Grinding It Out

by Ray Kroc

  “Of course!” I exclaimed. “That’s exactly what this sandwich needs, a slice of cheese. No, make it half a slice.” So we tried it, and it was delicious. And that is how the slice of cheese got into the McDonald’s Filet-O-Fish.

  We started selling it only on Fridays in limited areas, but we got so many requests for it that in 1965 we made it available in all our stores every day, advertising it as the “fish that catches people.” I told Fred Turner and Dick Boylan, both of whom happen to be Catholic, “You fellows just watch. Now that we’ve invested in all this equipment to handle fish, the Pope will change the rules.” A few years later, damned if he didn’t. But it only made those big fish sales figures that much sweeter to read.

  I have a pretty well developed set of taste buds, and I can usually predict, as with the cheese on fish, the kind of food combinations the public will like. But once in a while I miss the strike zone. That’s what happened with the Hulaburger, which I was taking bets would do better than Filet-O-Fish. The Hulaburger was two slices of cheese with a slice of grilled pineapple on a toasted bun. Delicious! I still have one for lunch at home from time to time. But it was a giant flop when we tried it in our stores. One customer said, “I like the hula, but where’s the burger?” Well, you can’t win ’em all.

  McDonald’s had a very good year in 1964, but a pall was cast on it for me by Art Trygg’s death from cancer. He had been a wonderful friend, always ready to share a joke or help with a problem. When I went to the office one Sunday and accidentally caught my hand in my car door, lopping off the end of one finger, Art was the one I called to take me to the hospital.

  Mental Snapshot: Art Trygg and I are sitting alone at my favorite table in the dining room at Rolling Green Country Club. I have just asked him to come to work for me, and he gets this peculiar, stricken look on his face. “There’s something you don’t know about me, Mr. Kroc,” he says, and he proceeds to explain that he is an ex-convict. It seems he drove a beer truck for the old Touhy gang in Chicago during Prohibition and was busted twice. The second time got him a stretch in Stateville Penitentiary. I slap my knee and exclaim, “What the hell, that doesn’t matter! You paid for your mistake, so forget about it.” He beams happily and says, “Okay, when do I start?”

  I appreciated Art’s honesty. I like people who level with me and speak their minds. I always say exactly what I think; it’s a trait that’s gotten me in trouble plenty of times, but I never have problems getting to sleep at night with a guilty conscience. That’s why I could never be a politician. People have told me from time to time that I should run for president. They think I could run the country with the same integrity and sound business sense that I gave to McDonald’s. I know it wouldn’t work. Not that I think a politician has to be dishonest—but he has to compromise some things he believes in strongly for the sake of political expediency. I could not do that.

  Art’s death troubled me in another way, too. I could not help but recall those many bachelor dinners when I would tell him about Joni like some lovesick schoolboy. I was content with Jane. She was a fine lady, but it was Joni I loved and knew I always would.

  Fortunately, there was little time to dwell on death and things that might have been. Business was bursting out the tops of our charts. We were entering the year of our tenth anniversary, and it looked like we were just getting started.

  In one critical way that was true. We were about to go public, and that boiled down to what had to be the most traumatic ten days our company had ever experienced. Harry and Dick had settled on Paine, Webber, Jackson & Curtis to be the underwriters of the issue, and there had been a lot of bickering back and forth over details of the deal for months. For one thing, the underwriters insisted that we must have one of the “big eight” accounting firms do our books. We had dealt with Al Doty’s company in Chicago for ten years. Both Harry and I wanted to continue with him, but they were adamant. Finally, Harry gave in and elected to go with the firm of Arthur Young & Company. Al Doty continued to do my personal accounting and still does, and June Martino’s and Harry Sonneborn’s, too. Our attorneys on the public offering were Dey Watts and Pete Coladarci from Chapman & Cutler. They worked very closely with Harry, of course, and that relationship was to make me uncomfortable in later dealings with them.

