by Ray Kroc
Back in the days when we first got a company airplane, we used to spot good locations for McDonald’s stores by flying over a community and looking for schools and church steeples. After we got a general picture from the air, we’d follow up with a site survey. Now we use a helicopter, and it’s ideal. Scarcely a month goes by that I don’t get reports from whatever districts happen to be using our five copters on some new locations that we would never have discovered otherwise. We have a computer in Oak Brook that is designed to make real estate surveys. But those printouts are of no use to me. After we find a promising location, I drive around it in a car, go into the corner saloon and into the neighborhood supermarket. I mingle with the people and observe their comings and goings. That tells me what I need to know about how a McDonald’s store would do there. Hell, if I listened to the computers and did what they proposed with McDonald’s, I’d have a store with a row of vending machines in it. You’d push some buttons and out would come your Big Mac, shake, and fries, all prepared automatically. We could do that; I’m sure Jim Schindler could work it out. But we never will. McDonald’s is a people business, and the smile on that counter girl’s face when she takes your order is a vital part of our image.
Finding locations for McDonald’s is the most creatively fulfilling thing I can imagine. I go out and check out a piece of property. It’s nothing but bare ground, not producing a damned thing for anybody. I put a building on it, and the operator gets into business there employing fifty or a hundred people, and there is new business for the garbage man, the landscape man, and the people who sell the meat and buns and potatoes and other things. So out of that bare piece of ground comes a store that does, say, a million dollars a year in business. Let me tell you, it’s great satisfaction to see that happen.
In 1974 The Fourteen Research Corporation published a seventy-five page analysis of McDonald’s growth projected through 1999. It described very neatly our financial position and the kind of real estate development I myself foresee:
The basis of McDonald’s success is serving a low-priced, value-oriented product fast and efficiently in clean and pleasant surroundings. While the Company’s menu is limited, it contains food staples that are widely accepted in North America. It is for these reasons that demand for its products is less sensitive to economic fluctuations than most other restaurant formats.
Until the early 1970s, McDonald’s was expanding almost exclusively in the suburbs. Yet for quite a while it had been spending a great deal on national advertising that was creating a latent, nationwide demand for its product. Thus, the stage was set for the company to diversify and strengthen its expansion program. There are now over 100 stores located in cities, shopping centers, and even on college campuses; most are doing exceptionally well, with many more planned.
We firmly believe that McDonald’s can successfully locate a store almost anywhere there are primary concentrations of population (i.e., suburbs and cities) and secondary concentrations (schools, shoping centers, industrial parks, stadiums, etc.) provided that capital turnover rates meet corporate objectives. It is this “nook and cranny” type of expansion along with continued conventional growth that leads us to project that on average 485 new stores will be added each year (through 1979) to world operations.
Nook and cranny expansion. Exactly! There are countless nooks and crannies throughout the country that are possible locations for us, and we fully intend to expand into them.
What does it take to get a McDonald’s franchise? A total commitment of personal time and energy is the most important thing. A person doesn’t need to be super smart or have more than a high school education, but he or she must be willing to work hard and concentrate exclusively on the challenge of operating that store. The value of our franchises has increased greatly over the years. I started issuing them for $950 back in 1955. Ten years later, when we went public, the average investment was $81,500. These days it takes about $200,000 for the franchise and related expenses—equipment, furnishings, signs, etc.—not counting interest or finance charges on borrowed money.
In the initial interview, the applicant is told what we expect and what the corporation will contribute. If he’s still interested after learning about the kind of personal and financial investment required, we put him to work in a McDonald’s store near his home. He’s assigned to evening or weekend hours that won’t conflict with his present job, and he learns firsthand what’s involved in both crew work and management. If he’s not really suited for our kind of restaurant operation, this is the time to find that out. After this experience and a final discussion with the licensing manager in his area, the applicant puts up his $4,000 deposit and is informed of the market area in which his restaurant is likely to be located. We never promise a specific community. Getting onto the list of registered applicants waiting for a location is harder than it used to be, because we give preference to present operators and to McDonald’s employees who have been with the corporation for ten years or more.
The applicant is advised when a site comes up for him (usually less than two years after his registration), and if he’s still interested after looking over the location, we begin getting him more involved in McDonald’s. We stay in close contact as he arranges to join us, divesting himself of another business, perhaps, selling a home, and looking for a new one in the community where his store is to be located. We now ask him to spend another 500 hours working in a McDonald’s restaurant. He’s also invited to attend orientation and management classes. Then, about four to six months prior to the date his store is scheduled to open, the licensee attends our advanced operations course at Hamburger U. This adds polish to the management skills and operations know-how he’ll need to greet his first customers.
All of this preparatory work and training helps insure success for the small businessman who gets a McDonald’s franchise. And it doesn’t stop there. We stay right in there helping him through our system of field representatives.
It’s all interrelated—our development of the restaurant, the training, the marketing advice, the product development, the research that has gone into each element of our equipment package. Together with our national advertising and continuing supervisory assistance, it forms an invaluable support system. Individual operators pay 11.5 percent of their gross to the corporation for all of this, and I think it’s a hell of a bargain.
