Founders - #7 Grinding It Out: The Making of McDonald's

Episode Date: May 27, 2017

What I learned from reading Grinding It Out: The Making of McDonald's by Ray Kroc. ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

and there's no talent here this is hard work this is an obsession talent does not exist we are all equals as human beings you could be anyone if you put in the time you will reach the top and that's that. So I am not talented. I am obsessed. Okay, so a little housekeeping before we get into today's book. I just recently redid the website for the podcast. So all show notes and links to the books that we cover are available at founderspodcast.com. The show is also on Instagram at Founders Podcast. If you use Instagram, add the show at Founders Podcast. Once I get to a few thousand followers on Instagram, I think we're going to live stream

the podcast as I record it using Instagram Live. That way you can see the full podcast before any edits, mistakes, and all. Also, I want to tell you some of the entrepreneurs that I'm going to be covering that are coming up soon. I just started reading The Last Tycoon, which is the story of Cornelius, or excuse me, The First Tycoon, which is the story of Cornelius Vanderbilt. It's an insane book so far. That one's going to take me a little bit. It might take me a few weeks to get that up because the book's about 800 pages. I also have a podcast coming up on the founders of Hewlett Packard. And I got that idea by reading the Steve Jobs biography. He kept referencing the respect and reverence he had for that company and the founders that created it.

I also found there's this great reading list if you guys use Medium by this guy. He's an investor named Keith Raboy, is I think how you pronounce his last name. But he put together a list. If you just search Keith Raboy on Medium, his last name is R-A-B-O-I-S. It's a list of maybe like 25 or 30 books. A lot of them centered around entrepreneurship, investing, and business. And so the Intel Trinity was on that list and it's about the founding story of Intel. So I have that book. It just arrived a few days ago. And I was also reading a blog post by WaitButWhy.

And it's about Tesla and Elon Musk. And Elon kept bringing up Henry Ford. So I knew I was going to cover him at some point. So I just decided to order his autobiography. And I just received that today. So Henry Ford will be coming soon. The founders of Hewlett Packard, Cornelius Vanderbilt, uh, the guys that started Intel. Those are just the books I'm working on now. And then we'll keep adding to the list as I, uh, I probably have 25

to 50, um, so far, and that number is only going to keep growing. So, um, and as finally before, uh, as a reminder, uh, founders, this is ad-free and independent due to patron support. So, patrons receive exclusive access to patron-only episodes. Every other episode I do is for patrons only. And patrons also get every episode early. So, this is a free episode for everybody, but the patrons will get it a few days early. Sometimes it's a few days. In some cases, it's been over a week early. It just depends on how fast I'm able to read and then

prepare for the podcast. So if you like what I'm doing here, please become a patron. That's the best way to directly support this podcast. Your support helps me create more podcasts on history's greatest entrepreneurs, and it's about for the price of a latte every month. So to me, it's a no-brainer. So I want to get into today's book. It's called Grinding It Out, The Making of McDonald's, and it's an autobiography by Ray Kroc. And we're going to deviate a little bit. I know we've been covering mostly technology entrepreneurs, and that's an interest of mine,

so I'm obviously going to keep exploring that path as much as possible but I do want to widen a little bit and I'm going to to cover entrepreneurs from all industries and I found this book because I saw a preview of the movie called founder and the autobiography I have in my hand is the text they used for the movie. So I read the book first, and then I thought it was my duty to watch the movie before I recorded the podcast in case I missed anything. The book is way better than the movie. The movie is not bad. I don't know if I'd watch it again. But the book I'd read again.

