Real Estate As A Financial EngineAlthough McDonald's franchises sprouted up across the Midwest and West like wildflowers after a spring rain, the company's success appeared to be short lived.
While the original deal he had struck with the McDonald brothers
endeared Kroc to early franchisees, it also set his fledgling
enterprise on a direct course to insolvency. Through 1960, when the
chain's restaurants racked up $75 million in sales, McDonald's earnings
were a mere $159,000. "In short, Kroc's concept for building McDonald's
was financially bankrupt," wrote McDonald's historian John Love. And
Kroc's dream house of cards began to collapse under its own weight.
Unable to give valued employees like Martino and Sonneborn raises, Kroc
paid them by granting them 30 percent of the company. He further
diluted his equity by ceding 22 percent of McDonald's stock to two
insurance companies to get $1.5-million loan in 1961.
Even this loan, obtained at remarkably onerous terms, only
temporarily slaked the firm's thirst for capital: Kroc needed to raise
a huge chunk of money -- $2.7 million -- to buy out the McDonald
brothers. His relationship with them was a continuing source of
irritation. They did not meet his precise standards at the McDonald's
franchises they had sold in California. Worse in Kroc's eyes, they took
the liberty of selling a McDonald's franchise to a competitor in Cook
County, Illinois, Kroc's home territory. Such actions intensified
Kroc's desire to manage the growing enterprise on his own. However much
he came to rue his connection with the McDonald brothers, Kroc realized
the value of product identification created by the more than 200
outlets bearing their name. "I needed the name," Kroc lamented. "How
far could I go on Kroc burgers?" Desperate for ultimate control of the
McDonald's name, in 1961 he mortgaged the company's future again. A New
York money manager arranged a $2.7-million loan from several college
endowment and pension funds, the interest payments on which were
calculated as a percentage of McDonald's sales.
Deep in hock and with no profit growth in sight, Kroc faced a
classic dilemma. He couldn't afford to expand. And he couldn't afford
to tread water. Fortunately, Harry Sonneborn came up with a solution.
He thought McDonald's could make money by leasing or buying potential
store sites and then subleasing them to franchisees initially at a 20
percent markup, and then at a 40 percent markup. Under this plan,
McDonald's would scout out sites and sign twenty-year leases at fixed
rates. Franchisees would then pay McDonald's either a minimum rate or a
percentage of sales, whichever was greater. As sales and prices
inevitably rose over the years, the company would collect more and more
rent as its costs remained virtually constant.
Embracing Sonneborn's idea, in 1956 Kroc set up a subsidiary,
the Franchise Realty Corporation, to execute the new strategy. In the
years thereafter, he flew around the country in a small airplane,
scouting suburban neighborhoods dotted with tract housing, schools, and
churches -- which he regarded as fertile ground for the planting of new
"Golden Arches." In this pre-strip-mall era, real estate along
well-traveled byways was both cheap and plentiful. And in a short
period of time, the real estate operation became a high-margin
contributor to McDonald's bottom line. As Kroc noted: "This was the
beginning of real income for McDonald's."
The real estate strategy played perfectly into Kroc's larger
goal of control. Rather than sell blanket geographic franchises, which
would grant the holder the right to build as many or as few stores as
he chose in a particular area, Kroc sold only individual franchises,
for a low fee of $950. This insured that operators unwillingly to play
by his rules could open no more than one outlet. As a landlord, Kroc
could compose legal documents guaranteeing further control. And by
writing leases that would force tenants to conform to corporate policy,
he could more easily insure that the look, feel, and taste of
McDonald's would be identical in Bangor, Maine, and Butte, Montana.
Leaving the company's stabilized finances in the capable hands
of Harry Sonneborn, Kroc set about expanding and professionalizing the
growing industrial empire. Under his novel conception, each franchisee
and operator was like a plant manager. Knowing that the hallmark of any
sophisticated industrial complex is professional management, Kroc in
1961 launched a training program -- later called Hamburger University
-- at a new store at Elk Grove Village, Illinois. There, the faculty
trained franchisees and operators in the scientific methods of running
a successful McDonald's and drilled them in the Kroc gospel of Quality,
Service, Cleanliness, and Value. "I put the hamburger on the assembly
line," Kroc liked to say. Hamburger U also contained a research and
development laboratory to develop new cooking, freezing, storing, and
While Kroc dictated the size and shape of burgers, he gave
franchisees wide latitude in other areas. He knew that McDonald's had
to simultaneously unleash the entrepreneurial energies of hundreds of
operators while maintaining the standards and regulations crucial to
the efficient operation of a far-flung industrial enterprise. As
McDonald's chronicler John Love wrote: "Ray Kroc's genius was building
a system that requires all of its members to follow corporate-like
rules but at the same time rewards them for expressing their individual
Going Public Through Advertising And A Stock OfferingNowhere
was the dichotomy between central control and operating autonomy more
evident than in advertising. At Christmas in the late 1950s, Turner and
other managers would tour the Chicago Loop in the "Santa Wagon," an
ice-cream truck converted into a rolling likeness of a McDonald's
drive-in. But despite this penchant for old-fashioned hucksterism,
McDonald's had no company-wide advertising strategy. Instead, when
Minneapolis operator Jim Zein saw his sales explode in 1959 after
running radio ads, Kroc encouraged operators to take to the air-waves
with their own campaigns. Following this directive, two Washington,
D.C., franchisees, John Gibson and Oscar Goldstein, decided to target
kids by sponsoring a local children's show, Bozo's Circus. When the
station canceled the show in 1963, the franchisees hired the headliner,
a twenty-five-year-old television announcer named Willard Scott, to
create a new clown persona for local ads. Thus was born one of
advertising's most enduring icons: Ronald McDonald.
