Grinding It Out

by Ray Kroc

  By the end of his first year in our office, Fred Turner had pretty much taken over the purchasing for us. Another thing he’d done in weeks when there were no stores opening was to visit existing stores and chat with the operators. He went down to Urbana first, then up to Waukegan, spending a day in each store. When he came back he gave me a little checklist he’d devised to show how these operations were doing. That list evolved into the format for our field consultations, which today is a vital part of our system-wide quality assurance.

  I’ve sometimes wondered what would have happened if the Post-Turner Corporation had found a site all four partners could agree on and Fred had become an operator. I’m sure he would have done extremely well, just as other members of the group did: Joe Post, for example, is an operator in Springfield, Missouri. He and his wife have three stores, including one on the city’s new Battlefield Mall that has five dining rooms on different levels, with fireplaces and fine paintings. It’s a veritable Taj Mahal among McDonald’s restaurants. Fred would have carved out an empire for himself no matter where he’d gone. I am sure of that, not only because I know him but because I know his wife. Patty Turner has allowed her husband to be successful. I know that she would have been right in there pitching with him if he’d chosen to become an operator. Since a McDonald’s restaurant is a prime example of American small business in action, the husband-wife team is basic for us. Typically, the husband will look after operations and maintenance while his wife keeps the books and handles personnel. This mutual interest extends into all levels of the company, and I’ve always encouraged corporate executive wives to get involved in their husbands’ work—two heads are better than one, whether a guy is manning a griddle and sweating out getting started in his own store or shuffling papers behind a fancy desk.

  9

  I knew something was drastically wrong as soon as I heard the tone of June Martino’s voice on the telephone. She said Harry Sonneborn had to talk to me immediately. I felt a queasy foreboding that this problem would have something to do with Clem Bohr. Harry and I had discussed Bohr and his recent strange behavior just before I’d left Chicago to look over some new locations on the East Coast.

  Bohr now had eight sites on which he had McDonald’s buildings in various stages of completion. He’d been giving us enthusiastic reports all along, but suddenly he’d grown remote and uncommunicative. He didn’t return Harry’s calls, and June had been trying to reach him for a couple of weeks without success.

  Harry came on the line from our attorney’s office. “Ray,” he said, “I’m afraid we are in deep trouble.”

  “Don’t tell me … is it Clem Bohr?” I asked.

  “You guessed it. We have had mechanic’s liens filed against us on the locations he’s leased to us. The son of a bitch never got clear title to any of this property. He never had the things financed. Now the owners are coming back on us.” My reply to that probably melted a few miles of Bell System’s wires. Suddenly our little company’s promise of prosperity looked more like the brink of bankruptcy. “What the hell are we going to do, Harry?” I shouted. “How much money are we talking about?”

  “Well, Ray, it’s going to be at least $400,000,” he said.

  “Jesus!”

  “Ray, I have an idea that I think could pull us out of this,” he said. “We can ask for a loan from our McDonald’s suppliers, I figure $300,000. Then I know a fellow in Peoria named Harry Blanchard. He married a widow who owns a big brewery, and he has some money to lend. I think he’ll help us out.”

  It made sense to me. If anyone stood to gain by our success and suffer if we failed, it was our suppliers. They knew McDonald’s restaurants possessed the potential of becoming super customers, and they knew we played straight. So I told Harry, by God, to go full speed ahead with it. He did, and it worked like a charm. Lou Perlman of Perlman Paper Company (later to become the Martin-Brower Corporation), Les Karlstedt of the Elgin Dairy Company, Louis Kuchuris of Mary Ann Baking Company, and Al Cohn of CFS Continental all agreed to make loans. Harry’s friend Blanchard and his associate, Carl Young, also lent us money.

  I don’t remember what happened to Clem Bohr. It seems to me that he went into the hamburger business in competition with us and lost his shirt. That happened to a number of sharpies who tried to spin off an operation they’d started with us in order to build a personal empire. Bohr probably would have done very well if he’d stuck by his original aggeement and been less greedy. The situation he forced us into is a good example of how adversity can strengthen you if you have the will to grind it out. It put us in a precarious financial condition, but we were eight fine locations to the good, and the spirit of mutual support it fostered with our suppliers would be very beneficial in the future. Perhaps the most positive result of the Bohr fiasco, however, was that it gave us courage to borrow heavily so we could expand McDonald’s more rapidly.

  My net worth in 1959 was about $90,000. This made it rather difficult to borrow money in the big amounts that Harry and I had in mind. I recall asking David Kennedy, chairman of the board of Continental Illinois National Bank of Chicago, for a loan. The man who would later become Secretary of the Treasury under Richard Nixon listened politely to my sales pitch on McDonald’s vitality and growth potential. Then he asked to see my balance sheet. After glancing over the single page, he stood up, and I knew the interview was over. He was kind about it, and I suppose I really couldn’t blame him. Yet I resented the rebuff, and you can be sure that I did my banking elsewhere from then on.