And it's a really – it reminds me a lot of how Sam Walton's autobiography is written. It's in very plain language, very short. This one's shorter than the Sam Walton one. And, you know, I probably have, I don't know, 30 different post-it notes in here. So there's some good information. It's completely different than any other story we've covered so far, we've talked about so far on the podcast. And when I'm using the word we, there's not just me over here doing it, but I'm talking about me and you is the we. One of the things I like about reading all these books is you realize that they are not, no one's born successful. They just work at it and then we

see the results of that success later on. So it's just really interesting to get to view the part of their life story before all this massive success comes. And in Ray Kroc's example, I mean, he didn't become successful till he was much, much older, past the age of 50. So I'm going to jump right into the book. And this is the part where he is selling his business at the time. He's selling these things called multi-mixers, which restaurants would buy from him to make milkshakes. And the McDonald's, the original McDonald's in San Bernardino, California, placed a large order.

They had like eight of these things running at one time. So he went out there. It's like, what are these guys doing? So he meets with them. He's extremely impressed with their organization. And now he has an idea in his mind. And so we're going to jump right to that. My enthusiasm for their operation was genuine, and I hoped it would be infectious and rally them in favor of the plan I had mapped out in my mind. I've been in a lot of kitchens of a lot of restaurants and drive-ins selling multi-mixtures around the country, I told them. And I've never seen anything to equal the potential of this place of yours.

Why don't you open a series of units like this? It would be a gold mine for you and for me too, because every one would boost my multi-mixer sales. What do you say? Silence. I felt like I dragged my tie in my soup or something. The two brothers just sat there looking at me. Then Mac gave that little wince that sometimes passes for a smile in New England and turned around in his chair to point up at the hill overlooking the restaurant. See that big white house with the wide front porch, he asked. That's our home and we love it. We sit out on the porch in the evenings and watch the sunset

and look down on our place here. It's peaceful. We don't need any more problems. We're in a position to enjoy life now and that's just what we intend to do. His approach was utterly foreign to my thinking, so it took me a few minutes to reorganize my arguments. But it soon became apparent that further discussion along that line would be futile. So I said they could have their cake and eat it too by getting somebody else to open the places for them. I could still peddle my multi-mixers in the chain. It'll be a lot of trouble for us dick mcdonald objected who could we get to open them for us i sat there feeling a sense of certitude begin to envelop me then i leaned forward and said well what about me

so he convinces them and ray crock by trade is salesman. So he sells them on him becoming the person that can expand all the McDonald's franchises, since they don't have an interest, too. So let's skip ahead a little bit. And this is him speaking. This is a really important part, because a lot of the people I know we've covered maybe had some kind of success early on. Ray Kroc did not. And you'll see what I'm talking about here.

When I flew back to Chicago that fateful day in 1954, I had a freshly signed contract with the McDonald's brothers in my briefcase. I was a battle-scarred veteran of the business wars, but I was still eager to go into action. I was 52 years old. I had diabetes and incipient arthritis. I had lost my gallbladder and most of my thyroid gland in earlier campaigns. But I was convinced that the best was ahead of me.

So I saw, I think I referenced this on the podcast before, but one time I saw this guy tweet something on Twitter that's saying if you're not successful by the time you're 30, like it's too late. And he just got destroyed in his mentions where it's just example after example of people having a success way later in life. And think about this, Ray Kroc at 52 years old, he's basically selling milkshake machines, marginally successful at at best and by the time he dies 30 years later he's one of the richest people on the planet now one area that ray kind of fits into the mold of uh all the other entrepreneurs we're talking about is he was kind of entrepreneurial for a young age um so let me go back into his life when he was a young a young man they called me danny dreamer a lot even

later when i was in high school and would called me Danny Dreamer a lot, even later when I was in high school and would come home all excited about some scheme I thought up. I never considered my dreams wasted energy. They were invariably linked to some form of action. When I dreamed about having a lemonade stand, for example, it wasn't long before I set up a lemonade stand. I worked hard at it and I sold a lot of lemonade. I worked at a grocery store one summer when I was still in grammar school. I worked at my uncle's drugstore. I worked in a tiny music store I'd started with two friends. I worked at something whenever possible. Work is the meat in the hamburger of life. There is an old saying that all work and no play makes Jack a

dull boy. I never believed it because for me, work was play. I got as much pleasure out of it as I did from playing baseball. So the majority of the podcast is going to be about his time after he does this deal with the McDonald's brothers, but I found this one anecdote interesting and I wanted to share it. As school ended that spring, the United States entered World War I. I took a job selling coffee beans and novelties door to door. I was confident I could make my way in the world and saw no reason to return to school.