Art Bender, my first franchisee, says he’s sometimes asked why he doesn’t just start his own restaurant instead of paying a percentage of his gross to McDonald’s. After all, he helped teach Ray Kroc the business; he could make it on his own easily.
“I might have a successful restaurant,” Art says, “but I’d have to think what it would cost me as an individual to buy the services I get from the corporation. The name itself is worth a lot, of course. National advertising with Art’s Place? No way. Then there’s purchasing power, Hamburger U. training for my managers, product development … how could I do all that alone?”
* * *
Our development in urban areas has been challenging, because it represents an entirely different kind of real estate situation. There also are all kinds of social and political currents swirling around in a big city that you don’t have to deal with in suburbia. Occasionally activists of one kind or another have tried to use an attack on McDonald’s to advance whatever cause they were pushing. We are a convenient symbol of establishment business. Our development in New York City, for example, was characterized by snobbish writers as some sort of sinister plot. Here was Daddy Warbucks dressed up like Ronald McDonald setting out to milk money from an unsuspecting populace. What these fanatics actually opposed was the capitalist system. Their political cant held that to be successful in the context of free enterprise, a business must be morally corrupt and guilty of all kinds of shabby business practices. I feel sorry for people who have such a small and wretched view of the system that made this country great. Fortunately, their hysterics rarely make much of an impression on residents, who we
lcome the clean and wholesome kind of operation McDonald’s runs. They realize that our stores can help upgrade their community. There are rare circumstances in which a neighborhood genuinely feels that McDonald’s would not be in keeping with its character. This happened in the posh Lexington Avenue area of New York City, and we withdrew. It cost us a lot of money, but we sure don’t want to locate in an area where people don’t want us—that makes for a losing business proposition. But if any of the aristocratic residents of Lexington Avenue think McDonald’s can’t be a tasteful, refined, and socially uplifting operation, a visit to Water Tower Place in Chicago might change their minds. Our neighbors in this ultramodern Michigan Avenue building include the classiest names in retailing. Our store there does a tremendous business, even though we have to explain to an occasional mink-furred dowager that, like it or not, she has to go to the counter and order her own hamburger, we have no table service.
It was wonderful to see all these changes taking place in McDonald’s and to be part of them. However, I was finding it increasingly difficult to keep up. Some days I could hardly get around because of the way arthritis was warping my hip. Yet pain was preferable to idleness, and I kept moving despite Joni’s urging that we settle down on our ranch. She really loves it there. So do I. But there were a lot of things I wanted to do that could not be accomplished from an easy chair.
For one, I wanted to own the Chicago Cubs, the baseball team I had been rooting for since I was seven years old. In 1972 the time seemed ripe and I tried to make an offer, but Phil Wrigley wouldn’t even talk to me. He sent word that if the club was for sale, I was the sort of person he would like to have buy it—but it wasn’t for sale. That made me madder than hell, because Wrigley is just sitting on that team. He hasn’t done a damn thing to improve them, but he won’t give them up and let someone else do it. It’s idiotic. The message he sent me indicated that he might change his mind one of these days, but I sure as hell wasn’t going to sit around waiting for that to happen. I just forgot about the whole thing. I wasn’t even considering going into baseball when I was flying out to Los Angeles to meet Joni early in 1974 and read the sports stories about the impending sale of the San Diego Padres. I thought to myself, “My God, San Diego is a gorgeous town. Why don’t I go over there and look at that ball park?” I’ve always admired Buzzy Bavasi, who was running the team, and the whole thing sounded very appealing. So I got in the car with Joni at the airport and told her that I was thinking of buying the San Diego Padres. She looked at me quizzically and said, “What on earth is that, a monastery?”
15
Everyone, including my wife and the commissioner of baseball, was shocked when I grabbed the public address microphone at the Padres’ first home game in 1974 and chewed out the players for putting on a rotten performance. The 40,000 fans roared, and the baseball writers went crazy. Joni was on the telephone as soon as I got back to the hotel to say she was ashamed of me. How could I do such a thing? Was I drunk? No, I assured her, I wasn’t drunk. I was just plain mad as hell.
That moment had been building for a good many weeks, probably since I first asked Don Lubin to begin negotiations to buy the team for me. I had read that the owner, California banker C. Arnholt Smith, was in deep financial difficulty and would be forced to sell. Several groups had expressed interest, so there was more than a little suspense about the affair. Don called Buzzy Bavasi, general manager of the club, and told him that Ray Kroc wanted to buy.
“That’s fine,” Buzzy said. “Who else is in the group?”
“He is the group.” There was a long, skeptical silence. Then Don added, “He owns seven million shares of McDonald’s common stock, which is selling for about fifty-five dollars a share.” Buzzy did a little mental arithmetic and said he would be glad to talk to Mr. Smith about it.
