Grinding It Out

by Ray Kroc

  In a few days, Harry called back and said he could come to work for $100 a week take-home pay. It was an offer I couldn’t refuse. Good thing for McDonald’s that I didn’t, because the company could never have grown as it did without the unique vision of Harry Sonneborn.

  Harry was born in Evansville, Indiana. His parents died when he was very young, and he was brought up by an uncle who had a men’s clothing factory in New York. Harry loved New York City. He grew up there in that climate of reverence for literature and art that is typical of so many Jewish families. But somehow, after college at the University of Wisconsin, he landed in Chicago to stay. He never lost that New Yorker aloofness, though, and this made me bristle sometimes. Yet I had to admire the way he studied the legal and financial problems we were steaming into. He immersed himself in stacks of books and learned the ins and outs of contracts and financial maneuvers as well as the lawyers and the bankers. We were breaking new ground, and we had to make a lot of fundamental decisions that we could live with for years to come. This is the most joyous kind of executive experience. It’s thrilling to see your creation grow. It’s dangerous, of course, because a small mistake can be absolutely ruinous. But in my definition, an executive is a person who rarely makes mistakes.

  One of the basic decisions I made in this period affected the heart of my franchise system and how it would develop. It was that the corporation was not going to get involved in being a supplier for its operators. My belief was that I had to help the individual operator succeed in every way I could. His success would insure my success. But I couldn’t do that and, at the same time, treat him as a customer. There is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other. Once you get into the supply business, you become more concerned about what you are making on sales to your franchisee than with how his sales are doing. The temptation could become very strong to dilute the quality of what you are selling him in order to increase your profit. This would have a negative effect on your franchisee’s business, and ultimately, of course, on yours. Many franchise systems came along after us and tried to be suppliers, and they got into severe business and financial difficulty. Our method enabled us to build a sophisticated system of purchasing that allows the operator to get his supplies at rock-bottom prices. As it turned out, my instinct helped us avoid the antitrust problems some other franchise operations got into.

  Another judgment I made early in the game and enforced through the years was that there would be no pay telephones, no jukeboxes, no vending machines of any kind in McDonald’s restaurants. Many times operators have been tempted by the side income some of these machines offer, and they have questioned my decision. But I’ve stood firm. All of those things create unproductive traffic in a store and encourage loitering that can disrupt your customers. This would downgrade the family image we wanted to create for McDonald’s. Furthermore, in some areas the vending machines were controlled by the crime syndicate, and I wanted no part of that.

  Our first three franchises were sold in Fresno, Los Angeles, and Reseda, California. Those stores opened the year after the Des Plaines operation got started. It was easier to swing deals in California, because landlords could be shown the successful operation the McDonald brothers had in San Bernardino and, consequently, were more readily persuaded to put up our kind of building for lease to my franchisees. It was painfully slow going, like trying to ice skate on bare concrete, but we worked like mad, and in the last eight months of 1956 we opened eight stores, only one of them in California. The first franchise in the Midwest was in Waukegan, Illinois, a city on the shore of Lake Michigan about forty miles north of Chicago. It was an incredible experience. The landlord was a banker, and he was very skeptical about the prospects of our fifteen-cent hamburger business. He really didn’t think our operator would be able to make the rent. The franchisee was doubtful, too. I asked Ed MacLuckie to go up and help open the store, and he ordered all the supplies. Before long I got a phone call from the operator, and he was madder than a hornet. “You guys are trying to ruin me!” he yelled. “MacLuckie has got more meat and buns in this place than I’ll be able to use in a month.…” My, how he raged! But that store took off like a barn fire the day it opened, May 24, 1956, and Ed had to make a panic run back to the Des Plaines store to borrow enough meat and buns to get Waukegan through the weekend. The operator, needless to say, was happy to eat his words. The owner of the real estate however, was convinced that I’d pulled a fast one on him. I don’t think a day of that twenty-year lease passed that he didn’t wish he’d demanded a lot more. Of course, beyond my faith in the fast-food concept, I had no better idea than he did about how the location was going to do. I’ve always dealt fairly in business, even when I believed someone was trying to take advantage of me. That’s one reason I have had to grind away incessantly to achieve success. In some ways I guess I’m naive. I always take a man at his word unless he’s given me a reason not to, and I’ve worked out many a satisfactory deal on the strength of a handshake. On the other hand, I’ve been taken to the cleaners often enough to make me a certified cynic. But I’m just too naturally cheerful to play that role for long, even after dealing with the likes of Clem Bohr.

  Clem was one of the more charming con men I met when we were building McDonald’s. He was a contractor from Wisconsin, and he had approached Harry Sonneborn with a proposal that sounded rather appealing. Bohr said he wanted to travel around and find good locations for McDonald’s restaurants in different parts of the country. He would purchase the land and have his firm erect a building on it, which he would then lease to us. We agreed, and Bohr marched off into the suburbs of distant cities to look for land.

  Harry and I gave little further thought to Clem Bohr, because we were too busy with our own projects. The biggest of these was the move that made possible McDonald’s dramatic growth. It started our evolution as a company whose business was developing restaurants and selling franchises to operate them.