Besides, the war effort was more important. Everybody was singing over there, and that's where I wanted to be. My parents objected strenuously, but I finally talked them into letting me join up as a Red Cross ambulance driver. I had to lie about my age, of course, but even my grandmother could accept that. In my company, which assembled in Connecticut for training, was another fellow who had lied about his age to get in. He was regarded as a strange duck. Whenever we had time off and went out on town to chase girls, he stayed in camp drawing pictures.

His name was Walt Disney. I brought that up because obviously you guys know that I have an interest in Walt Disney. I think it was the second podcast ever was about him. And I found another book recently about his life that I think I'm going to do like a part two, maybe in a few weeks, a few months from now. Oh, interesting enough too, years later, so they knew each other before they were 18 years old.

Years later, McDonald's, after Ray Kroc is the president and it's expanded it everywhere, he does a deal at Walt Disney to serve food at Disneyland in California. So a good part of his life, he sells as a paper cup salesman in Chicago. And he does that for a long time. I'm going to skip that part and move ahead to

since he's selling paper cuts mostly to like restaurants and stores that would serve some kind of beverage to clients. He then gets into selling the multi-mixers. So I want to I'm going to move ahead a little bit in the book just because I want to spend most of our time talking about his strategy for building at McDonald's. There's almost nothing you can't accomplish if you set your mind to it. I told that to a group of graduate students at Dartmouth College in March 1976. They had asked me to address them on the art of entrepreneurship, how to pioneer a business venture. You're not going to get it free, I said, and you have to take risks. I don't mean to be a daredevil.

That's crazy. But you have to take risks, and in some cases, you must go for broke. If you believe in something, you've got to be in it to the ends of your toes. Taking reasonable risks is part of the challenge. It's the fun. So this section right here is going to be called a one-man band. I was having a lot of fun back in early 1938 when I struck off on my own with a brand new multi-mixer in a big sample case and the whole nation of soda fountain operators and restaurant owners quivering in anticipation for this product. At least I thought they were. It

didn't take long for me to discover how wrong I was on that score. But there was enough evidence of interest to maintain my faith in the product. I believed I would be successful. I was a one-man marching band. I had a tiny office in Chicago, but I was seldom there. My secretary ran the office while I traveled all over the country. Sales were not bad considering the newness of the product. I could feel it beginning to catch on, but I was extremely unhappy with my financial setup. As a 60% partner, Sanitary Cup was able to restrict my salary. Sanitary Cup was his previous employer, and he did a deal with them that he was one of their best salespeople. He wanted to quit selling cups and then sell the Multimixer,

but they own the license, the resale license. So he had to do a deal with them where he had to give up 60% of his business. I determined after a little over two years that I was going to have to get that 60% back somehow. So I went to Clark, this is the guy that he did the deal with, and broached it to him. It was then I learned how he had misled me. The brothers, who own Sanitary Cup, had given up their interest to him for free. They probably never cared about the multi-mixer at all, and he

was going to take his pound of flesh from my heart. I was boiling mad, but there was not a damn thing I could do about it. I think this machine you're selling has a big future, Ray, he said. I was willing to discount the present to allow you to realize that future. But if you insist on getting my share back, then I must tell you that I want a handsome return on my capital investment. Never mind that I hadn't wanted his damn capital in the first place. All right, I said, how much? I don't know how he kept from choking on his own bile as he mouthed the figure.

$68,000. So just to give you some background there, the owners of the company of Sanitary Cup were holding the license, and one of their employees did this deal with Ray. But Ray didn't know, and his name is Clark, that Clark got the license from the company for free because they had no interest in selling multi-mixers. But he didn't tell Ray that for over two years he was getting the 60% of Ray's business while he was still working at Sanitary Cop. So he basically got screwed by this guy.

