Grinding It Out

by Ray Kroc

  I could tell the same sort of story about most of the suppliers who started with us in the early days and grew right along with us. Lou Perlman, our paper supplier, also went back a long way with me. He and I used to call on the same customers when I was selling Multimixers and he was peddling paper products. We attended the same conventions, and we became friends. So it was only natural that I went to him when I was starting McDonald’s and asked him to come up with a program of paper products imprinted with the McDonald’s logo.

  Lou and I shook hands on an arrangement that grew and multiplied for both of us. He began supplying McDonald’s operators with a complete line of paper goods, and his Perlman Paper Company became a subsidiary of Martin-Brower Corporation. He was chairman of the board of Martin-Brower when he retired.

  Harry Smargon, our shortening supplier, is another case in point. I was introduced to his product by accident. A fellow named Dick Keating was trying to sell me the kind of french fryer he made, and I was impressed—we still use Keating fryers to this day—but I was equally impressed with the quality of shortening used in the demonstration. So I found out about Harry Smargon and Interstate Foods, the young company he’d started three years earlier, and I telephoned him and asked for a thirty-pound sample. It wasn’t long before McDonald’s stores were ordering thousands of pounds of shortening from Interstate Foods. Naturally, Harry was delighted. He had been in the wholesale coffee business before he started Interstate, and experience there had taught him that customers often gave him an account because they wanted something extra, a sign, a clock, a coffee urn, or some such thing. So he telephoned one day and said he’d like to meet the man who was giving him so much business. Fine, come on down, I said.

  I could tell Harry was surprised at the tiny size of our office on LaSalle Street. I introduced him to June Martino, and we exchanged pleasantries for a time. Finally he said, “Ray, I’ve been getting a lot of business from you, and I’d like to show you my appreciation. I’d like to give you something for your stores—a sign or a clock—what would you like?”

  “Listen, Harry, you don’t know me, so I am going to forgive you for that,” I said. “But let’s get this straight, once and for all. I want nothing from you but a good product. Don’t wine me, don’t dine me, don’t buy me any Christmas presents. If there are any cost breaks, pass them on to the operators of McDonald’s stores.”

  Harry Smargon has prospered with McDonald’s, and I never heard him so much as hint at a kickback again.

  Gene Veto, our insurance man, was introduced to me by June Martino. We had sixteen restaurants franchised at the time, and there were about fifty or sixty insurance policies covering them. I knew we had a mess on our hands, but I didn’t know what to do about it. Gene took our portfolio home and spent about a week analyzing it. He returned with a report that pointed out duplications, areas where we needed more protection, and some overcharges. I thought it was a terrific report, and I pointed out that he had forgotten to bill us for it.

  He said, “I’m not going to send you a bill. I don’t think you can afford it. But you’ve got a great concept here, and I think we’ll be able to do some business in the future. I’ll be in touch.”

  As a matter of fact, Gene wound up reorganizing the insurance coverage for our franchised stores and later developed a plan whereby we could pool a number of our restaurants, regardless of location, and take advantage of discounts. His Keeler Insurance Company grew right along with McDonald’s. In 1974 when Keeler became a division of the Frank B. Hall Company, Gene was named chairman of the board.

  There are few things more gratifying to me than to see a meat plant like the one operated by Arthur and Lenny Kolschowsky in Chicago. It was built so they could offer McDonald’s operators in the Midwest millions of pounds of frozen patties. I can remember buying my first pound of ground beef for my Des Plaines store from the boys’ father, Otto Kolschowsky, in his neighborhood butcher shop!

  As we solved our supply problems in California and built more stores, business gradually picked up. But it remained far lower than it should have been. In midsummer of 1963, Nick Karos came to me with a proposal he had drafted for a television advertising campaign. The projected cost was $180,000 and he wanted to pay for it by raising the price of hamburgers in our company-owned stores a penny, from fifteen to sixteen cents.

  “Nick, this is a terrific plan,” I said. “But we’re not gonna raise the price. What I want you to do is go back to Chicago and present this to Harry Sonneborn. Make him come up with the money.”

  I knew he’d be able to do it, because the logic of his one-page memo was irrefutable. It demonstrated precisely how an ad campaign would repay its cost many times over, while failing to spend the money would cost us much more in the long run. Nick was successful, although Harry went along very reluctantly. The advertising campaign we put together was a smash hit. It turned Californians into our parking lots as though blindfolds had been removed from their eyes, and suddenly they could see the golden arches. That was a big lesson for me in the effectiveness of television.

  * * *

  As we began to turn the corner in California, the corporation as a whole was starting to reap the benefits of our earlier planning and investments. By 1963 we had gotten over the hump of front-end outlay for leased and purchased properties, and they were beginning to pay us some handsome returns.

  Also by this time our program of building and operating company stores was in its third year and had shifted into high gear. It too was contributing significantly to our mounting profits.

