McDonald’s was the first national hamburger chain in the US, founded in the 1940s. Ray Kroc was the man who grew the brand across the country. His autobiography is a lot of fun: it’s amusingly written and it tells the story of McDonald’s well.
The success of McDonald’s came down to three factors:
- Assembly-line production: making food quickly and cheaply
- Good French fries
- Good franchise model
The first McDonald’s was founded in 1940 by the McDonald brothers in San Bernadino, which is near L.A. The McDonald brothers in fact closed down their first successful restaurant in order to transfer principles they had learned in the running of that restaurant into the foundation of a new restaurant.
Kroc writes “The San Bernadino restaurant was a typical drive-in. It developed a terrific business, especially among teenagers. But after World War II, the brothers realized that they were running hard just to stay in one place. They weren’t building volume even though their parking lot was always full. So they did a courageous thing. They closed that successful restaurant in 1948 and reopened it a short time later with a radically different kind of operation. It was a restaurant stripped down to the minimum in service and menu, the prototype for legions of fast-food units that later would spread across the land. Hamburgers, fries and beverages were prepared on an assembly line basis, and to the amazement of everyone, Mac and Dick McDonald included, the thing worked! Of course, the simplicity of the procedure allowed the McDonalds to concentrate on quality in every step, and that was the trick. When I saw it working that day in 1954, I felt like some latter-day Newton who’d just had an Idaho potato caromed off his skull.”
On French fries, Kroc writes “Now, to most people, a french-fried potato is a pretty uninspiring object. It’s fodder, something to kill time between chewing bites of hamburger and swallows of milk shake. That’s your ordinary french fry. The McDonald’s french fry was in an entirely different league. They lavished attention on it. I didn’t know it then, but one day I would, too. The french fry would become almost sacrosanct for me, its preparation a ritual to be followed religiously.”
Kroc writes “One of my suppliers told me ‘Ray, you know you aren’t in the hamburger business at all. You’re in the french-fry business. I don’t know how the livin’ hell you do it, but you’ve got the best french fries in town, and that’s what’s selling folks on your place.’”. Looking back, Kroc writes “The quality of our french fries was a large part of McDonald’s success.”
Robert Anderson, who helped Kroc write the book, writes about McDonald’s franchise model in an afterword “Kroc’s real contribution was not in standardizing American taste - it was in creating the McDonald’s franchising system. His greatest skill was as an instinctive leader who brought entrepreneurs into a structure that both forced them to conform to high standards of quality and service and freed them to operate as independent business people. These franchisees, teamed with corporate managers and the various suppliers of food and equipment, form a system that by 1987 represented more than 2,000 independent companies.”
One thing that is interesting about the franchise model is that Howard Schultz expressly avoided the franchising route for scaling Starbucks. He feared that he wouldn’t be able to control quality. Schultz was founding Starbucks in the early days of venture capital, and he was able to raise venture capital to fund growth. It’s interesting to see that Blue Bottle Coffee just raised $25 million in venture capital to grow. I wonder whether the idea of financing a national roll-out on a franchise system is on the decline.
Starting out aged 52
An interesting fact about Ray Kroc as an entrepreneur was the fact that he was 52 years old when he first started rolling out McDonald’s across the country. He spent the next 20+ years of his life expanding McDonald’s to 4,000 stores across the world. A bit like Sam Walton, Ray Kroc built a system that kept on growing, long after he retired: now McDonald’s has 34,000 stores around the world.
Before getting involved with McDonalds, Kroc was in the business of selling Multimixers for making milk-shakes. He’d heard about the San Bernadino McDonald’s restaurant buying a lot of Multimixers from him, and he flew out to meet the owners. He was taken with the operation straight away, and he writes “‘I’ve been in the kitchens of a lot of restaurants and drive-ins selling Multi-mixers around the country”, I told them, “and I have never seen anything to equal the potential of this place of yours. Why don’t you open a series of units like this? It would be a gold mine for you and for me, too, because every one would boost my Multimixer sales. What do you say?”
The McDonald brothers agreed to let Kroc be the one to start opening new stores. Kroc writes “When I flew back to Chicago that fateful day in 1954, I had a freshly signed contract with the McDonald brothers in my briefcase. I was a battle-scarred veteran of the business wars, but I was still eager to go into action. I was 52 years old. I had diabetes and incipient arthritis. I had lost my gall bladder and most of my thyroid gland in earlier campaigns. But I was convinced that the best was still ahead of me. I was still green and growing.”