  Our big problem was that our “Development Accounting” method was not certifiable, in the opinion of our accountant. So our books had to be completely redone to show what our earnings would have been without that accounting. We had less than two weeks to go back through the transactions of all previous years and bring the financial statements up to date. Gerry Newman and his staff worked virtually around the clock for ten days straight. The report was completed four hours before the deadline and was flown to Washington, D.C. in our company plane. It just made it under the wire.

  Our biggest argument with the underwriters was on what the initial selling price should be. We had split the stock a thousand to one by that time, and the underwriters thought we should go out at seventeen times earnings. I wouldn’t stand for that. I knew we were worth more, and I stood to lose more than anyone else if we went out too low. Harry agreed. He fought for twenty times earnings, and he made several trips between New York and Chicago trying to get them to see it our way. It was a stalemate. We had come down to the final deadline when I walked into Harry’s office and told everyone involved that there was no way we would go for less than twenty. That was a pretty heavy moment. But I meant it; even if we had to flush away all the hours and weeks of effort that had got us to this point, I was determined not to sell McDonald’s short. No way!

  * * *

  So we went on the market at $22.50 a share, and it shot up to $30 before trading ended that first day. The issue was oversubscribed—a tremendous success. Before the first month ended, it had climbed to $50 a share, and Harry, June, and I were wealthier than we’d ever dreamed possible.

  Harry was as happy with the outcome as I was, but he wasn’t satisfied with having our stock listed over-the-counter. He wanted to see McDonald’s up there with the bluest chips on the big board. The New York Stock Exchange had some pretty tough requirements. You had to have so many shareholders in a certain geographic distribution, and you had to have a certain number of round-lot (100 shares or more) shareholders. I really didn’t care that much about it. I went along with Harry on the basis that the New York was the class listing, where McDonald’s ought to be. But it struck me that some of these folks he was dealing with about it were codfish aristocrats who weren’t too sure they wanted to deal with a company that sold fifteen-cent hamburgers. If so, to hell with them! At any rate, we were accepted, and to celebrate, Harry and his new wife, Aloyis, and June Martino and Al Golin all ate hamburgers on the floor of the New York Stock Exchange. Boy! That got terrific coverage in the newspapers. Not only because of the hamburgers, but Aloyis and June were among the first women ever allowed on the floor of the exchange.

  This was in July 1966, a year in which we broke through the top of our charts again with $200 million in sales, and the scoreboards on the golden arches in front of all our stores flipped to “OVER 2 BILLION SOLD.” Cooper and Golin sent out a blitz of press releases interpreting the magnitude of this event for a space-conscious public. “If laid end-to-end,” they enthused, “two billion hamburgers would circle the earth 5.4 times!” Great fun. Even Harry Sonneborn got caught up in the spirit of promoting McDonald’s, and he pulled off a stunt that made me proud of him. He wanted to have us represented in the big Macy’s Thanksgiving Day parade in New York, and he approved the concept of a McDonald’s All-American High School Band, made up of the two best musicians from each state and the District of Columbia. Then he hired the world’s biggest drum and had it shipped by flatcar from a university in Texas. While it was enroute, and the subject of a lot of publicity generated by the parade’s promoters, Harry and Al Golin were having a new drumskin made with McDonald’s All-American Band printed on it. It was a huge success. So was the introduction
of our clown, Ronald McDonald, who made his national television debut in the parade. Harry followed the coup with another—sponsoring the first Superbowl telecast.

  Pretty heady stuff. But there was real substance under all the hoopla. We had our first stock split in April 1966, and I told our first annual stockholders meeting as a public company the following month that we had created a new American institution. I also stressed that it was our strict adherence to moral principles in business that made us so strong.

  The steady expansion of our business had another effect, one we hadn’t foreseen. We simply outgrew our red-and-white tile buildings. There also appeared to be a movement among our customers away from the idea of eating in their cars. So we decided to experiment with larger buildings and inside seating. As Jim Schindler declared in a presentation he made on the subject, “It’s obvious that our present equipment will not support the kind of volume we are going to do.”

