Grinding It Out

by Ray Kroc

  Luigi has a Ph.D. in canon law from the University of Rome and Latin University in the Vatican. He reads ancient Greek for relaxation. When he came to the United States he anticipated getting a university teaching position. His wife, also a Ph.D., was hired by Valparaiso University in Indiana, but Luigi learned to his great astonishment that colleges here are not teaching Latin anymore. They had no need of his specialty, so he stayed with McDonald’s and worked his way up from the lowest crew position to manager of the store. His conversation with me is full of explanations of how he has been “culture shocked” by his transition from classic refinement in Rome to a restaurant that is the symbol of a “society on wheels” in which people eat on the move, holding their food in their hands. He thinks the architecture of our red-and-white tile buildings should be redesigned.

  Is this guy nuts?

  My decision finally was to bring Luigi into the corporation. All that education had given him a complete set of additional things to worry about beyond the normal problems of business, but he seemed to handle them well. Certainly his work record made him a prime candidate to manage one of our new McOpCo stores. One of the things Luigi had done in that Glen Ellyn McDonald’s was to teach what may have been the first formal operations lessons in our system. He decided that his crew was not greeting customers properly, so he wrote what he called a “Windowman Lesson” and sat his crew members on shortening cans in the basement to listen to him lecture. He even gave them homework to do and money rewards when they showed improvement.

  The idea of holding classes for new operators and managers had occurred to me when I first brought Fred Turner into headquarters. He was enthusiastic about it, too, and it was one of those goals that keep coming up in meetings but are put aside to make room for more pressing things. Fred refused to let the idea get buried, though. He collaborated with Art Bender and one of our field consultants named Nick Karos to compile a training manual for operators. When we were planning to build a company store in Elk Grove Village, a fast-growing development northwest of Chicago, I insisted that it have a full basement instead of the usual partial basement. That was to be the first classroom for courses that eventually would become Hamburger University. There was a motel next to the Elk Grove store so it was convenient for out-of-town operators and managers to stay there while attending classes. They would sit at desk-arm chairs down among the potato sacks and listen to lectures by Nick Karos, Fred Turner, and Tony Felker. At noon the students would apply what they’d learned by doing practical work upstairs in the store. Our first class had eighteen students.1 We awarded them a Bachelor of Hamburgerology degree with a minor in french fries.

  My God, it was great to be green and growing! To see stories in newspapers across the country recognize our impact on business and praise our operators for their participation in community affairs.

  Ours was the kind of story the American public was longing to hear. They’d had enough of doom and gloom and cold war politics. The Soviet Union’s blustering announcements of new ballistic missiles and launching of the first satellite, Sputnik, into orbit around the earth had fostered a defensive attitude in our country, and people built bomb shelters in their backyards and read up on what to do in case of nuclear attack. In the fall of 1959 Soviet Premier Nikita Khrushchev told the United Nations General Assembly, and the world, banging his shoe on his desk for emphasis, that his nation’s system would bury capitalism.

  Shortly after that Irv Kupcinet wrote in his Chicago Sun-Times column:

  Nine sailors, soon to be discharged from Great Lakes, called on Ray Kroc, head of McDonald’s Drive-ins, at his LaSalle Street offices the other day. They related that they had entered the service together, were leaving together, and wanted to go into business together. Kroc obliged them. The nine sailors will be partners in a McDonald’s franchise in Portland, Ore. This is what Ray Kroc means by fulfillment of the American capitalist dream. See, Khrushchev?

  I’ve held a lot of press conferences and given a lot of interviews during the growth of McDonald’s throughout the country, but one of the most memorable was set up by Al Golin with the late Associated Press columnist Hal Boyle. I knew Boyle only by reputation as a Pulitzer Prize–winning war correspondent whose column seemed to show up in papers in just about every city I visited. I didn’t know that he was one of New York’s more disorganized writers, and I was blissfully unaware of Al Golin’s agonies over the fact that Boyle had forgotten about our appointment and wanted to “do it some other time.” Al did tell me there’d been a problem, and we would have to do the interview in Boyle’s office instead of over lunch.

