What the company or idea is
Raymond Albert Kroc (1902 to 1984) was an American businessman who was instrumental in turning McDonald’s into a global fast food corporation. Born in Oak Park, Illinois, he worked as a paper-cup salesman, a real estate agent and a pianist before selling milkshake mixers. In 1954 he visited a hamburger restaurant in San Bernardino, California, owned by Richard and Maurice McDonald, and convinced the brothers to let him franchise it. He bought the company from them in 1961 and led it until his death. He was president from 1955 to 1968, chairman from 1968 to 1977 and senior chairman after that. He is credited as McDonald’s founder because of his work as franchise agent and his role in its expansion, although he did not found it.
How it actually makes money
Kroc grew McDonald’s by franchising it. He sold only single-store franchises, not the territorial franchises common in the industry. Exclusive licences for large markets were the quickest way for a franchisor to make money, but they cost the franchisor control. A franchisee with one store at a time still depended on the franchisor, especially if they wanted another. By 1984 McDonald’s had 7,500 outlets in the United States and 31 other countries and territories, with system-wide sales of more than $8 billion in 1983. His personal fortune was around $600 million.
What works
Kroc wanted the same service and quality at every location. He kept the assembly-line Speedee Service System that the brothers introduced in 1948 and standardised operations around it. Franchisees had strict rules on how food was made, portion sizes, cooking methods and times, and packaging. He refused to use soybean filler in the patties. The same discipline applied to service. Customers whose orders were wrong, or who waited more than five minutes, got their money back.
What does not
The buyout was fraught. The brothers wanted a small chain and never sent Kroc formal letters allowing the changes he wanted. In 1961 he bought the company for $2.7 million, the figure they gave him, and Harry Sonneborn raised the funds. The brothers did not transfer the original San Bernardino location to him, and it had been renamed the Big M because they had not kept the rights to the name. Kroc opened a new McDonald’s near it, and the Big M eventually closed. An annual 1% royalty is alleged to have been promised on a handshake, but the only support is a claim by a nephew of the brothers. The film The Founder, based on the book he co-authored, Grinding It Out, takes a critical view of how he treated them. Kroc also donated $255,000 to Richard Nixon’s 1972 campaign, and Senator Harrison Williams accused him of making the donation to influence Nixon to veto a minimum wage bill.
What to take from it
The trade-off is visible in one choice. Kroc passed up the fastest route to money, territorial licences, in order to keep control over how every store ran. The founder label is also worth reading against the record. He bought a system built by others and made it uniform and large. After retiring from running McDonald’s in 1973 he bought the San Diego Padres for $12 million in 1974.
Is it worth your time
Yes, if you are studying franchising or how standardisation scales a service business. It is thin on fees, finances and how the company actually earned its income.
