RAY KROC McDONALD’S

By Dr. Richard Hattwick.

The Business Hall of Fame Our laureates and fellows exemplify the Illinois tradition of business leadership. Ray Kroc was born in the suburb was only able to work in five hours of sleep at of Oak Park in 1902. He dropped out of high night, but as he put it, “I was determined to school because he was too anxious to start live well and have nice things, and we could earning money. Brimming with confidence, do so with income from my two jobs.” Kroc began his career with two jobs. By day he would sell ribbon novelties, door-to-door. Ray Kroc eventually decided to give up By night he would play the piano for various piano playing and devote himself full time to groups on a one night stand basis. Within a selling paper cups. He was an outstanding few years he had graduated to selling paper salesman and soon had 15 salesmen working cups to restaurants and playing the piano under him. six days a week for a local radio station. He At the age of 35 Ray Kroc decided to strike out on his own. He borrowed heavily to raise of , french fries, and drinks. They the money to start a company selling a had standardized the production process multiple spindle milkshake mixer. His wife was in a way which cut costs and maintained a worried about the risk he was taking, and high level of quality. By selling a high volume argued against the move, but Kroc told her, of food every day they could make a good “You have to take risks, and in some cases profit at an unbelievably low price for the you must go for broke.” food being sold. Hamburgers, for example, sold for 15 cents even though “everyone For more than a decade, Ray Kroc made knew” that you couldn’t make a profit at less a living marketing his mixers. He set up a tiny than 25 cents per . office run by a secretary while he traveled all over the country visiting potential custom- Kroc recognized the potential national mar- ers and operating sales booths at restaurant ket for this approach. He signed a contract and dairy associa- with the McDonald tion conventions. He brothers which al- made good money, lowed him to own but the operation and franchise similar was small. It was not restaurants across until 1948 that he was the country. Kroc able to hire a book- would charge each keeper. In a good franchise $950 plus year he would sell 1.9 percent of gross 5,000 mixers. sales. The McDonald brothers would re- By 1950 Ray Kroc ceive 0.5 percent out was convinced that of Kroc’s 1.9 percent. the mixer business had peaked and he be- gan a serious search for a new product to Kroc returned to Illinois where he prepared sell. He heard stories of the amazing volume to open a demonstration store. There were of business being done by two Californians numerous complications involved, but Kroc at their San Bernardino, California, drive-in overcame them all and opened his Des restaurant. His curiosity was further aroused Plaines, Illinois store on April 15, 1955. Help when the McDonald brothers ordered a was hired to run the store during the day, large number of mixers from him. And so in while Kroc continued to work at his mixer 1954 Ray Kroc went to San Bernardino, Cali- company. But after work Kroc plunged into fornia, to find out what the McDonald broth- the task of expanding his McDonald’s chain. ers were doing with their drive-in restaurant. In May of 1955 Kroc was visited by Harry What Ray Kroc found in San Bernardino Sonneborn, who had just resigned as a vice was the model for the revolution. president of the Tastee Freeze company. The McDonald brothers sold a limited menu Sonneborn had observed the new McDon- ald’s restaurant and concluded that the build the restaurants and then lease them concept was a winner. He told Kroc that to the franchisees. This policy, along with the he would like to get involved. Ray Kroc did terms of the franchise agreement, would not believe that he could afford another enable McDonald’s to maintain the desired employee, but he also felt that he needed quality standards. the skills which Sonneborn had to offer. And so Kroc asked Sonneborn to figure out the However, in order to build the restaurants, lowest possible salary he could Kroc needed capital. And here is where Son- live on and Kroc neborn’s skills came into play. Harry Sonne- would then de- born devised an arrangement where- cide whether by a local land owner would lease or not he could his land to McDonald’s, taking afford Sonneborn. a second mortgage. Sonneborn came Kroc and Sonneborn back with a figure would then go of $100 a week to a bank take home pay. and get Kroc hired him at a that salary. It was one of the wisest moves ever made by Ray Kroc, for first mortgage loan on the Sonneborn’s financial innovations building. It was a tech- were to become crucial for the nique which worked be- rapid growth of McDon- cause in those days the ald’s. land owners did not