Selling paper cups
Up to this point in his life, Kroc had been a successful salesman, and a hard worker. Before Multimixers, Kroc was in the business of selling paper cups, which he had selected because he “sensed from the outset that paper cups were part of the way America was headed”.
About his sales technique, Kroc wrote “My cup sales kept growing as I learned how to plan my work and work my plan. My confidence grew at the same rate. I found that my customers appreciated a straightforward approach. They would buy if I made my pitch and asked for their order without a lot of beating around the bush. Too many salesman, I found, would make a good presentation and convince the client, but they couldn’t recognize that critical moment when they should have stopped talking. If I ever noticed my prospect starting to fidget, glancing at his watch or looking out the window or shuffling the papers on his desk, I would stop talking right then and ask for his order.”
Kroc was a hard worker. Early on his career, he was working 19 hour days in two jobs: sales, and playing the piano on a radio show in the evening. He writes “I had to arrive at the station at 6pm and play for two hours. I was off from 8 to 10pm, and then I returned to work until 2am. A few hours later, 7 or 7:15am, I’d be off with my sample case in pursuit of paper cup orders. The only break in this routine was Sunday, my day off from paper cup selling. But we had afternoon hours at the radio station then.”
After getting the go-ahead from the McDonald brothers to roll McDonald’s out nationally, Kroc got to work on setting up the second store. Getting the french fries right proved challenging. “I had explained to Ed MacLuckie with great pride the McDonald’s secret for making french fries. I showed him how to peel potatoes, leaving just a bit of the skin to add flavor. Then I cut them into shoestring strips and dumped them into a sink of cold water. The ritual captivated me. I rolled my sleeves to the elbows and, after scrubbing down in proper hospital fashion, I immersed my arms and gently stirred the potatoes until the water went white with starch. Then I rinsed them thoroughly and put them into a basket for deep frying in fresh oil. The result was a perfectly fine looking, golden brown potato that snuggled up against the palate with a taste like… well, like mush. I was aghast. What the hell could I have done wrong? I went back over the steps in my mind, trying to determine whether I had left something out. I hadn’t. I had memorized the procedure when I watched the McDonald’s operation in San Bernadino, and I had done it exactly the same way. I went through the whole thing once more. The result was the same - bland, mushy french fries. They were as good, actually, as the french fries you could buy at other places. But that was not what I wanted. They were not the wonderful french fries I had discovered in California. I got on the telephone and talked it over with the McDonald brothers. They couldn’t figure it out either.
"This was a tremendously frustrating situation. My whole idea depended on carrying out the McDonald’s standard of taste and quality in hundreds of stores, and here I couldn’t even do it in the first one!"
In solving the problem, Kroc learned something about how potatoes improve in flavor as they dry out after being dug. ”I contacted the experts at the Potato and Onion Association, and explained my problem to them. They were baffled too, at first, but then one of their laboratory men asked me to describe the McDonald’s San Bernadino procedure step-by-step from the time they bought the potatoes from the grower up in Idaho. I detailed it all, and when I got to the point where they stored them in the shaded chicken-wire bins, he said ‘That’s it!’ He went on to explain that when potatoes are dug, they are mostly water. They improve in taste as they dry out and the sugars change to starch. The McDonald brothers had, without knowing it, a natural curing process in their open bins, which allowed the desert breeze to blow over the potatoes. With the help of the potato people, I devised a curing system of my own.”
The majority of McDonald’s stores were franchised. This created a culture of small businessman, many of whom operated several McDonald’s at once and became very successful.
Kroc writes about the franchise culture “Nobody could argue with the success of menu additions such as the Filet-o-Fish, the Big Mac, Hot Apple Pie, and Egg McMuffin. The most interesting thing to me about these items is that each evolved from an idea of one of our operators. So the company has benefited from the ingenuity of its small businessmen while they were being helped by the system’s image and cooperative advertising muscle.”
Each franchisee pays a percentage of its gross sales to the McDonald’s corporation. The percentage was 1.9% when McDonald’s started, and by the time Kroc was writing his autobiography, which was 1977, it was 11.9%.