  We agreed that we wanted McDonald’s to be more than just a name used by many different people. We wanted to build a restaurant system that would be known for food of consistently high quality and uniform methods of preparation. Our aim, of course, was to insure repeat business based on the system’s reputation rather than on the quality of a single store or operator. This would require a continuing program of educating and assisting operators and a constant review of their performance. It would also require a full-time program of research and development. I knew in my bones that the key to uniformity would be in our ability to provide techniques of preparation that operators would accept because they were superior to methods they could dream up for themselves. But research and development and a staff to supervise and service operators effectively takes money.

  The experience of Tastee-Freeze and Dairy Queen, two prominent franchising firms in the country at that time, and our own sense of direction with the units in California led to the conclusion that the only practical way for McDonald’s to grow as we envisioned would be for us to develop the restaurants ourselves. Being in the restaurant development business would mean that we could plan a strong system in which locations could be developed by McDonald’s as part of an overall, long-range, nationwide marketing program.

  That idea was exciting, wow! It appealed to my salesman’s instinct, because, obviously, it would make the right to operate a McDonald’s restaurant far more valuable to a potential operator than if we were franchising only a name. But building dream castles was one thing; actually getting into the restaurant development business was a seemingly insurmountable problem. Harry’s solution, the formation of Franchise Realty Corporation, was to my mind a stroke of financing genius.

  Franchise Realty was the supreme example of a guy putting his money where his mouth is. I did a lot of talking about the ideal way to develop McDonald’s with the kind of quality and uniformity that would insure our success. And when Harry came up with a way to make it possible
, I backed it by going into hock for everything I had—my house, my car, you name it. Talk about grinding it out! I felt like Samson with a fresh haircut. But that dream of what the company could be sustained me.

  We started Franchise Realty Corporation with $1,000 paid-in capital, and Harry parlayed that cash investment into something like $170 million worth of real estate. His idea, simply put, was that we would induce a property owner to lease us his land on a subordinated basis. That is, he would take back a second mortgage so that we could go to a lending institution (in the early days it was a bank) and arrange a first mortgage on the building; the landlord would subordinate his land to the building. I must admit that I was a bit skeptical: Why would a landlord want to do that? But I let Harry plunge ahead without interference.

  I believe that if you hire a man to do a job, you ought to get out of the way and let him do it. If you doubt his ability, you shouldn’t have hired him in the first place. I knew that Harry had schooled himself thoroughly in the fundamentals of leasing agreements. In addition to the volumes he pored over, he hired a consultant from Washington, D.C., an expert in real estate deals named Dreyfus. Harry brought this fellow to Chicago and spent a week talking to him at $300 a day. June Martino was afraid I was going to blow my top and throw Harry and his consultant both into the street. But that was the farthest thing from my mind. I know that you have to spend money to make money, and as far as I was concerned, Harry was simply doing the job I’d hired him to do.

  One of the reasons his subordinated lease idea worked so well was that in the late fifties we didn’t have the proliferation of franchise operations and the fierce competition for commercial fringe property that developed in the course of the next twenty years. Another reason was that both Harry and I were pretty good salesmen, and we could romance a property owner with the notion of earning at least a little something from his vacant land.

  * * *

  This was the beginning of real income for McDonald’s. Harry devised a formula for the monthly payments being made by our operators that paid our own mortgage and other expenses plus a profit. We received this set monthly minimum or a percentage of the volume the operator did, whichever was greater. After a time we began realizing substantial revenues from the formula, and we could see that we were merely nibbling around the edges of this huge hamburger frontier we were exploring.

  I recall that Harry made a trip to San Bernardino about the time we were really starting to roll, and Dick McDonald asked him what he thought the future of McDonald’s would be. Harry told him that one day this company would be bigger than F. W. Woolworth. Dick really did a double take at that. He told me later, “I thought you had a genuine nut on your hands, Ray.” But Harry knew exactly where he wanted to go, and he knew how to get there.

  In one of the impromptu meetings that Harry, June, and I frequently had after hours in the office, or in my home, Harry said, “We are doing fine with these bank mortgages, but if we are to gain any stature in the financial community, we are going to have to get some big institutional investors to back us.” I agreed, and Harry went after the insurance companies. The first deal he made was with All-American Life Insurance Company in Chicago. They agreed to arrange a number of mortgages for us. Then he succeeded in lining up Central Standard Life, also in Chicago.

  This was great news. We were moving ahead, gathering momentum; we could see the day that we would start making a profit. I felt deeply indebted to Harry and June. They worked tirelessly, and I knew that both of them were neglecting their family obligations completely so that they could stay on top of things in our rapidly building operation. June later told me that all the while her two boys were growing up, she never made it to one of their birthday parties or graduation ceremonies, and there were several times that she had to be in the office on Christmas. I knew what she and Harry were doing, because I was in the same boat. It was a little easier for me, perhaps, because of the continuing cold war between Ethel, my daughter, and me. My total commitment to business had long since been established in my home. But that made me feel all the more grateful toward Harry and June. I couldn’t give them raises to compensate them for their past efforts, but I could make sure that they would be rewarded when McDonald’s became one of the country’s major companies, which I never doubted it would. I gave them stock—ten percent to June and twenty percent to Harry—and ultimately it would make them rich. At the time, of course, Chicago Transit Authority tokens would have been worth more.