  That was okay with me, but I wasn’t prepared for this big room with clattering typewriters and teletype printers. You could hardly hear yourself think. And there was Boyle, looking like a fun-loving Irish bartender behind a desk covered with what one of his colleagues had described as “a sacred pile of debris, which is said to conceal the first of the Dead Sea Scrolls and the last of Judge Crater.”2 Boyle shoved a pile of papers from a chair and asked me to sit down. I chose the edge of a desk. My public relations man looked a bit dismayed, but I didn’t mind. I’d come to tell the story of McDonald’s and I did, raising my voice to carry over the background noise. One by one the other reporters and editors left what they were doing and gathered around Boyle’s desk. By the time I finished talking the room was quiet. There was a crowd listening, and several of them wanted to know how they could get out of the newspaper business and become McDonald’s operators. Boyle was impressed, too. His column started this way:

  America has gone mad over pizza pies, but in less than five years Ray Kroc has built up a 25-million-dollar business in an older U.S. food favorite—the hamburger. “I put the hamburger on the assembly line,” said Kroc, 56, president of a chain that now sells 100 million 15-cent hamburgers a year.

  It went on to tell how I’d developed the system, and it closed with these observations:

  Kroc says his spectacularly successful hamburger emporiums average a net of $40,000 on an annual gross of $200,000. The average customer’s check is 66 cents. “Not one franchise has failed … we don’t see how one could,” he said crisply. “In any case, we wouldn’t let it. We’d come in and take over.”

  What none of these stories mentioned, and I wasn’t about to tell anyone, was that even though our stores were booming, and even though our “development accounting” allowed us to show a profit, we had no cash flow. We were in the trough between our heavy outlays for land and buildings and the income in rents from those properties. Of our first 160 stores, only 60 were units for which we had developed the restaurants and were receiving income above the service fee. The rest were units in which the operators themselves owned the restaurants, and they paid us only the 1.9 percent service fee. This put us in a rather paradoxical situation. Our gross sales figures continued to climb, and many individual units were prospering. One store in Minneapolis chalked up a then incredible one-month sale of $37,262. At the same time, we were barely able to meet our payrolls in corporate headquarters. Harry Sonneborn issued an order that no bill for more than a thousand dollars would be paid in full. Anything over a thousand would be paid in monthly installments.

  That was the situation when Dick Boylan decided to hire a young accountant named Gerry Newman. Dick had developed into Harry Sonneborn’s understudy—Harry didn’t spend a nickel or even sneeze, it seemed, without telling Boylan what he was doing and why. He wanted to make sure his deals would be carried out if he should happen to get run over by a truck. We needed someone with experience in construction accounting who could analyze our costs. Newman had handled books on brick-and-mortar and plumbing businesses, so Boylan brought him aboard. Gerry had wanted to handle us as one of several accounts, but he soon found that our workload left little time for other clients. That would have been all right if we’d been able to compensate him for it. But we couldn’t. All we had to offer was more work. We had forty-five people in our office then, and their cost was more t
han our revenue. The week finally came that we were overdrawn at our bank and couldn’t meet our payroll. Gerry’s solution was to switch the pay period from weekly to bimonthly. He posted a notice on the bulletin board that anyone who was strapped by not getting their check that Friday could borrow up to $15 from petty cash.

  Mental Snapshot: I am sitting in Dick Boylan’s office with Dick and Harry and this new kid, Gerry Newman. I don’t know much about him, but I’m told he’s bright as hell. We are having a late-evening conference about accounting. Art Trygg arrives from the Singapore with a load of barbecued ribs and other goodies, and this gets us off the subject of bookkeeping, for which I am grateful, because what I really want to talk about is the tremendous sales volumes our units around the country are reporting.

  “Listen,” I say, “one of these days we are going to hit grosses of $100,000 a month! We’re gonna be a billion-dollar company!”

  Newman is frozen by that statement, stopped in mid-bite. He looks at me with this funny, pop-eyed expression.