Successful advertising helped spur even greater growth. And in
1965, with 710 McDonald's spread throughout forty-four states, $171
million in sales, and a relatively tidy balance sheet, McDonald's
finally blossomed. The company went public on April 15, ten years to
the day after Kroc opened the Des Plaines store, selling 300,000 shares
priced at $22.50 each. Many of the shares were offered by Kroc, who
reaped $3 million on the sale, as well as by Sonneborn and June
Martino. As investors jumped on the McDonald's bandwagon, the stock
jumped to $30 on its first day of trading and soared to $49 soon after.
Kroc deployed the cash to expand and fend off rapidly
proliferating rivals, for the company's success has spawned a slew of
imitators seeking to cash in on the growing industrialization of fast
food. In 1965, there were already 1,000 Kentucky Fried Chickens, 325
Burger Chefs, and 100 Burger Kings in operation. Each chain, fortified
by cash infusions, expanded rapidly in the late 1960s, so much so that
by 1970, fast food had grown to a $6.2-billion business garnering 17.8
percent of all money spent in restaurants.
In such an environment, standing still was tantamount to
shrinking. "A laurel rested upon quickly wilts" was a favorite
Kroc-ism. So aside from opening new restaurants at a breakneck pace,
McDonald's added a new weapon to its arsenal: national advertising.
Having labored mightily to create uniform standards throughout the
system, Kroc expended capital to forge a uniform image. In 1967,
McDonald's spent $2.3 million, or about 1 percent of its sales, on its
first national advertising campaign, which was an unheard amount for a
fast-food chain. "What small businessman wouldn't cheerfully give up 1
percent of his gross to get our kind of commercials and things like
sponsorship of The Sound of Music
on network television to promote his store?" Kroc asked rhetorically.
Expanding the Ronald McDonald campaign created by the Washington
franchises, the company outfitted the clown with a gaggle of
kid-friendly characters such as Hamburglar, Mayor McCheese, and
Grimace, a large purple creature who craved shakes and french fries.
"We're not in the hamburger business; we're in show business," Kroc
liked to say.
Kroc backed up the advertising blitzkrieg with several new
products, many of which were created by franchisees. Pittsburgh
operator Jim Delligatti, seeking to bolster sales, in 1967 began
testing a new double-decker hamburger that he dubbed the Big Mac.
McDonald's introduced the sandwich throughout the chain in less than a
year, and it has since become the firm's enduring signature product.
Other new menu items, ranging from the Filet-o-Fish to the Egg
McMuffin, also sprouted from the fertile imaginations of McDonald's
operators and were similarly welcomed by Hamburger Central, as the
headquarters came to be known.
Becoming A Global InstitutionThrough rapid growth and
extensive advertising, McDonald's in the early 1970s became the
nation's largest fast-food chain and an easily recognizable feature of
the American cultural landscape. And the supreme ruler of McDonaldland,
Ray Kroc, became a figure of national stature. In 1972, when more than
2,200 McDonald's outlets racked up $1 billion in sales, Kroc received
the Horatio Alger award from Norman Vincent Peale. As the value of his
stock holdings rose to about $500 million, the septuagenarian acquired
certain trappings of wealth: a house in Beverly Hills, a mansion in
Florida whose doorbell chimed "You Deserve A Break Today," and the San
Diego Padres baseball team. But Kroc remained at heart a simple man,
who spoke proudly of "the peasant bones of my Bohemian ancestors."
Unlike so many other newly rich captains of industry, he developed no
taste for great art or society events. Instead, he continued to find
beauty in the simple bun. "It requires a certain kind of mind to see
beauty in a hamburger bun," Kroc rhapsodized. "Yet, is it any more
unusual to find grace in the texture and softly curved silhouette of a
bun than to reflect lovingly on the hackles of a favorite fishing fly?"
Just as the Ford Motor Company aroused the scrutiny of muckraking
journalists and reforming politicians, Ray Kroc's high-profile
industrial juggernaut attracted attention from many quarters. As
McDonald's fare became a staple of the American diet, it aroused the
snobbery of the food industry elite. New York Magazine's
Mimi Sheraton proclaimed: "McDonald's food is irredeemably horrible,
with no saving graces whatever." Nor did the nutritionists take kindly
to McDonald's offerings. As Dr. Jean Mayer, a Harvard professor, wrote:
"The typical McDonald's meal -- hamburgers, french fries, and a malted
-- doesn't give you much nutrition. It's typical of the diet that
raises the cholesterol count and leads to heart disease."