  About this same time, Harry had been approached by an insurance salesman named Milton Goldstandt, who said he could arrange financing for us with the John Hancock Life Insurance Company. He wanted a pretty hefty fee for arranging the deal, plus a certain portion of our stock, and I was opposed to this. But Harry wanted to pursue it anyhow and see where it led.

  First thing I knew, Goldstandt had brought in an older gentleman named Lee Stack, who had been a financial vice-president of the John Hancock Company and had retired to become a limited partner with Paine, Webber, Jackson & Curtis, the stockbrokers. Harry Sonneborn and Lee Stack began flying all over the damned country cooking up financial deals for McDonald’s. As it turned out, I didn’t have to worry about giving any stock to Goldstandt, because the big loan arrangement with the Hancock didn’t work out. However, with Stack’s help, Harry arranged more than a dozen mortgages with the John Hancock.

  * * *

  Somewhere in the course of our loan discussions, the idea emerged that we should build and operate ten or so stores as a company. This would give us a firm base of income in the event the McDonald brothers claimed default on our contract (I had yet to receive a single registered letter from them authorizing our buildings to be constructed with basements and furnaces). If worse came to worst, the thinking went, we could always retrench and operate our company stores under some other name. The germ of this idea, too, might have sprung from our dealings with Clem Bohr, in which case I thank him in the same spirit one thanks the robber who at least spared his life.

  Establishing company stores, of course, would require a truly massive infusion of capital. But Harry said he thought he could arrange it with the help of his friend Lee Stack.

  The proposition that Harry finally brought to me was for three insurance companies to lend us $1.5 million in exchange for about 22½ percent of our stock. Harry introduced me to Fred Fideli, who represented State Mutual Life Assurance, and John Gosnell of the Paul Revere Life Insurance Company. These two men explained how they had arranged with their firms and the Massachusetts Protective Association to make the loan. I was intrigued by the proposal, and I was impressed with Fideli and Gosnell. The only problem seemed to be how we would handle the deal among ourselves. My Bohemian frugality fought with the idea of giving up any part of the stock in the company I had struggled so desperately to build; yet the appeal of $1.5 million was irresistible. The arrangement we came up with, after a lot of discussion, was that I would contribute
22½ percent of my remaining stock (leaving me with 54¼ percent), Harry would put in 22½ percent and June Martino would give up 22½ percent of hers.

  It turned out to be the best deal those three insurance companies ever made. They sold their stock a few years later for between $7 and $10 million. That is one hell of a return on investment. (However, if they’d waited until 1973 to sell, they could have gotten over five hundred million dollars!)

  That loan could be called the liftoff of McDonald’s rocketlike growth in the sixties. It took a lot more financial thrust to put us into orbit, but we would never have gotten off the ground without it. Our first McOpCo (McDonald’s Operating Company) store was purchased from an operator in Torrence, California. A short time later, in the summer of 1960, we opened our first company-built store in Columbus, Ohio.

  I took my hat off to Harry Sonneborn then for negotiating that loan, and I still do today. Yet the results of it, in terms of the posture Harry was giving the company, contained the seeds of a philosophical clash that eventually would split Harry and me and nearly destroy McDonald’s. It was then that Harry’s view of the corporation as just a real estate business, rather than a hamburger business, began to crystalize. As he had set it up, we would not take a mortgage for more than ten years, even on a subordinated basis. We had twenty-year leases on all the property. This meant, of course, that after ten years when our mortgages were paid off, we would have all the income from a store free and clear to the corporation. That was fine. But Harry’s line of thought had this annex: Since we were not obliged to renew licenses, at the expiration of the licenses the company could wind up operating all of the stores. I would not agree with that. I never did and I never will. It can’t happen so long as my influence and that of Fred Turner enforce the view that the corporation is in the hamburger restaurant business, and its vitality depends on the energy of many individual owner-operators. The corporation has purchased stores—many of them, as I will show in later chapters. But our procedures for doing so are clearly spelled out to franchisees. We bend over backward to be fair in every case. We recognize that it would be unwieldy and counterproductive for the corporation to own more than about thirty percent of all stores. Our slogan for McDonald’s operators is “In business for yourself, but not by yourself,” and it is one of the secrets of our success.

  A curious circumstance developed for the company in the momentum generated by the loan from the three insurance companies. We could show that we were making a profit now. At the same time, we had no cash flow.

  The reason for this was simply that the accounting regulations were weak in the area of deferred expenses you could carry on your books. We were capitalizing all the real estate overhead and all the construction overhead for a period of eighteen months. We called this “Developmental Accounting,” and it allowed us to show a bottom line profit. But it was distorting our profit and loss statements.

  We hired a regular parade of people in the late fifties. We sold them a dream and paid them as little as possible. I don’t feel bad about that, because I wasn’t making much myself, and those who stayed with us are now very well off, indeed.

  Bob Papp was hired as a draftsman to assist Jim Schindler. He later became a vice-president in charge of construction. John Haran came into the company to help Harry with real estate. These added people meant that we needed more space, of course, so we kept moving around in the area where I had had my original two-room office, knocking down walls and expanding.

