Obviously, fast food restaurants like McDonald's and Burger King are extremely successful, but when you see the prices, you might wonder how they're able to bring in billions of dollars. While you probably know some of their secrets, there are other ways in which they make money that you might not even think about. Sure, the value menus are cheap, but there are other things on the menu which will more than make up for those costs, and most chains aren't exactly known for paying employees well. Let's take a look at how fast food restaurants really make their money.
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LifestyleTranscript
00:00It seems crazy that fast food restaurants like McDonald's can stay in business with
00:04the cost of their food so low.
00:06How can anyone really turn a profit offering dollar menus, coupons, and value meals?
00:11While it may seem like fast food restaurants are pricing themselves out of business, the
00:14most successful ones employ lots of tricks to make sure patrons keep coming back.
00:19Plus, there are some factors most people don't consider.
00:22For example…
00:23Real estate
00:24One of the most surprising ways that fast food companies make money has nothing to do
00:28with food.
00:29Most fast food restaurants are licensed franchises that fall under a much larger corporation.
00:33These corporations make a lot of money from real estate by leasing out franchises to smaller
00:38companies or individual owners, who then turn over a percentage of their profits.
00:42One former CFO of McDonald's said the company is not technically in the food business, we
00:47are in the real estate business.
00:49The only reason we sell 15-cent hamburgers is because they are the greatest producer
00:53of revenue from which our tenants can pay us our rent.
00:56McDonald's owns about 45 percent of the land and 70 percent of the buildings that are home
01:00to its franchises.
01:01In 2014, roughly a third of their $27.4 billion in revenues came from their franchised restaurants.
01:08After all, those fees have to be paid, no matter how business is going.
01:13Limited menus
01:14Fast food restaurants cut down on overhead by offering limited menu items.
01:18This helps keep their costs low and leads to higher profit margins, since the foods
01:22they offer are typically cheap to make.
01:24For example, a 50-pound bag of potatoes can be purchased for less than $10.
01:28This means the side of fries you spend a few dollars on actually costs the restaurant pennies.
01:33Burger joints don't offer very many side items, so there's a good chance most customers will
01:37just default to those super-profitable french fries.
01:40How do you know you're gonna love the taste of these fries?
01:46That's how.
01:47Upselling diners
01:48The main purpose of value menus, or coupons, is to lure the customer into the restaurant.
01:53From there, fast food places employ other tactics to make sure they make a profit.
01:58While that value menu may look tempting, restaurants will try to steer you away from the lower-priced
02:02items in favor of more expensive foods.
02:05This tactic, called upselling, is used in most industries, and is one of the ways fast
02:09food companies keep turning such large profits.
02:12You might tell yourself you're going to just order a $1 burrito, but when you get to the
02:15restaurant and see the mouth-watering images of combo meals, there's a good chance you're
02:20going to rethink your order.
02:21Fast food menus will prominently feature these tantalizing images to convince you to spend
02:25more money.
02:26And even if you manage to hold out even after seeing the pictures on the menu, there's still
02:31a good chance you'll cave when the cashier asks if you'd like fries with your order.
02:34Fast food restaurants employ this psychological tactic because they know it'll be hard for
02:39you to say no.
02:40A study conducted at Eastern Illinois University found that people will eat 85 percent more
02:45when asked directly.
02:46According to Eat This, Not That,
02:48it's harder to turn down that extra food when you're being asked if you want it by
02:51another person.
02:52By using this method, restaurants know they can easily get you from purchasing a single
02:56item from the value menu to dishing out $5 or more for a meal.
03:00"...McDonald's and you, and you, you too!"
03:03Cashing in on extras
03:05If you've ever added guacamole to your burrito bowl at Chipotle, you know what it's like
03:09to get hit with an extra charge once you get to the cash register.
03:12But even with a sticker shock, customers still pay up, and in droves.
03:16As it happens, the restaurant is making a pretty decent profit off of that dollop of
03:21guac.
03:22A single avocado costs between 50 cents and a dollar, but Chipotle charges an additional
03:26two bucks for a side of guacamole.
03:28Considering the popularity of the dip, those profits add up pretty quickly.
03:32Low prices, low wages
03:34Another way fast food restaurants keep their costs low is paying their workers lower salaries.
03:39Despite raking in a ton of money each day, the average fast food place pays their employees
03:43just a little bit above the federal minimum wage.
03:46This drives down the overhead costs significantly.
03:49Low wages may help restaurants cut down on costs, but it has a lot of people frustrated.
03:53Many workers have demanded higher minimum wages in recent years.
03:57Convenience
03:58Fast food restaurants are a multi-billion dollar industry in the United States alone.
04:03When you factor in the number of locations all over the world, you're looking at a business
04:07that turns astronomically large profits.
04:09The average American spends roughly $1,200 on fast food each year, with around 9.3 million
04:16Americans served every day.
04:18One of the reasons they're so popular is their sheer convenience.
04:21It can be hard for many people to find the time to cook or sit down for a meal, but fast
04:25food restaurants offer a far faster option.
04:29Soft drinks, hard cash
04:30Fast food restaurants make a killing on soft drinks.
04:33They're one of their biggest moneymakers.
04:35A large soft drink may only cost you a buck or two, but that can translate up to a 90
04:39percent profit margin for restaurants.
04:41Each soft drink sold costs the restaurant less than a quarter.
04:44High profit margins on soft drinks are one of the reasons that fast food restaurants
04:48can afford to offer cheaper options like dollar menus in the first place.
04:52While they might actually lose money on those items, they more than make up for it in soda
04:55sales.
04:56This ice cold coke is calling you.
04:58I'm just a dollar at McDonald's.
05:01Come get me."