Thursday, 2 November 2017

THE MAKING OF MCDONALD’S

We love McDonald’s hamburgers, right? OK, most or at least a good percentage of us do. It’s, of course, the fast-food restaurant chain that gave us the golden arches. It also gave us the Big Mac and its legendary slogan: “Two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun.”

How did McDonald’s get started in the first place? Enter the expertise of remarkable entrepreneur Ray Kroc.

Ray Kroc, 1976 (US Public Domain)
Raymond Albert Kroc was born to poor Czech parents in Chicago, Illinois on October 5, 1902 and brought up in the suburb of Oak Park. Dropping out of school at 15, in the midst of World War I, he lied about his age and took training with the Red Cross as an ambulance driver with the hope of going overseas. A fellow trainee in the same course was Walt Disney. The two became fast friends during their schooling at Sound Beach, Connecticut. The war ended before either one saw overseas duty, however, with Disney arriving in Europe just as the armistice was signed.

For the next several years, Kroc took on various jobs: a pianist and DJ for a local Oak Park radio station, then later as a paper cup salesman. It was not until he began working for a company called Prime Castle selling milkshake mixers that something clicked, enough to change his life forever. This particular machine could mix five drinks at once, saving any restaurant owner a ton of time. When one of his buyers asked for eight machines in 1954, Kroc decided to pay the purchasers a visit. They were brothers Richard and Maurice McDonald who owned a string of restaurants called McDonald’s that specialized in hamburgers, fries, pies, milkshakes and soft drinks in the San Bernardino area of California, and had come a long way since opening their first store in 1940.

Kroc flew out to the Sunshine State and was immediately impressed by the McDonald brothers success and efficiency in making “assembly line” hamburgers--a restaurant version of Detroit’s auto mass-production system. Kroc wanted in on the business, offering to work as a franchising agent in return for a profit cut. Before Kroc, the brothers franchised only their idea, rather than their McDonald’s name. That would soon change. Kroc saw a “cash cow,” if there ever was one.

The following year, he became McDonald’s Corporation president and opened the first restaurant using the McDonald’s name outside California in Des Plains, Illinois. Furthermore, he quickly created a corporation that purchased suitable restaurant sites for future McDonald’s franchisees. By 1960, he was largely responsible for establishing 200 franchises nationwide. But Kroc was looking for more out of the business and nothing was going to stop him, despite the brothers’ attitude in staying small and not wishing to move forward or were simply too afraid to. Not so with Kroc. In 1961, he bought the business rights to the McDonald brothers operation for $2.7 million.

In the deal, the McDonald brothers were supposed to receive an annual royalty of 0.5%. However, this part of the deal was only a handshake. Due to disputes over how the process was handled and the real estate rights to the original McDonald’s restaurant in San Bernardino, which the McDonald brothers did not want to transfer to their partner, Kroc refused to honor the handshake royalty portion because it wasn’t in writing. The brothers kept the restaurant and called it “The Big M” because they no longer had the McDonald’s naming rights. Kroc got even. In response, he had a new McDonald’s restaurant built near the original one and with its much-larger sales left the McDonald brothers in the dust, forcing their original store out of business within six years.

In 1961, Kroc sent a letter off to his old friend Walt Disney. “I have recently taken over the national franchise of the McDonald’s system. I would like to inquire if there may be an opportunity for a McDonald’s in your Disney Development.” The deal fell through, however. One story is that Disney wanted to increase the price of fries from ten to fifteen cents and keep the five-cent profit for himself. To that, Kroc said no.

McDonalds 1990s logo (US Public Domain)
In full charge of the McDonald’s chain with the golden arches, Kroc tweaked the assembly line method further by standardizing the meals to the point that no matter where one bought their burgers and fries, they wouldn’t taste any different than another franchise even if it was across the country. Franchise owners went through a vigorous training course in “Hamburger University” at the head office in Elk Grove, Illinois, where they received certificates in “hamburgerology with a minor in French fries.” Most employees were teenagers looking for part-time jobs. All employees had to be prompt with their service, neat in appearance and courteous.

In early 1974, Kroc retired as McDonald’s CEO and bought the San Diego Padres at a steal for $12 million, once he heard they were planning a move to Washington, D.C. (after five disappointing years in the majors on the West Coast). Although they lost 102 games to only 60 wins in 1974, the Padres attracted a million fans for the first time in their franchise and increased their attendance for the next several years, peaking at 1.6 million twice and 1.5 million on three other occasions, without really being that good on the field. Their best season was 84-78 in 1978, the first time seeing 1.6 million fans.

Ray Kroc died of a heart attack in San Diego on January 14, 1984 at the age of 81. At that time, he had a personal wealth of $500 million. Not bad for someone who had never finished basic school. Instead, he established his own success by attending the school of hard knocks. “I guess to be an entrepreneur you have to have a large ego, enormous pride,” he once said, “and an ability to inspire others to follow your lead.”

Upon his death, McDonald’s had 8,000 restaurants in the United States and 33 other countries. Global sales were $8 billion in 1983. Kroc passed away a year too soon because the Padres had their best year in 1984: They won 92 games, attracted 1.9 million hometown fans, took the National League pennant, and fought their way to the World Series, only to lose in five games to the American League Detroit Tigers.

I remember when McDonald’s came to my hometown of Regina, Saskatchewan in the early 1970s. Their radio and TV ads got right to point: Get this, you could buy their basic burger, fries, and a drink and still get change back from your dollar. Tell that to kids nowadays and hear their reaction.

Today, 30,000 fast-food McDonald’s outlets are in more than 100 countries, with about 15 percent company owned. Most make an average yearly profit of between half-a-million to a million dollars.

2 comments:

  1. IN THE EARLY 1970s I WAS A STOCKBROKER IN FLORIDA WHERE A WOMAN CLIENT OF THE FIRM, WHO HAD WORKED AS THE SECRETARY TO RAY KROC, HAD ACCUMULATED OVER ONE MILLION SHARES OF McDONALD'S STOCK ...
    ON ANY GIVEN DAY SHE HAD A TRADING ACCOUNT OF ANYWHERE FROM 30 TO 50 MILLION OR HIGHER ...
    LIKE KROC, SHE WAS TOTALLY UNEDUCATED BUT KNEW THIS WAS THE THING TO DO IN BUILDING A LARGE HOLDING IN THE CORPORATION.

    ReplyDelete