  Our first store with inside seating opened in Huntsville, Alabama, in July 1966. It was pretty primitive compared to the kind of seating we have now—a narrow counter with stools and a couple or three small tables—but it was a big step forward.

  I had put Luigi Salvaneschi in charge of real estate in California when Bob Whitney left us, a choice that was greeted with a lot of headshaking and raised eyebrows back in Chicago. But they didn’t know Luigi like I did. He had taken over the first McOpCo store I built when I moved to California in 1961, the Manhattan Beach unit, and he ran it like a veteran. Luigi was always after me to improve the architecture of our buildings.

  “Mr. Kroc, California is setting the trend for the rest of the country in community planning,” he’d say. “How can we go into these towns and propose to put up these slant-roof buildings, which are absolute eyesores?”

  I’d usually wind up getting mad and throwing him out of my office when he started carrying on about aesthetics and Michelangelo and blah, blah, blah. Yet, down deep, I knew he was right. The time was coming that we were going to have to make a major change in the appearance of our buildings. But I was biding my time, letting the need ripen, because I knew that this was going to mean a big battle between Harry Sonneborn and me. I could smell it coming, and I wanted to be ready for it on every front when it happened.

  13

  There is a cross you must bear if you intend to be head of a big corporation: you lose a lot of your friends on the way up.

  It’s lonely on top.

  I never felt this so keenly as when Harry Sonneborn and I had our final confrontation, and he resigned.

  Recalling the various elements of this situation is like thinking about a set of Chinese boxes, each one nesting inside another. When the last one is removed, you are left with an empty box, a sense of loss.

  Harry was in poor health. He had a chronic bad back. He also had severe diabetes. Once he was laid up with his back for a whole week in some remote little town in western Canada. He couldn’t be flown out; he had to be put on a train. No taxis or rental cars in the town, so he bought a Cadillac, paid cash for it, and had his wife drive him to the railhead. They probably still talk about the incident in that town. Due to his illness, toward the end of 1966, Harry was spending more and more time away from the office. He’d stay for weeks at a time at his wife’s home down in Mobile, Alabama.

  That was the first box.

  Another was the division of loyalties among the executives in our office into the Kroc people and the Sonneborn people. This situation was aggravated by a conflict between Harry and me over the appointment of executive vice-presidents. I had demanded that Fred Turner be made an executive vice-president. Harry’s price for it was that Pete Crow be made one, too. Well, it was a dumb situation, but I had to go along with it. Dick Boylan was executive VP in charge of the budget and accounting; Pete Crow was head of new store development, which included real estate, construction, and licensing; and Fred Turner was in charge of the retail end, including operations, advertising and marketing, and equipment. Later on Fred took over licensing from Pete. Staffers referred to this three-headed setup as the “troika,” and I never found anyone who was happy with it. The three executives were supposed to be equal in authority. The problem, however, was that Harry kept hold of the purse strings himself, and what the situation boiled down to, except with Boylan, was responsibility without authority.

  Inside that box were several others having to do with Harry’s direction of the company on a course that was completely opposite to the tack I wanted it to take. These ranged all the way from compensation for staffers to proposals that the arches be removed from new buildings. I approved taking them off, but as soon as Harry saw the plans, he’d say, “Put the goddam arches back!”

  The most important problem I had with Harry, however, was his growing conservatism in real estate development. He was listening to bankers and others who told him the country was heading into a recession in 1967 and that McDonald’s ought to conserve cash and hold down its construction of new stores.

  Finally Harry put a moratorium on all new store development. No more construction. I was opposed to it, but when Luigi came into my office wringing his hands and complaining, I really couldn’t give him any direction.

  “Mr. Kroc, what am I going to do?” he asked. “I have thirty-three locations in the works. They are all good ones. We can’t afford to lose them. What shall I do?”

  “Tell ’em something vague, Luigi. String ’em along,” I said. “I’m going to Chicago and see what I can do.”

  I was in our LaSalle Street offices the next morning waiting for Harry. When he came in we went at it hammer and tongs. I forced the issue all the way, with the result that he resigned. It was a hell of a mess, and I stewed about it all the way back to California.