And there's a couple examples in the book that he talks about how important it is to just to know what kind of deals you're doing because he gets excited and doesn't look at the details and winds up screwing him. This is how he's going to raise the $68,000 to buy out and get so he owns 100% of the company. And this is what I would consider the first phase of grinding it out. And grinding it out is not only the title of the book, but I would say the motto of Ray Kroc's life. I didn't know where in the hell I was going to raise the money, but I had made my mind up to do it.

In the end, most of the cash came from my new home in Arlington Heights. I managed to get an increase in the mortgage, much to Ethel's dismay. Ethel's his first wife. Her apprehensions about becoming Mr. Multimixer had been laid to rest at this point, but I don't think she ever got over the shock of discovering that we were nearly $100,000 in debt. She couldn't seem to handle it. For me, this was the first phase of grinding it out, building my personal monument to capitalism. I paid tribute in the feudal sense for many years before I was able to rise with McDonald's on the foundation I had laid. Perhaps without that adversity, I might not have been able to persevere later on when my financial burdens were redoubled.

I learned then how to keep problems from crushing me. I refused to worry about more than one thing at a time, and I would not let useless fretting about a problem, no matter how important, keep me from sleeping. I knew that if I didn't, I wouldn't be bright and fresh to deal with customers in the morning. This is an interesting story how World War II now impacts his business. On December 7, 1941, we were thrown into the war by the Japanese sneak attack on the Pearl Harbor, and I was thrown out of the multimixer business. Supplies of copper used in winding the motors from the multimixer were restricted by the war effort. A salesman without a product is like a violinist without a bow.

So I scratched around and made a deal to sell a line of low-fat malted milk powder and 16 ounce paper cups for a drink called Malta Plenty. It was mixed in the cup using the metal sleeve or collar, just like a one in a million, and managed to make a living on multiplenty. But paying off my debt became a real nightmare. This is the debt of the $68,000 to buy 60% back of his company. I did it though, and then when World War II ended, I was able to go back to selling multi-mixers on my own. It was a glorious feeling. So the first half of the book is just a series of ups and downs. Every time he thinks he's making progress, he takes one step forward, two steps back.

So this section is the downfall of the multi-mixer and the transition to McDonald's. And so he sells a multi-mixer for two years, realizes he's getting screwed. Then he works to buy out Clark. And when he's doing that, a war erupts, and then he's forced to not sell it for a while. Now he's back to selling it. And the company that's producing the multi-mixer is actually about to implode. It wasn't easy to be cheerful about my business in the early 1950s. Al Doty once told me that he liked to have lunch with me because he always learned something about his own business trends. You seem to be able to see further into the future than the rest of us, he said. I believe I did, and what I saw made me very unhappy. It was clear that Multimixer's

days were numbered. Liquid Carbonic Corporation, that's the people that make the multi-mixture. Stockholders had engaged in a big proxy fight. The man who had inherited the presidency was determined to continue the firm's manufacture of soda fountains out of dedication to employees who had served that division loyally for many years. His opponents wanted to scrap the soda fountain division because it was losing money. They won. Other manufacturers were cutting back too. The handwriting was on the wall and Walgreens underscored it when, for the first time, they began pulling soda fountains out of their stores.

The upshot of all this, I knew, was that I had to find a new product. Preferably something that would be as innovative and as attractive as the multi-mixer had been 15 years earlier. It was not long after that I became intrigued by the stories of the McDonald's brothers and their operation that kept 8 multi-mixers whirring up a bucket brigade of milkshakes out there in sunny San Bernardino. What the hell, I thought, I'll go see for myself. So I booked my 52-year-old bones onto the Red Eye Special and flew west to meet my future. Okay, so now we're going to get into, we're going to go back to where this story started.