Kroc writes “Art Bender, my first franchisee, says he’s sometimes asked why he doesn’t just start his own restaurant instead of paying a percentage of his gross to McDonald’s. After all, he helped teach Ray Kroc the business; he could make it on his own easily.
“‘I might have a successful restaurant,’ Art says, ‘but I’d have to think what it would cost me as an individual to buy the services I get from the corporation. The name is worth a lot, of course. National advertising with Art’s Place? No way. Then there’s purchasing power, Hamburger U training for my managers, product development… how could I do all that alone?’”
Some issues in the franchise system arose. Kroc writes “Back then, of course, I couldn’t foresee an operator owning twenty-five of thirty stores. I couldn’t envision situations in which an operator claimed we were hurting his sales volume by locating another store too close to his….I wasn’t thinking about what would happen when a franchise expired. But my basic philosophy is as true today as it was then. We are an organization of small businessmen. As long as we give them a square deal and help them make money, we will be amply rewarded.”
It takes a while for someone to get a McDonald’s franchise. After applying, they first have to work in a McDonald’s store near their home. Kroc writes “He’s assigned to evening or weekend hours that won’t conflict with his present job, and he learns firsthand what’s involved in both crew work and management. If he’s really not suited for our kind of restaurant operation, this is the time to find that out.”
In 1977 Kroc says that it would usually take less than two years for a site to come up for the applicant. The applicant would then have to do another 500 hours working in a McDonald’s restaurant. Then they attend Hamburger University where “we award them a Bachelor of Hamburgerology degree with a minor in french fries.”
Learning from adversity
When Kroc was selling paper cups, he came up with the idea of selling Multimixers, and thought it was a terrific idea. He negotiated a contract with a Multimixer firm to sell Multimixers, and he tried to persuade his paper cup employer to go into the Multimixer business. They thought it was a bad idea, and Kroc decided to resign and pursue the Multimixer opportunity himself.
At this point his paper cup employer said that Kroc didn’t have the Multimixer contract: he’d signed it on behalf of his employer, meaning that they owned the contract. Kroc said to his employer “Well, since you aren’t going to use the contract, just give it up.” They refused to do this, and instead they negotiated to own 60% of Ray Kroc’s new company in return for relinquishing the contract. They also provided $6,000 of startup capital. Kroc knew this was a bad deal but he nonetheless accepted it. At one point Kroc states that this was a “Satanic deal”. I don’t quite understand why the Multimixer company wasn’t empowered to rip up the contract and sign a new one with Kroc, given that Kroc’s employer wasn’t going to pursue the Multimixer opportunity. But there we go.
Later on Kroc was doing fairly well at selling Multimixers, but as a 40% owner, his previous employer was still effectively his boss, with their 60% ownership. He offered to buy the 60% off them, and they demanded $68,000 for their share. Kroc writes “I was so benumbed by his outrageous demand that I couldn’t think straight.”
Kroc re-mortgaged his house and paid off the amount. He writes “For me, this was the first phase of grinding it out - building my personal monument to capitalism. I paid tribute, in the feudal sense, for many years later I was able to rise with McDonald’s on the foundation I had laid. Perhaps without that adversity I might not have been able to persevere later on when my financial burdens were redoubled.”
Howard Schultz talks about learning from adversity in his first book “Fear of failure drove me at first, but as I tackled each challenge, my anxiety was replaced with a growing sense of optimism. Once you overcome seemingly insurmountable obstacles, other hurdles become less daunting.”
Another echo, more on the legal wrangling side of things, is the bit in Sam Walton’s life where he had built his first store to tremendous sales, and suddenly the owner of the department store refused to renew his lease, preferring instead to reclaim ownership of the store, along with all the trade goodwill Walton had created. Walton was irate at himself for having let himself be caught out by a contractual oversight - not checking the renewal terms of the lease. I wrote about this in my review of Sam Walton’s autobiography.
Kroc writes “I learned then how to keep problems from crushing me. I refused to worry about more than one thing at a time, and I would not let useless fretting about a problem, no matter how important, keep me from sleeping. This is easier said than done. I did it through my own brand of self-hypnosis. I may have read a book on the subject, I don’t remember, but in any case I worked out a system that allowed me to turn off nervous tension and shut out nagging questions when I went to bed. I knew that if I didn’t, I wouldn’t be bright and fresh and able to deal with customers in the morning. I would think of my mind as being a blackboard full of messages, most of them urgent, and I practised imagining a hand with an eraser wiping that blackboard clean. I made my mind completely blank. If a thought began to appear, zap! I’d wipe it out before it could form. Then I would relax my body, beginning at the back of my neck and continuing on down, shoulders, arms, torso, legs, to the tips of my toes. By this time, I would be asleep. I learned to do this procedure rather rapidly.”