  Every once in a while when I walked past Harry’s office, I would ask, “By the way, Harry, what do you hear from Clem Bohr?”

  “Just had a phone call from him the other day,” Harry would say. “He seems to be cooking with gas. He’s got a location in Cleveland that he’ll start building on any day now.” Next Bohr got a site in Wisconsin, and then we had reports that he’d acquired two pieces of property in downstate Illinois. Each time I got one of these bulletins, I’d say, “Cripes, that’s great, Harry; wonderful,” and we’d talk about what a terrific guy Clem Bohr was.

  Cooking with gas was a popular expression at the time, but it was an in-joke with us. When somebody was cooking with gas around our place it meant that he was really doing everything right. This stemmed from our experience in patterning our stores on the plans provided by the McDonald brothers. Jim Schindler insisted on using gas units for making french fries instead of the electric friers the McDonald boys were using. Gas proved to be more efficient for this purpose. It was cheaper, and we got a better product. So we tried to “cook with gas” in all our operations at McDonald’s.

  The experience with the Waukegan store and the others we opened during the summer and fall of 1956 brought home to me the fact that I needed a good operations man in corporate headquarters. I was committed in each franchise agreement to furnish the licensee with experienced help to train his crew and get the McDonald’s system working in his store. I couldn’t afford to bring Art Bender from California each time, and I couldn’t spare Ed MacLuckie from the Des Plaines store very often, so I had to give some of the operators a $100 discount in lieu of the promised assistance. This was not good at all, because insistence on quality has to be emphasized in every procedure, and every crew member must be drilled in the McDonald’s method of providing service. These basic elements will insure success for a store, unless its location is unspeakably bad, and we have had only a few instances of that in more than twenty years. But the fundamentals do not spring forth, self-evident and active, from the brow of every former grocery clerk, soda jerk, military man, or specialist in one of the hundreds of other callings who join the ranks of McDonald’s operators. Quite the contrary; the basics have to be stressed over and over. If I had a brick for every time I’ve repeated the phrase QSC and V (Quality, Service, Cleanliness, and Value), I think I’d probably be able to bridge the Atlantic Ocean with them. And the operators need the stress on fundamentals as much as their managers and crews. This is especially true of a new location.

  So I needed someone to handle operations. Harry and June agreed, but since they didn’t come into contact with the day-to-day routine in stores as I did, they were at a loss for suggestions. “God, you’d need a real dynamo, Ray,” said June Martino. “You haven’t got anybody with the experience of an Art Bender or an Ed MacLuckie. Who could you get?”

  “Never mind,” I assured her. “I think I know just the guy.”

  8

  Fred Turner.

  That was the name I had in mind for the position of corporate operations man. I have a mental snapshot on file that shows Fred, who one day would become President and then Chairman of the Board of McDonald’s, as he looked when he first walked into my office, in February 1956. He was little more than a kid, twenty-three years old. He had a baby face and the most infectious grin I’d seen in years. He and another young fellow named Joe Post came in to answer an ad I had run in the Chicago Tribune for franchisees. Fred and Joe and two other members of their families had formed what they called th
e Post-Turner Corporation. Their aim was to buy a McDonald’s franchise, which Fred and Joe would operate. I gladly took their down payment on the license fee and suggested that it would be a good thing if they learned the ropes by working in the Des Plaines store while waiting to get their own location going. Fred took me up on it. He went to work immediately for $1 an hour. He was also getting $85 a week from his family group, an advance they agreed to consider part of the cost of getting into the business, although Fred was obligated to pay it back eventually.

  Fred was a terrific worker. He had a natural feel for the rhythms and priorities that make a McDonald’s restaurant click. This talent quickly showed up in the reports I got from Ed MacLuckie. Even Art Jacobs, who spent very little time around the store, noticed Fred. I could see he was a born leader, and I was happy that he was going to be one of my franchisees. At least I thought he was until the Post-Turner Corporation began having problems. One of their basic rules was that the decision on where their franchise was to be located had to be unanimous. They could get two votes on a number of sites, and, occasionally, three. But never could all four agree.

  I gathered that Fred was getting pretty disgusted with the situation. After a time he quit accepting the family group’s subsidy and took a second job selling Fuller Brushes. He was afraid they never would find a location, and he didn’t want to go deeply in debt to the enterprise. Late in the fall of 1956, Bill Barr, operator of a newly opened store on Cicero Avenue in Chicago, asked if he could have Fred as his manager.

  “Yes, you can,” I told him. “But remember that I want him in the corporation. When the time comes, I am going to take him.”

  The time came sooner than I anticipated. We had a difficult situation developing down in Kankakee, Illinois, with one of the pieces of property we were acquiring for Franchise Realty. We needed an operator there, so I sent Harry Sonneborn around to talk to Fred to see if he would take that store and run it for us. He agreed, but then the deal fell through, and I asked him to come to work downtown instead.