He's describing what he notices at McDonald's. It was a restaurant stripped down to the minimum in service and menu, the prototype for legions of fast food units that would later spread across the land. Hamburgers, fries, and beverages were prepared on an assembly line. Of course, the simplicity of the procedure allowed the McDonald's to concentrate on quality in every step, and that was the trick.

When I read this section, it reminds me of one of my favorite quotes. I'm not sure who said it but I saw it's a tweet that the first time I saw it was a tweet from Jack Dorsey and it says, make every detail perfect and limit the numbers of details to perfect. And so that's basically what I got from reading this description of how McDonald's organized their restaurants at the time. So now we're going to go back to the conversation he's having with the McDonald's brothers. So I asked Dick McDonald when he wondered aloud who they get to open a lot of similar restaurants for them, what about me? The response seemed to surprise him and his brother momentarily.

But then they brightened up and began discussing this proposal with increasing enthusiasm. Before long, we decided to get their lawyer involved and draw up an agreement. I would have rights to franchise copies of their operation everywhere else in the United States. The buildings would have to be exactly like the new one their architect had drawn up with the golden arches. The name, McDonald's, would be on all of them, of course, and I was 100% in favor of that. I had a feeling that it would be one of those promotable names that would catch the public fancy. I was for the contractual clauses that obligated me to follow their plans down to the last detail too, even to signs and menus, but I should have been more cautious there.

The agreement was that I could not deviate from their plans in my units unless the changes were spelled out in writing, signed by both brothers, and sent to me by registered mail. This seemingly innocuous requirement created massive problems for me. There's an old saying that a man who represents himself has a fool for a lawyer, and it certainly applied in this instance. I was just carried away by the thought of McDonald's drive-ins periferating like rabbits with eight multi-mixers in each one. Also, I was swayed by the affable openness of the McDonald's brothers. The meeting was extremely cordial. I trusted them from the outset.

That trust would later turn to bristling suspicion, but I had no inkling of that eventuality. I don't think I pronounced that last word correctly either. So let's just pause there real quick. This agreement he's signing is the foundation to the McDonald's Corporation, which is separate from the single McDonald's burger stand in San Bernardino. And it's the foundation of what becomes one of the largest companies ever built. And he didn't even have an attorney.

So I don't know. I just thought that part was pretty crazy. And let's go into the details of the agreement. The agreement gave me 1.9% of the gross sales from franchisees. I had proposed 2%. The McDonald's said, no, no, if you tell a franchisee you're going to take 2%, he'll balk. It sounds too full and rounded. Make it one and nine tenths and it sounds like a lot less. So I humored them on that one. The brothers were to

get 0.5 out of my 1.9%. This seemed fair enough and it was. If they had played their cards right, that 0.5% would have made them unbelievably wealthy. I've often been asked why I didn't simply copy the McDonald's Brothers plan. They showed me the whole thing, and it would have been an easy matter, seemingly, to pattern a restaurant after theirs. Truthfully, the idea never crossed my mind. I saw it through the eyes of a salesman. Here was a complete package, and I could get out and talk up a storm about it. Remember, I was thinking more about prospective multi-mixer sales than hamburgers at that point. Besides, the brothers did have some equipment that couldn't be

readily copied. They had a specially fabricated aluminum griddle for one thing, and they set up all of the rest of the equipment in a very precise step-saving pattern. Then there was the name. I had a strong intuitive sense that the name McDonald's was exactly right. I couldn't have taken the name, but for the rest of it, I guess the real answer is that I was so naive or so honest that it would have never occurred to me that I could take their idea and copy it and not pay them one red cent. Just a little anecdote here as kind of a warning, and we see this sometimes where McDonald's basically kills his first marriage. We're going to talk about his first wife here. Her name is Ethel.

Ethel was incensed by the whole thing. We had no obligations that would be jeopardized by it. Our daughter Marilyn, what they're saying by it, by him entering into this agreement for becoming the head of McDonald's franchise. Our daughter Marilyn was married and no longer dependent on us, but that didn't matter to Ethel. She just didn't want to hear about the McDonald's or my plans. I had done it again and once too often as far as she was concerned. The quarrels we had had when I extended the mortgage were mere preludes to this one.