We had a preliminary meeting in which I swapped baseball yarns with Buzzy and his son, Peter. We hit it off right from the start. I’d always admired Buzzy and respected his professionalism since the days when he was one of the old Brooklyn Dodgers and was associated with baseball executives like Larry MacPhail, Branch Rickey, and Walter O’Malley. Our chat stirred all the memories of my lifelong interest in baseball and made me set my heart on owning this team. But there were to be many anxious weeks of bargaining before the deal was concluded. Smith at first wanted half a million dollars more than I was willing to pay. After the price was agreed upon, his lawyers still stalled while trying to extricate him from his problems with the government. Don Lubin kept me posted by telephone on the day-to-day meetings with the Smith group. In one crucial session, held in an elegant suite atop a bank that Smith had once controlled, the going got particularly heavy, and Don and his partner, Bob Grant, held a strategy conference in a room that looked out over San Diego Bay. He told me later that they believed Smith was ready to throw in the towel and go along with our demands, but they weren’t sure. Then they noticed a photograph on a table that was so faded by the sun they could barely make out the faces of the three men in it—C. Arnholt Smith, Richard M. Nixon, and Spiro Agnew. That symbol of faded glory was particularly striking in the wake of Watergate, and it gave my men a psychic lift—they went to bat with renewed vigor. Finally, they narrowed the differences down to one or two points. I flew into San Diego late one evening and met with them and Smith.
“Look, Mr. Smith, we have delayed long enough,” I said. “Unless this deal is signed now, there isn’t going to be any deal.”
We signed.
The Padres had been in the cellar for five straight years, so I wasn’t expecting any miracles. I told the sportswriters I thought it would take at least three years to build the team up, and I wasn’t surprised when they started the season by dropping a three-game series in Los Angeles. Disappointed but not surprised.
I was greeted like a hero in San Diego. Old men and little boys stopped me in the street to thank me for saving baseball for the city. The mayor presented me with an award in the opening ceremonies of our first home game. The sportswriters also gave me an award, the U.S. Navy Band and Marine Band played, and cameras flashed as I stood there, arms raised, making the V-sign, acknowledging the cheers like a presidential candidate.
Gordon McRae sang the national anthem and the umpire called, “Play ball!” I was so excited when that first Houston Astro batter walked to the plate that I could hardly contain myself. But the mood passed quickly as I watched error after error by my team. After a few innings I got disgusted.
Then the Padres showed some signs of life. They loaded the bases with one out. Our fourth batter hit a high pop-up behind the plate, and we all watched it tensely, giving it body English, trying to will it to fall into the stands for a foul strike. But the Houston catcher took it for the second out. I turned to Don Lubin and said, “Doggone it. We had a rally going there. Well, we still have one out left.”
As I turned to watch the play again I was astonished to see the Astros trotting in off the field. “What’s the matter?” I yelled. “There’s still one out to go!” Don shook his head and said, “Yes, there was. But our man on first ran to second on that foul fly and was doubled off first by the catcher.”
That really made me furious. I jumped up and stomped down to the PA booth. The man at the microphone looked up in disbelief as I burst in. “Hello, Mr. Kroc,” he said. Without replying, I grabbed the microphone out of his hands. At that very instant a man ran stark naked across the playing field from the left field stands. My voice boomed out into every corner of the park, “Get that streaker out of here! Arrest him! Get the police!” The streaker was never caught, but he had created quite a stir in the audience. It was nothing, however, compared to the commotion I was about to generate.
“This is Ray Kroc speaking,” I told the fans. I said I had good news and bad news for them. There were ten thousand more of them in the park that evening than had turned out to see the Los Angeles Dodgers’ opener in the larger Chavez Ravine stadium a few nights before. That was the good news. “The bad ne
ws is that we are putting on a lousy show for you,” I bellowed. “I apologize for it. I’m disgusted with it. This is the most stupid baseball playing I’ve ever seen!”
Interviewers still ask me about that incident. Usually the question is whether I regret it. The answer is hell no! I only regret that I didn’t lay it on them a lot harder. I did have to make a diplomatic apology to the commissioner, but I have the satisfaction of being responsible for a new rule in baseball—no one but the official announcer can use the public address system at a game. I also introduced a novel concern to baseball. It was my insistence, well known to McDonald’s employees, that customers receive a quality product for their money. Apparently I was the first owner ever to suggest that players owe top performance to the fans who support them.
At the time, reaction to my outburst was mixed. Newspaper columnists expounded on it, and television commentators hashed it over. I think that, generally, they agreed with the point I was making—that it’s no crime to lose unless you fail to do your best. All kinds of baseball personalities were quoted pro and con as to how that applies to professional players. Doug Rader, the third baseman for the Houston Astros (who later joined our club), said, “Who the hell does he think he’s talking to, a bunch of short order cooks?” I told the press that Rader had insulted all short-order cooks, and I invited any of them in the San Diego area to be my guests at the opening game of our next home series against the Astros. If they came wearing a chef’s hat, they would be admitted to the ball park free. Thousands of people showed up in chef’s hats for that game, and they were all seated behind third base. Rader was presented with a chef’s hat at home plate before the game started. Our fans booed every play he made during the game—all in the spirit of fun, of course.