Ray Kroc’s concept have of his business was that any other groups of a family oriented restaurant willing to lease the land. giving quick service. The limited menu Later, of course, competition for of standard quality items would be offered the fast food sites would make the arrange- at a low price. The food would be served in ment impossible to implement. pleasant surroundings exuding cleanliness. In Kroc’s view, it was essential to maintain qual- Sonneborn also developed a formula ity standards throughout the chain. To do so, whereby the franchisee made monthly pay- thought Ray Kroc, it would be desirable to ments covering the mortgage payments plus a profit for McDonald’s. This became such a lucrative source of revenue that some ob- ate the cash flow received by the company. serves called McDonald’s a real estate busi- To finance this move, Sonneborn arranged ness with a fast food business sideline. a large loan from several insurance compa- nies. He viewed this as the first step in a long In 1956 McDonald’s opened 11 franchised run process leading to company ownership stores. Twenty-five more were opened in of all stores. But Kroc was convinced that 1957. By that year, the growth of the chain the vitality of his organization came in part made it necessary to hire a full time opera- from the efforts of the franchisees. To Kroc tions man. Young Fred Turner was given the this meant that no more than 30 percent of job. Turner began to develop a check list the stores should be company owned. Kroc’s for inspection of operating units, thus further views prevailed. upgrading the quality control effort. By the beginning of 1965 the McDonald’s Ray Kroc himself made a total commit- chain had grown to 657 stores grossing $129 ment of his time and resources to the goal million. McDonald’s was providing training of dominating the fast food industry. By 1960 for new operators at its ; his strategy and its effective execution had a research facility was producing a stream created a chain of 228 stores with sales in ex- of new products; and a program of “field cess of $56 million. But Kroc was not satisfied consultations” developed by Fred Turner was with the company’s rate of growth. He and proving effective in motivating local store Sonneborn decided to build and operate a operators to maintain quality standards. group of company stores in order to acceler- In 1965 two major new developments providing supporting services and maintain- strengthened McDonald’s competitive po- ing tight quality controls at the local stores sition. First, the company went public. The cannot be overemphasized. stock was offered to the public at $22.50 per share. Within a month the price had climbed There was another development in 1965 to $50.00 per share. that signaled the form which future compe- tition was to take. In 1965 McDonald’s made Second, Kroc created a decentralized its first addition to the menu – a fish sandwich. management structure by establishing a network of regional offices and delegating In 1966 a more frivolous, yet probably more numerous powers to those offices. This was a significant competitive tool was introduced

move similar to the action of General Robert by McDonald’s. The company unveiled Wood when he adopted a decentralized re- Ronald McDonald, a clown who symbolized tail organization structure at Sears, Roebuck the McDonald’s strategy of appealing to the in the 1930’s. And just as Sears’ subsequent children of the middle class family. In adver- success was credited in part to the decen- tising and in live appearances at local stores, tralized structure, so both Kroc and a number actors dressed as Ronald McDonald helped of his licensees cite the regional offices as a build traffic for McDonald’s. key to the subsequent profit growth at Mc- The following year one of the most signif- Donald’s. The role of the regional offices in icant competitive weapons was unveiled when McDonald’s launched its first national Led by Turner, McDonald’s continued to ex- advertising campaign and markedly raised cel. The quality controls, basic strategy and the cost of competing. Kroc had always commitment to advertising remained the been a strong believer in the value of adver- same. But the advertising campaign themes tising, but prior to 1967 McDonald’s had fo- changed with the times. The appearance cused its advertising efforts on the local level. of the stores changed and indoor seating Once into national advertising, McDonald’s was added. New items were included on the quickly became one of the country’s lead- menu, beginning with a large double burger ing advertisers. The advertising program was called the “” which was introduced funded by a “voluntary” contribution of 1 in 1968. Perhaps the most significant menu percent of gross sales of each store. addition was the package breakfast items offered on McDon- a nation- ald’s was wide basis entering in 1976. the period Within of its great- a year, est growth. breakfast Yet it was sales were at this time account- that Harry ing for Sonneborn approxi- chose mately 10 to leave percent of the com- McDon- pany. His ald’s sales. decision was influenced by disagreements between himself and Ray Kroc over the way The Turner years also saw McDonald’s ex- the company should be run. And at the time pand into new geographical areas. Stores he left, he was so certain that the compa- were opened in foreign countries, in the ny was heading for trouble that he sold the central cities of the United States, and in the substantial bloc of McDonald’s stock which new enclosed shopping malls which began he owned. The sale netted him several million to blanket the country. dollars. But had he kept faith and held on to the stock, he would have been able to sell it Ray Kroc continued to take an active inter- a decade later for over $100 million. est in the company in the 1970’s, serving as chairman of the board. But he also began A year after Sonneborn’s departure, Kroc to devote a great deal of his time to charita- elevated Fred Turner to the presidency of the ble activities and the professional company and what might be termed the baseball club which he purchased in 1974. “post Ray Kroc era” at McDonald’s began. WESTERN ILLINOIS UNIVERSITY

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