It closed the door between us. She dutifully attended McDonald's gatherings in later years, and she was liked by operators' wives and by women on the staff, but there was nothing more between us. Our 35 years of holy matrimony endured another five in unholy acrimony. Okay, so I have this section labeled bizarre, and it's just some weird behavior from the McDonald's brothers. You can clearly see that this relationship with them is not going to last very long. So he's building out a McDonald's franchise at this time and he needs to change something and his contract says he has to get

in writing. So I called the McDonald's boys and told them about my problem. Well, sure, you need a basement, they said, so build one. I reminded them that I had to have it documented by a registered letter. They poo-pooed it, said it was all right to go ahead. They weren't much good at writing letters, and they couldn't afford to hire a secretary. Actually, they probably could have hired the entire typing pool at IBM if they had a mind to. I hung up hoping that they would have second thoughts and send me written confirmation, but they never did. It was a messy way to start, being in default on the first unit, but there was no choice. I went ahead with the building, telling myself when I got breathing space, I would fly out to see the McDonald's and get all the contractual wrinkles ironed out at

once. That would have worked had the McDonald's been reasonable men. Instead, they were obtuse. They were utterly indifferent to the fact that I was putting every cent I had and all I could borrow into this project. When we sat down with our lawyers in attendance, the brothers acknowledged the problems but refused to write a single letter that would permit me to make changes. We have told you by telephone that you may go ahead and alter the plans as we discussed, said their attorney. But the contract calls for a registered letter. If Mr. Kroc does not have that, he's put in jeopardy, said my counsel. That's your problem. It was almost as if they were hoping I would fail. This was a peculiar attitude for them to take

because the more successful the franchising, the more money they would make. My attorney gave up on the situation. I hired another and he quit too, saying I was plain crazy to continue under such conditions. He could not protect me if the McDonald's should close in on me. So I said, let him try. And I plunged ahead. So at this time he's developing franchises, but he still has his day job selling multi-mixtures. I do want to say something that it'll become apparent. I think if you read the book and throughout the podcast,

he wasn't the easiest person to deal with. There's a lot of people that were entrepreneurs that we're covering on the podcast. I think almost every single one is headstrong. Maybe that's why they don't get just jobs like normal people. But you can definitely get the sense that he was hard charging and probably really hard to deal with. So I just want to get that out of the way. So here's a little bit about his schedule before he's able to do McDonald's full-time. I would drive down to DePlaine, that's where the first McDonald's store is, each morning and help get the place ready to open. The janitor would arrive at the same time that I did,

and if there was nothing else to be done, I'd help him. I've never been too proud to grab a mop and clean up the restrooms, even if I happen to be wearing a good suit. But usually there were a lot of details to be taken care of in terms of ordering supplies and keeping the food operation going, so I could write out detailed instructions for the manager. The manager's name is Ed. Ed came in about 10 o'clock in the morning to open the store at 11 o'clock. I would leave my car at the store and walk the three or four blocks to the Northwestern Station, where I'd catch the 757 express train to Chicago and be in my office before 9 o'clock.

In the evenings, I would commute back to the store, back to the plane and walk over to the store. I was always eager to see it come into my view, my McDonald's. But sometimes that sight pleased me a lot less than other times. Sometimes Ed would have forgotten to turn the sign on when dusk began to fall, and that made me furious. Or maybe the lot would have some litter on it that Ed said he hadn't had time to pick up. Those little things didn't seem to bother some people, but they were gross affronts to me. I'd get screaming mad and really let Ed have it.