  Hamburger University had meshed fully into our system by 1963 and was sending a steady procession of qualified operators and managers into the field, where they spread the gospel of Quality, Service, Cleanliness, and Value. Classes had grown to an average of twenty-five or thirty students, and we were holding eight to ten two-week sessions a year. Hamburger U was also helping to test and implement training procedures on new equipment that was being developed by our Research and Development Laboratory in Addison, Illinois.

  Louis Martino, June’s husband, had started the R&D lab in 1961. He’d had extensive in-store experience as an operator in Glen Ellyn, Illinois, and he saw the need for more sophisticated mechanical equipment and electronic aids to speed up our food assembly line and make our products more uniform. His first project was the development of a computer to time the blanching of french fries. We had a recipe for blanching that called for pulling the potatoes out of the oil when they got a certain color and grease bubbles formed a certain way. It was amazing that we got them as uniform as we did, because each kid working the fry vats would have his own interpretation of the proper color and so forth. Louis’s computer took all the guesswork out of it, modifying the frying time to suit the balance of water to solids in a given batch of potatoes. He also engineered a dispenser that allowed us to squirt exactly the right amount of catsup and mustard onto our premeasured hamburger patties. Our insistence that beef used to make our patties be no more than nineteen percent fat had been difficult to enforce. We had to take relatively large samples to some laboratory and have it tested. This changed with the development of the Fatilyzer, a simple but precise testing device that an operator could use to analyze meat right in his store. If it was more than nineteen percent fat, he would reject an entire shipment. After this happened to a supplier a few times, he would get the message and improve his own quality controls.

  All of this progress was very rewarding.

  I should have been elated.

  We had a fine, hard-working staff in California—Bob Whitney handled real estate; Gene Bolton, legal; Bob Papp, construction; and Nick Karos, operations. The office was enlivened by the pranks of my fun-loving secretary, Mary Torigian. It was a hell of a contrast to the austere mood of the Chicago office. One morning, for example, I came to work to find Colonel Sanders sitting outside my door typing away. It was Mary wearing a Kentucky Fried Chicken Halloween mask. I didn’t say a word. I walked right by her and b
opped her on the head with my rolled up newspaper as I passed.

  I should have been happy, but the undeniable fact was that I was miserable. I had forced Joni out of my mind, but I could not get her out of my heart. She and her husband had long since moved to Rapid City, South Dakota, to open McDonald’s stores of their own, and I knew they were doing very well from the daily financial reports I received on all our operations.

  I wondered if she missed me as much as I missed her. After Art Trygg went back to Chicago, I was really lonely. He had a girlfriend there, a spinster who worked in our real estate department, so I couldn’t blame him for not wanting to stay in California.

  I moved out of my apartment into a home in Woodland Hills. I busied myself in buying furniture and fixing the place up with all kinds of conveniences for gracious living. I have never been a cliff dweller, I told myself. But down deep, I think I did it with the subconscious hope that Joni would change her mind, and we would live there together.

  One thing I liked about that house was that it perched on a hill looking down on a McDonald’s store on the main thoroughfare. I could pick up a pair of binoculars and watch business in that store from my living room window. It drove the manager crazy when I told him about it. But he sure had one hell of a hard-working crew!

  Some people are bachelors by nature. I am not. I guess I need to be married to feel complete. That’s why I fell so hard for Jane.

  Her name was Jane Dobbins Green. She was John Wayne’s secretary. A mutual friend introduced us, and I was charmed by Jane’s sweet disposition. She was lovely, a sort of diminutive Doris Day, and she was completely opposite to Joni in manner. Joni is a strong person who knows her own mind. Jane was compliant: If the sky was clear and I said it looked like rain, Jane would agree.

  We had dinner together the night after we met, and the next night, and the night after that. In fact, we had dinner together five nights in a row. I was enchanted. Within two weeks we were married.

  Of course, Joni found out about it eventually. One day I got a telephone call from her and we had a brief, businesslike conversation that she ended by asking, “Ray, are you happy?”

  I was shaken and astonished. It took me a moment to catch my voice. Then I blurted, “Yes!” and slammed down the receiver.

  12

  Jane and I sold our place in Woodland Hills and moved to a big house in Beverly Hills. I wasn’t around there much though, because when you’re green and growing at the rate McDonald’s was in 1963, there’s little time for personal interests. We topped all previous construction records in 1963 by building 110 stores scattered all over the country, and we did even better the following year when we had a net income of $2.1 million on sales of $129.6 million. I became a regular commuter between Los Angeles and corporate headquarters, spending two weeks at a time in L.A. and the next week in Chicago.

  I had to take a more active role at headquarters, because the operations were expanding so rapidly and because Harry had withdrawn from day-to-day business in the office to spend all his time studying how we could take the company public.

  Harry and Dick Boylan had talked to some large corporations, including Consolidated Foods, Holiday Inn, and United Fruit about the possibility of merger. There was a fad for mergers at that time, and there were certain advantages to be gained from merging with an already public company, as opposed to going public by ourselves. These negotiations never got very far, because the only condition under which Harry or I would agree to merge was if McDonald’s would be the surviving company.

