for them is reduced and he also gets protected from the escalation in raw material costs which will impact his product cost. For example, many petrochemical, fertilizer and Garment manufacturing companies require lot of Petro-based raw-materials. When the raw-materials costs shoot up due to oil price fluctuations, these products also cost more. So, companies like Reliance have started focussing on building Refineries themselves so that they can use them in their Industries to produce Polyester Yarns and Poly-Propylene. Not surprisingly, Reliance's cost per unit of these products are one of the cheapest in the world. Hence, Reliance is not that vulnerable to market shocks as compared to Grasim or National Fertilisers Limited.

But, coming back to the topic of Infosys's land signing spree, make no mistakes, I see an imminent slow-down in the IT sector post 2009 when the tax holidays for this sector are being proposed to be removed by the Government. Currently, Infosys and other Indian IT companies hardly pay any tax to the Goverment while all other traditional industries pay taxes in the range of 30-32 % of their Net Income. So, pretty soon,Infosys hopes to rake in huge profits due to real estate appreciation and thereby will continue to create more millionaries for years to come... In short, Infosys is Powered by Intellect, Driven by Real Estate Values.. Hmmmmmmmmmm..