Expanding the menu beyond hamburgers
In his books, Howard Schultz has written about the tensions between purism and growth for Starbucks. There were also differing views about whether to expand McDonald’s menu beyond hamburgers.
In the case of McDonald’s, the first proposal was to add a fish sandwich. Kroc writes “My reaction when Lou first broached the fish idea to me was, “Hell no! I don’t care if the Pope himself comes to Cincinnati. He can eat hamburgers like everybody else. We are not going to stink up our restaurants with any of your damned fish!
"But Lou went to work on Fred Turner and Nick Karos. He convinced them that was either going to have to sell fish, or sell the store. So they went through a lot of research, and finally made a presentation that convinced me."
Another addition was the Hot Apple Pie. Kroc writes “Our Hot Apple Pie came after a long search for a McDonald’s kind of dessert. I felt we had to have a dessert to round out our menu. But finding a dessert item that would fit readily into our production system and gain wide acceptance was a problem. I thought I had the answer in a strawberry shortcake. But it sold well for only a short time and then slowed to nothing. I had high hopes for pound cake, too, but it lacked glamor. I was ready to give up when Litton Cochran suggested we try fried pie, which he said is an old southern favorite. The rest, of course, is fast-food history. Hot Apple Pie, and later Hot Cherry Pie, has that special quality, that classiness in a finger food, that made it perfect for McDonald’s.”
Sparing with the company dime
Like Sam Walton, who flew economy class while being one of the richest people in the world, Ray Kroc was also sparing with the company dime. Kroc writes “I purchased a fleet of nineteen customized Greyhound buses, outfitted with kitchens, restrooms, telephones, color television, and lounge style seating, and I rent these to the corporation for one dollar a year….I also bought the company plane, a Grumman Gulfstream G2 jet. McDonald’s rents it from me for the same low price, one dollar a year.”
Brad Stone, in The Everything Store, mentions that Jeff Bezos always lets passengers in the company jet know that Bezos is personally paying for the jet, not the company. Apparently Larry Page and Sergey Brin personally paid for the Google jet too.
Kroc has a humorous, sparky writing style. About San Bernadino, the site of the first McDonald’s, Kroc writes “Now San Bernadino is on the edge of the desert, remember, and you could probably put its average annual precipitation in a martini glass and still have room for an olive.”
About hamburgers, Kroc writes “Consider, for example, the hamburger bun. It requires a certain kind of mind to see beauty in a hamburger bun. Yet, is it any more unusual to find grace in the texture and softly curved silhouette of a bun than to reflect lovingly on the hackles of a favorite fishing fly? Or the arrangement of textures and colors in a butterfly’s wing? Not if you are a McDonald’s man. Not if you view the bun as an essential material in the art of serving a great many meals fast. Then this plump yeasty mass becomes an object worthy of sober study.”
On real estate “Finding locations for McDonald’s is the most creatively fulfilling thing I can imagine. I go out and check out a piece of property. It’s nothing but bare ground, not producing a damned thing for anybody. I put a building on it, and the operator gets into business there employing fifty or a hundred people, and there is new business for the garbage man, the landscape man, and the people who sell the meat and buns and potatoes and other things. So out of that bare piece of ground comes a store that does, say, a million dollars a year in business. Let me tell you, it’s a great satisfaction to see that happen.”
On the foundation that his scientist brother runs “My brother Bob talks the language of science. He’s pedantic and painstaking; he’s willing to get fewer things done in order to make fewer mistakes. I’m impatient. I’m willing to make a few mistakes in order to get things done. So our thinking is miles apart on the handling of money for the foundation. I never realized it could be so damned difficult to give away money. Our grants seem to take endless study and deliberation. Yet I must say that Bob has managed to fund some important research. We have had many highly esteemed scientists and physicians attend our conferences, and the results of their sessions have been published as books and as supplements to the most prestigious medical journals.”