  The reason for going public, in addition to raising capital for the company was to give us some funds ourselves. We had put this tremendous money-gathering machine in motion, and it was running at a fantastic rate. But we hadn’t been taking anything out, we were plowing it all back, so as not to slow down the company’s expansion.

  So Harry spent his days closeted in meetings with bankers, brokers, and lawyers. I was busy trying to decentralize our management structure. We had 637 stores now, and it was unwieldy to supervise them all from Chicago. It has always been my belief that authority should be placed at the lowest possible level. I wanted the man closest to the stores to be able to make decisions without seeking directives from headquarters.

  Harry didn’t quite see things my way in these matters. He wanted tighter corporate controls, a more authoritarian posture. I maintained that authority should go with a job. Some wrong decisions may be made as a result, but that’s the only way you can encourage strong people to grow in an organization. Sit on them and they will be stifled. The best ones go elsewhere. I knew that very well from my past experience with John Clark at Lily Tulip Cup. I believe that less is more in the case of corporate management; for its size, McDonald’s today is the most unstructured corporation I know, and I don’t think you could find a happier, more secure, harder working group of executives anywhere.

  My solution to our administrative problem was simply to divide the country into regions. There were to be five of them, but we decided to establish the West Coast Region of fourteen states first, because it was growing faster and was the most difficult to administer from Chicago. I chose Steve Barnes to be our first regional manager.

  Steve had joined McDonald’s in 1961 from Lou Perlman’s company, where he’d sold us paper products. He had come to my attention in 1962 for the pioneering work he was doing in developing frozen french fries in collaboration with a fellow named Ken Strong, who now heads our food research lab in California.

  The idea of using frozen french fries appealed to me greatly. It could assure us a continuous supply of the best potatoes, Idaho Russet Burbanks, because we could conceivably purchase and process an entire crop without fear of spoilage. Shipping costs would be a lot lower, and the square boxes of frozen potatoes would be much easier to handle and store than 100-pound bags. It also would eliminate two messy and time consuming tasks in our stores—peeling the potatoes and blanching them.

  There were diehards in our organization who thought that the only good french fry was made from a fresh potato. For them there was something mysterious, almost sacred, in the rites of peeling, washing the starch out, and blanching. I was to blame for this attitude, I suppose, because I had put so much emphasis on it, and I insisted that our classes at Hamburger U. make it a ritual.

  But for an operator to insist on peeling his own potatoes in the store instead of using a frozen product was on the same order as insisting on slaughtering his own steers and grinding the hamburger. Not quite as messy, of course, but potato peelings gave us plenty of problems nevertheless. At least one store had failed and some others were in serious difficulty because of potato peelings. These were outlying units in areas where septic tank fields functioned less than perfectly due to the character of the local soil. Our potatoes were peeled by carborundum wheels and the fine waste was washed into the septic system. Whew! what an odor! No stable in the world could stink worse than a rich vein of fermenting potato peelings. And customers tend to avoid a restaurant that’s going aswamp in its own sludge.

  Of course, the quality of our french fries was a large part of McDonald’s success, and I certainly didn’t want to jeopardize our business with a frozen potato that was not up to our standard. So we made certain that the frozen product was thoroughly tested and that it met every condition of quality before we made it part of the system.

  There was another product being tested at this time that would prove to have a tremendous effect on our business. This was the Filet-O-Fish sandwich. It had been born of desperation in the mind of Louis Groen in Cincinnati. He had that city as an exclusive territory as a result of some horse trading he’d done with Harry and me back in the days when we were using everything but butterfly nets to catch franchisees. Lou’s major competition was the Big Boy chain. They dominated the market. He managed to hold his own against them, however, on every day but Friday. Cincinnati has a large Catholic population and the Big Boys had a fish sandwich. So if you add those two together on a
day the church had ordained should be meatless, you have to subtract most of the business from McDonald’s.

  My reaction when Lou first broached the fish idea to me was, “Hell no! I don’t care if the Pope himself comes to Cincinnati. He can eat hamburgers like everybody else. We are not going to stink up our restaurants with any of your damned old fish!”

  But Lou went to work on Fred Turner and Nick Karos. He convinced them that he was either going to have to sell fish or sell the store. So they went through a lot of research, and finally made a presentation that convinced me.

  Al Bernardin, who was our food technologist at the time, worked with Lou on the type of fish to be used, halibut or cod, and they finally decided to go with the cod. I didn’t care for that; it brought back too many childhood memories of cod liver oil, so we investigated and found out it was perfectly legal to merchandise it as North Atlantic whitefish, which I like better. There were all kinds of fishhooks in developing this sandwich: how long to cook it, what type of breading to use, how thick it should be, what kind of tartar sauce to use, and so forth. One day I was down in our test kitchen and Al told me about a young crew member in Lou Groen’s store who had eaten a fish sandwich with a slice of cheese on it.