Are You in the Right Business?
I recently read an article claiming that McDonalds was not in the fast food business, but was in the real estate business. The company buys locations and leases them to franchisees, using fast food as a way of ensuring stable and low-risk rental income. But, for its property model to work people have to keep visiting its franchisees’ restaurants – that’s why the company has a vested interest in ensuring that their fast food concept continues to be relevant. So, I looked at to the McDonald’s annual report, and yes, over 2/3 of their operating income comes from revenues from franchisees.
Well, now I understood why McDonalds was the initial funding source for Redbox. In 2002, McDonalds placed eleven DVD rental kiosks in the Washington DC metro area, ostensibly as another way to “ensure stable and low risk rental income”. In essence, they took their core business proposition and looked for other ways to add revenues consistent with that specific business definition.
Similarly, a successful regional concert promoter came to me a few years ago with a difficult question. They wanted to exit the concert promotion business because the risk profile had become too great, but didn’t know what they could do next that capitalized on their success as concert promoters.
After extensive research and strategic visioning, we realized that, like McDonalds, they were in a different business than they had been originally contemplated. Their concerts tended to be full weekend outdoor beach festivals. They were actually in the business of providing “California lifestyle experiences”, not specifically music experiences. In fact, most of their sales came from pre-sold tickets that were paid forbefore the actual music artists were all announced – people were more interested in the experience itself than the specific musical act!
We repositioned this value proposition into a far more stable revenue model by creating fixed venue, multi-platform “California themed” entertainment centers in markets that were starving for unique entertainment destinations. The city and investors alike have warmly embraced the first 15,000 square foot facility, opening in Ventura, California in June.
Take a moment and think about what business your company is truly in. Are you leaving revenue on the table by not capitalizing on your core business proposition?