  Years later I learned that Gerry had gone home and told his wife, Bobbi, that he had met me that night, and I had to be either a nut or a dreamer or both. Here he was worried about whether we’d still be in business the next week, and I was carrying on about the billions of dollars in our future. A year or so after that incident, Gerry was offered a job by another drive-in chain at twice the salary he was getting from us. He turned it down. When the disbelieving head-hunter asked why, he said, “Because you don’t have a Ray Kroc.”

  But it took more than belief in me for Gerry to stay with us. It also took daring and a personal vision. Gerry has a mind that’s much like mine in certain respects. He has a strong memory that gives him total recall of situations. Unlike me, however, he’s also a squirrel with reports and odd pieces of paper. As a result, he is able to answer virtually any question one could ask about McDonald’s. He even remembers some things that I forget, and that’s rare.

  Cynics say everything has its price. I say poppycock! There are things money can’t buy and hard work can’t win. One of them is happiness. There’s a slippery notion for you! Would I have been happy if I’d never met Joni Smith? I don’t know. Certainly I was fulfilled in my work. It was my life. Yet, having met her, I realized there was something missing. So I went after it. I would have given anything. I would even have dropped McDonald’s to win her. But money had no value in this quest. All I could do was wait and hope that she would come to me.

  Finally, after what seemed like months, Joni called to tell me she’d made up her mind. Rather, her daughter and her mother had helped her make up her mind. They were both strongly opposed to her getting a divorce, and she couldn’t bring herself to break with them. So her answer was no.… A giant fissure cracked the concrete of LaSalle Street, and our office building crumbled into it as thunder rolled and lightning cracked over the smoking ruins! I was the only one who felt it, of course, but that made the agony a hundred times worse. I sat there alone for hours, ignoring the ringing of the telephone, watching the daylight wane and streetlights come on. Then I heard Art Trygg calling to me from the outer office. He stood in the door looking at me quizzically.

  “Get your bags packed, Art,” I told him. “We’re going to California!”

  11

  I made Harry Sonneborn president and chief executive officer of McDonald’s in 1959, when he negotiated the $1.5 million loan with the three insurance companies. I continued as chairman, and we worked substantially as equals. Harry’s sphere was financial and administrative matters. Mine was the retail end—operations, dealing with suppliers, and so forth. Our interests and control overlapped when it came to seeking out sites and developing them. The two of us were the only officers with authority to close a transaction for a new location.

  My view was that this relationship and relatively smooth-running division of responsibilities would continue when I moved to California. I’m not sure exacty what Harry thought, but I believe his opinion was that I had removed myself from the command center to go off on what, at heart, he considered a fool’s errand. At any rate, as time passed he became increasingly bullheaded and willful, and we began clashing on all kinds of trivial as well as important issues. The only thing that kept us together, finally, was the diplomacy of June Martino. When Harry would countermand one of my directives, leaving some young executive between a rock and a hard place, June would work it out with us individually. She became known in office gossip as “The Vice-President of Equilibrium.” Needless to say, it was not long before this began affecting morale in the organization, expecially in Chicago. It also caused the gradual creation of an unwritten organizational chart in which executives were identified as Kroc people or Sonneborn people. Harry brought in a hard-driving real estate operative named Pete Crow, who with others formed the nucleus of the Sonneborn faction.

  I could see this situation forming like a glacier beginning to build in the Chicago office, but there wasn’t a damned thing I could do about it. I had my hands full with the boar’s nest of problems I found in California. In the end, my California project was worth the effort. The position of the area for McDonald’s changed between 1961 and 1967 from an insignificant cluster of stores to a dynamic market, equal in development and volume to the rest of the country. But it took me fully three years to get the mess unraveled and headed in the right direction. First off, because Los Angeles had been the cradle of drive-in restaurants, and they had grown so wildly throughout the region, the industry had accumulated more corrupt habits than a flophouse janitor. Suppliers had formed a series of cartels and managed to push prices out of sight. For example, the same buns we were paying twenty cents for in Chicago were going for forty cents in L.A. Meat was the same way. But meat was even worse, because of the dramatic fluctuations in supply. When beef grew scarce, fast-food operators began performing the ancient ritual known as turning pockets inside out. To make matters more difficult, California distributors took it for granted that a franchisor walked around with his hand out for kickbacks in exchange for granting exclusive contracts. The distributor always made out, because he would get back the amount of the payoff and maybe even a little extra in increased prices to the franchisee.