  One day Harry came in and told me he was going to hire a young fellow named Dick Boylan to help him with finances. “He’s a lawyer and accountant, and he’s our kind of guy, Ray,” Harry said. “Let me tell you what he did. He and his partner, whose name is Bob Ryan, are selling insurance, see? They know they have about as much chance as a snowball in hell of getting to see me with that act. But it happens that they both used to work for the Internal Revenue Service, so they tell my secretary they are from the IRS. Naturally, I think, ‘Holy Christ, what now?’ And I call June in to listen to what they have to say. Boylan gives me this kind of sheepish grin and says, ‘With our background of working for the IRS, Mr. Sonneborn, we know we can design an insurance plan that will help you.…’ Well, that breaks June up, and I have a hard time keeping a straight face myself.

  “Their insurance proposal was pretty good, too. It was a hell of a presentation. June was very impressed, and she’s the one who suggested hiring him.”

  Dick Boylan is now senior executive vice-president and chief financial officer of the company. Some time after he joined us we also hired his former partner, Bob Ryan, and he’s a vice-president and treasurer. I could go on and on listing people who joined us at this time, many of whom are now officers of McDonald’s or wealthy operators. One of our fine old-timers, Morris Goldfarb from Los Angeles, said at the 1976 operator’s convention in Hawaii that he was certain research would show that Ray Kroc has made millionaires of more men than any other person in history. I don’t know about that; I appreciate Morrie’s view, but I would put it another way. I’d rather say I gave a lot of men the opportunity to become millionaires. They did it themselves. I merely provided the means. But I certainly do know a powerful number of success stories.

  McDonald’s doesn’t confer success on anyone. It takes guts and staying power to make it with one of our restaurants. At the same time, it doesn’t require any unusual aptitude or intellect. Any man with common sense, dedication to principles, and a love of hard work can do it. And I have stood flat-footed before big crowds of our operators and asserted that any man who gets a McDonald’s store today and works at it relentlessly will become a success, and many will become millionaires—no question.

  There are hazards and pitfalls, of course, just as there are in any small business. And some locations go along for years with a very modest volume. But, almost without exception, these stores will catch on at some point and begin to grow, as Morrie Goldfarb himself can testify. He was one of my very first franchisees. His store on La Tijera Boulevard in Los Angeles opened a year after my place in Des Plaines. I went out to look at his location, and it was excellent. I congratulated him on it. But for some reason it turned out to be a real turtle. Morrie had sold a little restaurant he’d scrimped by with for years to go into McDonald’s with his son, Ron. He thought that now he was going to get out of the woods at last. But his previous place had been a cakewalk compared to this. He couldn’t build enough volume to hire a full crew, and he and Ron were working their heads off handling two stations apiece all day long.

  Morrie called me on the telephone and raised hell.

  “Ray, I am averaging $5,000 a month here,” he said. “If I have a real good month it’s $7,000. Now that place called Peak’s across town is doing $12,000 a month, and they have an inferior location!”

  Peak’s happened to be a misfit McDonald’s, one of the franchises sold by the McDonald brothers before I came into the picture. I suggested to Morrie that he ask the McDonald boys for some guidance. He said O.K., that was a good idea, he’d do it. A few days later he was back on the phone more upset than before.

  “This is ridiculous!” he moaned. “I had Maurice and Richard come down from San Bernardino, and they spent most of the day here poking around. They get ready to leave, Ray, and you know what they tell me? They say, ‘You are doing everything just right. All you have to do is continue this way and the business will come.’ Hellfire, they were no help at all!”

  I told Morrie that I would come out again and see if I could figure it out. It was baffling. I studied that place from every angle without coming up with an answer.

  Morrie’s volume problem continued for about five years. After he got his equipment paid off he had a little breathing space. Then I moved out and opened our California office. We built a lot of new stores and started a local advertising campaign, and that really got things rolling for Morrie. In 1975, his La Tijera store grossed close to a million dollars. He has torn the old store down now and replaced
it with a beautiful new building.

  I get furious all over again just thinking about that California situation during the first five years we were in business. It was aggravation unlimited. In many ways it was a parallel to the frustrations I faced at home with my wife. The McDonald brothers were simply not on my wavelength at all. I was obsessed with the idea of making McDonald’s the biggest and best. They were content with what they had; they didn’t want to be bothered with more risks and more demands. But there wasn’t much I could do about it, California was simply too far away for me to deal with effectively from Chicago.

  At one point I sent Fred Turner out to report on the McDonald brothers’ California operations. He came back appalled at the haphazard situation he’d found. The brothers’ own store in San Bernardino was virtually the only “pure” McDonald’s operation. Others had adulterated the menu with things like pizza, burritos, and enchiladas. In many of them the quality of the hamburgers was inferior, because they were grinding hearts into the meat and the high fat content made it greasy. The McDonald boys just turned their backs on such poor practices. Their operators refused to cooperate with mine in volume purchasing and advertising. We asked them to contribute one percent of their gross toward an advertising campaign that would benefit our stores and all of them as well, but they would have nothing to do with it. All I could do for the time being was to live with it. I am bitter about the experience; not for myself alone, but for fine operators like Morrie Goldfarb and many others who lost five years’ growth as a result.