Politicians took note, too. In 1974, when the company's market
value surpassed that of lumbering U.S. Steel, Senator Lloyd Bentsen
complained: "Something is wrong with our economy when the stock market
is long on hamburgers and short on steel." But the future Secretary of
the Treasury ignored the fact that burgers had become an industrial
product nearly as significant as rolled steel, for the McDonald's
industrial complex was a prodigious consumer of raw materials. It
bought about 1 percent of all beef wholesaled in the United States and
a huge quantity of potatoes besides. Each store was an
opportunity-generating machine -- providing one out of fifteen young
Americans with a point of entry into the workplace. To broadcast its
booming output, McDonald's made a practice of posting its latest
chain-wide total sales figures on the Golden Arches. And the mounting
billions were monitored in the highest offices in the land. President
Richard Nixon, upon meeting Kroc in the early 1970s, asked him: "What
is it now, eight or nine billion?" Kroc replied: "Mr. President, it's
Many analysts viewed McDonald's rampant growth as
unsustainable. But Kroc believed the company needed to continue to
expand in order to survive. "I don't believe in saturation," he said.
"We're thinking and talking worldwide." Kroc envisioned a world in
which 12,000 sets of Golden Arches would stand as outposts of a mighty
commercial empire. Sure, there was one store for every 90,000 citizens
of the United States in 1972. But there were three billion people
outside America's borders who had never wrapped their mouths around a
Big Mac. So just as Henry Ford sought foreign markets for the Model T,
Ray Kroc embarked upon an ambitious campaign. McDonald's started by
invading former Axis powers Japan and Germany in 1971. And in 1977, it
introduced the fast-food sandwich to the land of Sandwich, opening the
company's 3,000th store in London. "With all the fervor of the Pilgrims
returned, McDonald's set out to introduce Europe to the joys of the
real American hamburger," Forbes noted.
Establishing beachheads in European capitals was just the beginning.
Over the course of the decade, the thousand stores that the company
opened overseas fueled its 27 percent annual growth rate. Golden Arches
sprouted from the soil in virtually every continent -- in South
America, in Europe, and in Asia. The chain became so universally
recognized as a symbol of American enterprise and influence that, when
Marxist guerrillas blew up a McDonald's in San Salvador in 1979, they
proclaimed the terrorist act a lethal blow against "imperialist
Although Kroc stepped down as chief executive in 1968, giving
way to Fred Turner, he remained a vital symbol of the company's roots,
and an enduring influence over day-to-day operations. The founder
reviewed first-day results from each new store, and kept watch over the
company-owned McDonald's outlet from his office in southern California.
"Despite McDonald's success, and his personal wealth of $340 million,
he always worries," Forbes wrote in 1975. "When Kroc travels, he insists that his chauffeur take him to at least six McDonald's for surprise inspections."
Though he killed the competition, the competition didn't kill Ray Kroc.
He passed away from old age in January 1984, at the age of eighty-one,
just the ten months before McDonald's sold its 50-billionth hamburger.
Ray Kroc didn't live to see his company's ultimate triumph. The
Dow Jones Industrial Average, the best daily barometer of the nation's
economy, consists of the nation's thirty most important companies. In
1985, when the value of McDonald's $4.16-billion real estate portfolio
surpassed that of Sears, the New York Stock Exchange added McDonald's
to the Dow. With this stroke, Wall Street validated Ray Kroc's
contention that beef patties could be placed on the assembly line. The
once-humble hamburger finally took its rightful place among planes,
trains, and automobiles as a titan of American industry.
Adapting To Foreign ClimatesOne key to McDonald's
continued growth is international expansion. With operations in more
than 65 countries, McDonald's now opens about one-third of its new
restaurants outside of the United States. In the early 1990s, Fred
Turner predicted that international sales would eventually surpass U.S.
While foreign markets can sometimes offer new obstacles for the
American company, like hostile government bureaucracies and unreliable
local suppliers, McDonald's faces an even greater overall challenge. In
each country, from Belgium to Brunei, the company is forced to walk the
tightrope of selling its uniquely American product, while
simultaneously catering to local tastes.
Although McDonald's always insisted on planting its rigid
operating system in foreign soil, when it came to other aspects of the
restaurants' operation, the company was more flexible. For example, to
make the chain's name more easily pronounceable for Japanese consumers,
it was changed to Makudonaldo,
and its mascot became Donald MacDonald. Hamburger Central also allowed
local operators to devise unique promotional campaigns. "Our name may
be American, but we're all Irish," ran one promotional campaign for
outlets in Dublin.
Today, even the menus at McDonald's restaurants in foreign
locations clearly reflect differences that do not exist at the
company's American outlets. While the stores offer fare like
hamburgers, french fries and milk shakes, there have been some
additions: for example, when McDonald's restaurants opened in Germany
in the early 1970s, they started serving beer; in the Philippines they
offer McSpaghetti noodles, while Norwegian franchises offer a salmon
fillet sandwich, the MacLak.