  Convincing these people that we were an honest operation, that we protected our operators, and that we would take no kickbacks, was a big order. They could not be persuaded that if they would supply McDonald’s restaurants with items the way we wanted them at prices that would allow us to sell hamburgers for fifteen cents, our growth would put them on Easy Street. McDonald’s had no identity as a system out there, and that sharpened the other barb of our problem—low volume.

  Mental Snapshot: Nick Karos, field consultant, one of the group of executives I’d brought with me from Chicago to help develop California, is standing on the corner in front of an invitingly clean McDonald’s where we are doing zero business. Nick has one foot up on a fireplug, and he is watching the flow of people in bizarre-looking cars and the pedestrians walking brightly ribboned dogs, typical Angelinos in their habitat. He says to me, “Ray, the reason we can’t pull people in here is because these golden arches blend right into the landscape. People don’t even see them. We have to do something different to get their attention.”

  “Okay, Nick,” I reply. “Lemme know when you find the solution.”

  Nick did come up with a proposal, but it wasn’t the next day, or even the next year. As one of Fred Turner’s favorite sayings has it, we were up to our asses in alligators, and in that situation it is difficult to remember that your objective is to drain the swamp. First we had to get our supply problem solved. Nick Karos was a big help there. He was a griddle-savvy guy who had grown up in a Wimpy’s restaurant that his father owned in Joliet, Illinois. He’d come to us from operating a Henry’s hamburger stand in Chicago, and he did a lot of fieldwork for us in the St. Louis area, where he’d dealt with the Freund bakery people. It happened that Harold Freund had retired to California. So Nick looked him up and int
roduced him to me. As I mentioned earlier, I had a hell of a time persuading Harold to go back into business and build a bakery to serve McDonald’s operators. But he did, at last, and our financial prospects brightened immediately.

  At the same time, I was looking for a meat purveyor. My choice was a fellow I had known from my years of traveling before I started McDonald’s System. His name was Bill Moore, and he had a company called Golden State Foods. Bill had bought out his partner in the firm the year before I moved to California, and he’d lost money for thirteen straight months. His plant and equipment were outdated, and he needed capital. His approach was to try and get me to buy Golden State Foods. I turned that off quickly, explaining that I didn’t want McDonald’s in the supply business.

  “Well, then,” he said, “I need about a million dollars to keep from going under. You’ve done a fair amount of borrowing. What do you think I should do?”

  “Listen, Bill,” I said, “you hang on here. We have fifteen stores now, and pretty soon we’ll have a hundred. You’ll be able to get back on your feet and expand right along with us.”

  He agreed, and that’s exactly what happened. In fact, Bill Moore is a good example of what McDonald’s has done for the suppliers who came with us and helped us grow. In 1965 he and a partner bought a McDonald’s franchise in San Diego, a market I was dubious about because it was the home turf of the Jack-in-the-Box chain, which had about thirty locations there. Burger Chef had broken its spatula trying to compete with them. Bill and his partner had a low start, but they made it. In just over two years they developed four more stores and were really cooking with gas when the partner dropped dead of a heart attack. We bought back all five units for stock. A couple of years later Bill sold the stock for enough money to build a large manufacturing and warehouse complex in City of Industry, California. His meat plant there now processes 300 million hamburger patties a year for McDonald’s restaurants, and in addition, he makes syrup for soft drinks and manufactures milk shake mix. He also has gone into distribution for McDonald’s units. He perfected the one-stop service idea, in which a truck pulls up to one of our stores and fills all its needs, like an old-fashioned grocery store delivery truck, with a single call. This results in great savings for both parties. Bill has another plant and warehouse in Atlanta and distribution centers in San Jose, California, and in North Carolina and Hawaii.