  I felt I needed legal advice, but I didn’t want to go to Chapman & Cutler. They are a fine law firm, and I’m sure their opinion would have been honest and aboveboard. However, I thought that they were influenced too much by Harry, and I made up my mind that they wouldn’t represent McDonald’s in the future. So I called Don Lubin of Sonnenschein Carlin Nath & Rosenthal in Chicago and asked him to come out and talk to me. Don had done some personal legal work for me, and his firm had represented McDonald’s in some matters early in our development.

  Lubin’s advice was that I try to patch it up with Harry. He knew that Harry was very close to the financial community, and he felt that a sudden resignation by this key individual seemed almost certain to hurt McDonald’s. So I asked him to talk to Harry and try to get him to stay, although I really didn’t think it was going to work. I also told Lubin that I wanted his firm to begin representing McDonald’s, and I wanted him to go on our board of directors.

  Harry agreed to stay, but it was an unhappy situation for both of us. He continued to spend more time in Alabama than he did in Chicago, and I felt he was just going through the motions of running the company. But it’s true that his health was getting worse all the time. Finally we agreed he would resign. Based on his employment agreement, he would be paid $100,000 a year. Harry had a substantial chunk of McDonald’s stock, but he was so certain the company would go down the chute when he left that he sold it all. He wanted the money, I’m told, to go into the banking business in Mobile. But it’s a shame, because although the sale gave him a few million dollars at the time, the stock subsequently had a series of splits that made each share worth ten times as much. Had he kept it, his stock would be worth over $100 million. So his lack of faith in us was very costly for him.

  I really had my work cut out for me now. I took the title of president and chairman of the board, and I removed that misguided moratorium on building new stores. In reviewing our real estate picture, I discovered all kinds of locations we had purchased and sort of stockpiled for future development. When I was told that we were waiting for the local economy to improve in those areas, I hit the ceiling.

  “Hell’s bells, when times are bad is when you want to build!” I screamed. “Why wait for things to
pick up so everything will cost you more? If a location is good enough to buy, we want to build on it right away and be in there before the competition. Pump some money and activity into a town, and they’ll remember you for it.”

  I also had to deal with the morale problem in our office. Much of the rift was healed as soon as Harry left. In fact, I heard one of our top execs quoted as saying, “Hooray, we’re back in the hamburger business!” But we had been losing some good people as a result of the strained situation, and I didn’t want to lose any more.

  The guy I was chiefly concerned about was Fred Turner. He was extremely unhappy with his role in the “troika,” and he had been sending out signals to indicate it. I knew that he had been getting a lot of telephone calls from other franchise operations. He’d had several very good offers for top positions. So before Harry’s resignation was formally announced, I took Fred to dinner at the Whitehall.

  “Fred, I know you have been unhappy lately,” I told him. “I realize you have felt frustrated in your work. But I want to tell you something in complete confidence. Harry has resigned. I am going to take his title and do some fence mending and some ass kicking. This will take about a year. At the end of that year, I am going to make you president of McDonald’s.”

  You could have toasted a McMuffin in the light of that smile of Fred’s.

  Then his face clouded, and his eyes bulged with anger. He hit the table with his fist so hard the silverware danced, and nearby diners flinched in alarm. “Dammit, if you knew about this frigged-up situation in the office, why didn’t you do something about it?” he rasped.

  For once in my life, I didn’t answer fire with fire. I felt like a father who has failed to stick up for his son, and there was no way I could explain to Fred the kind of tightrope I’d been on with Harry. So I told him to calm down, and one day he would figure it out for himself. Now I’m not so sure that’s true, because Fred has no patience with office politics, and Harry’s methods would be as foreign to him as they were to me. Anyhow, he couldn’t stay mad for long. He was too happy. He said he was as glad about the resolution of the situation in the office as he was over being promised the presidency. I was relieved, because the rest of our conversation that evening showed that I had been a lot closer to losing Fred than I’d suspected.