How the McDonald’s Brand Took Over the World

As Ray Kroc sat in his car, he saw a miracle happen. The parking lot was full, the lines were long, and customers were leaving with armfuls of food and smiles on their faces. Kroc stopped a few of them to see what was going on, “You can get the best hamburger you have ever had for fifteen cents. And you do not have to wait or tip the waitresses.” He had traveled all over the country as a milkshake vending machine salesman, visiting countless restaurants of all kinds. But he had never seen a vending machine like this. It was 1954, fourteen years after the McDonald brothers opened their little burger drive-in in the town of San Bernardino, California.

Brothers Mac and Dick McDonald had founded the fast-food stand in 1940, but were not truly successful until eight years later. At that time, they turned the kitchen into a mechanized assembly line, reducing each step of the process to the bare essentials with minimal effort. They did away with servers and indoor seating, replacing them with a system where customers order directly through outdoor service windows. By focusing on keeping costs down, the brothers were able to keep prices low for a consistently good product. Inevitably, that led to high customer turnover. “Our whole concept was based on speed, low prices and volume,” Dick McDonald recalls. “By 1954, they had randomly licensed ten other drive-ins, many of which were poorly run and had no consistent system. They were McDonald’s in name only.

VISIONARY at it finest

This is where Ray Kroc, a spunky salesman from Illinois, came in. Kroc was a visionary. No matter what kind of business he pursued throughout his life, he dreamed big. From selling milkshake machines to selling real estate in Florida, his goal was always to be the best. He was not satisfied with second place.

When he pitched his franchise idea to the McDonald brothers (he had already tried Carl Karcher and Harry Snyder), he did not hesitate to think big. “Visions of McDonald’s restaurants at intersections across the country flashed through my mind,” Kroc later recalled. At first, the brothers politely declined. They were content with the decent income they were earning from operating a single store in California. Kroc persisted, explaining that he would help open all the stores and do the hard work, while the brothers would just sit around and collect the royalties. They agreed. A contract was drawn up that same day, and Kroc headed back to Chicago.

Before he could start selling franchises, Kroc had to set up his own McDonald’s to perfect all the operations. He went fifty-fifty with a friend to a store in Des Plaines, Illinois, which opened its doors on April 15, 1955. All the mechanisms for saving money and time had to be the same – the layout of the frying plates and deep fryers was critical to the efficiency of the operation.

Most importantly, Kroc placed a high priority on consistent food quality. Initially, they had some difficulty replicating the success of the San Bernardino store. It turned out that the potatoes left out in California yielded very different fries than in Illinois. Kroc’s attention paid off: “Ray, you know you are not in the hamburger business at all,” one of his suppliers told him. “You are in the French fry business. I do not know how you do it, but you have got the best fries in town, and that’s what convinces people to come to your store.”

Although the Des Plaines store was not doing as well as the McDonald’s store in California, it had been making money from day one, and Kroc now had the confidence to recruit franchisees. A little more than a year after opening in 1955, there were already eleven franchised stores across the country. Another year later, twenty-five more stores were opened, marking the beginning of breakneck growth.

Arrangement that has not generated income turn over

Through his arrangement with the McDonald’s brothers, Kroc earned just 1.9 percent of the gross revenues of all McDonald’s franchises, and 25 percent of that went to the brothers. (In 1960, McDonald’s earned only $159,000 despite systemwide sales of $75 million.) Something had to be done to generate additional revenue. Harry Sonneborn, the company’s financial genius, came up with the idea of buying the real estate under the franchise locations and leasing it back to the operator. Franchise Realty Corporation was formed in 1956 to act as a landlord for current and prospective franchisees. As operators began paying higher and higher monthly rents, Franchise Realty soon became one of McDonald’s largest profit generators.

From the owner of a franchise to the owner of the entire company

in 1959, the decision was made for the company to build and operate approximately ten additional locations in addition to the franchise operations. To finance the expansion, they obtained a $1.5 million loan from three insurance companies in exchange for 22½ percent of McDonald’s stock.

After the first McOpCo (McDonald’s Operating Company) store opened, the loan was to provide the foundation for McDonald’s rapid growth in the 1960s.

Despite the new income from McOpCo and Franchise Realty, Kroc was unhappy with his arrangement with the McDonald brothers. in 1961, he asked them to name their price and bought the company and the name for $2.7 million. At the time, he balked at the price and thought the brothers’ offer was outlandish. But in retrospect, the acquisition would prove to be one of the best investments Kroc ever made.

Kroc stepped down as chairman in 1968, but continued to play an active role in the company. Despite the poor economy in the 1970s, he urged company executives to increase the pace of growth. “Damn it, when times are bad, you should build!” Kroc shouted to his executives. “Why wait until things pick up so you can make everything more expensive?”

Top of the world

At the time of Kroc’s death in 1984, the McDonald’s system had grown to nearly eight thousand restaurants in thirty-two countries around the world. Using the same methods Kroc had adopted and perfected from the McDonalds brothers, the company continues to maintain its role at the top of the fast-food world. In 2008, it narrowly surpassed Subway in the number of stores, with 31,672.

With average sales per store of $2.2 million, McDonald’s remains the undisputed market leader with system-wide sales of more than $70 billion. That seventy billion in sales came from serving over twenty-one billion customers in 2008 – meaning that every person in the world visited a McDonald’s an average of three times last year. Even Ray Kroc could not imagine that.

Great leadership and luck works in any sucess story

So, aside from great leadership and the luck that is part of any success story, how did McDonald’s achieve these results? When you look at the company’s history, three elements stand out: its franchising model, its leadership in cost and time efficiencies, and its ability to put those benefits into the minds of its customers.

If you have a good brand and a model that resonates well with customers, the concept of franchising is very attractive to any business person. You provide the name, image, procedures, product and some training, the rest of the work is done by the franchisees, and you receive permanent royalties. The capital required to grow a franchising business is minimal, which makes it even more attractive from a return on investment standpoint.

HAMBURGER RESTAURANT BUSINESS

At McDonald’s, Ray Kroc made sure franchising was front and center from day one. “The company is in the hamburger restaurant business, and its vitality depends on the energy of many individual owners,” Kroc reminded his colleagues. “We are an organization of small business owners. As long as we give them a fair deal and help them make money, we will be richly rewarded.” During his tenure at McDonald’s, Kroc maintained a delicate balance between top-down, system-wide standards and a decentralized, entrepreneurial environment at both the franchise and corporate levels.

Throughout its history, McDonald’s was closely involved in the development of its operators’ locations. When Kroc left the company, franchisees were required to initially work five hundred hours in another location and attend Hamburger U, the company’s training facility for managers and operators. Sometimes the company looked for locations for its operators years in advance.

The Secret Source.

But the franchise relationship was a two-way street. Over the years, operators developed successful additions to the menu such as the Big Mac, Filet-O-Fish and Egg McMuffin. in 1963, the marketing idea of two Washington, D.C., operators was soon applied to the entire chain and has been promoting the company ever since. Ronald McDonald, the “Hamburger Happy Clown,” was invented by Willard Scott, a local television announcer, to appeal to children and their families. Kroc, who has always been a fan of catchy marketing gimmicks, loved the idea.

But without a great concept, franchising falls apartment on its face. McDonald’s ability to have both the fastest and most cost-effective processes gave it a lasting advantage over competing fast-food chains.

In the 1960s, the company recognized the need for more sophisticated mechanical devices and electronic aids to speed food preparation and make products more consistent. The McDonald’s Research and Development Laboratory was established to solve these problems.

Technicians and engineers worked on everything from a dispenser that dispensed just the right amount of ketchup every time to the Fatilyzer – a testing device that allowed employees to analyze meat deliveries as they were delivered.

Kroc was relentless when it came to cutting costs and improving operations. “Perfection is very hard to achieve, and perfection was what I wanted at McDonald’s. Everything else was secondary to me.”

Autobiography of Kroc’s

In Kroc’s autobiography, Grinding it Out, he succinctly describes some of the reasons McDonald’s works so well with both customers and franchisees:

We wanted to build a restaurant system that would be known for food of consistently high quality and consistent preparation methods. Our goal, of course, was to secure business based on the reputation of the system, not on the quality of an individual store or operator. This would require an ongoing program of training and support for operators and constant review of their performance.

The key to uniformity would lie in our ability to provide preparation techniques that operators would accept because they were better than the methods they could come up with on their own.

In the eyes of customers, creating a uniform and consistent product is one of the most important aspects of McDonald’s success. No matter where you go, once you see the ubiquitous “golden arches,” you know exactly what you’re going to get. Especially if you’re in a hurry, why risk eating somewhere else? McDonald’s isn’t known for the high quality of its food, service or atmosphere but as its huge customer base shows, McDonald’s is the clear leader in cost, speed and consistency.

Remember that while franchising opens up many opportunities, it also does not always go smoothly. So consider how you can apply McDonald’s key strategies to your own business, and be able find your unique selling proposition and maximize it!