He took it in good part. I know he was concerned about these details as I was because he proved it in his own stores in later years. But perfection is very difficult to achieve, and perfection was what I wanted in McDonald's. Everything else was secondary to me. So jumping a little bit ahead, one of the most important things that ever happened to

McDonald's is Ray hires this guy named Harry Sonneborn. And I want to tell you a little about Harry and then I want to tell you about the genius idea that changed McDonald's forever. Yet I had to admire the way he studied the legal and financial problems we were steaming into. He immersed himself in stacks of books and learned the ins and outs of contracts and financial maneuvers, as well as the lawyers and the bankers. And that wasn't his trade. He had previously worked at, I think, Dairy Queen. One of the basic decisions, and this is before I get into the genius idea

Harry came up with. This paragraph was really surprising to me. I think actually really smart too. One of the basic decisions I made in this period affected the heart of my franchise system and how it would develop. It was that the corporation was not going to get involved in being a supplier for its operators. My belief was that I had to help the individual operator succeed in every way I could. His success would ensure my success, but I couldn't do that and at the same time treat him as a customer. So what he's saying, there's a lot of franchisees or franchisors. So they have you sign a franchise agreement, and then you have to buy the supplies needed from the franchise from them.

He didn't do that. They would all buy from the same suppliers, but that supplier wouldn't be McDonald's because he wanted his franchisee to not be a customer of his because then you might be optimizing for short-term sales success instead of long-term franchise success. I thought that was a really, really good idea, especially this time where the whole reason we're covering Ray Kroc is not because fast food restaurants are that interesting, but the actual franchise system and the business model that he came up with and pioneered is interesting.

And he got help with that from Harry, and this is going to be one of the longer parts we cover. The biggest of these was the move that made possible McDonald's dramatic growth. It started our evolution as a company whose business was developing restaurants and selling franchises to operate them. We agreed that we wanted McDonald's to be more than just a name used by many different people. We wanted to build a restaurant system that would be known for food of consistently high quality and uniform methods of preparation. Our aim, of course, was to ensure

repeat business based on the system's reputation rather than the quality of a single store operator this would require a continuing program of educating and assisting operators and a constant review of their performance it would also require a full-time program of research and development I knew in my bones that the key to uniform form it to uniformity would be in our ability to provide techniques of preparation that operators would accept because they were superior to methods they could dream up for themselves. But research and development and a staff to supervise the service operators effectively takes money. Now remember, at this time, he's only making 1.9% of franchisees gross sales, and he has to give up 0.5 of that to the McDonald's brothers. So effectively 1.4%.

And they're selling hamburgers a time for 15 cents. So it's not going to get it done. So this is where they changed the business model of what is known as McDonald's today. The experience of Tasty Freeze and Dairy Queen, two prominent franchising firms in the country at that time, and our own sense of direction with the units in California led to the conclusion that the only practical way for McDonald's to grow as we envisioned would be for us to develop the restaurants ourselves. Being in the restaurant development business would mean that we could plan a strong system in which locations could be developed by McDonald's as an overall long-range nationwide marketing program. That idea was exciting.

It appealed to my salesman's instinct because obviously it would make the right to operate a McDonald's restaurant far more valuable to a potential operator than if we were franchising only a name. So basically give them entire business as opposed to just a name. But building Dreamcastles was one thing. Actually getting into the restaurant development business was a seemingly insurmountable problem. Harry's solution, the formation of Franchise Realty Corporation, was to my mind a stroke of financing genius. And here's how they do it. Franchise Realty was the supreme example of a guy putting his money where his mouth is. I did a lot of talking about the ideal way to develop McDonald's with the kind of quality and euphority that would ensure our success. And when Harry came up with a way to make it possible,

I backed it by going into hawk for everything I had, my house, my car, you name it. Talk about grinding it out. So he's saying he put every single asset he did as collateral to what they're about to do. I felt like Samson with a fresh haircut, but that dream of what the company could be sustained me. We started Franchise Realty Corporation with $1,000 paid in capital, and Harry parlayed that cash investment into something like $170 million worth of real estate. Here's the genius part. His idea, simply put, was that we could induce a property owner to lease us his land on a subordinated basis. That is, he would take back a second mortgage so that we could go to a lending institution, in those early days it was a bank, and arrange a first mortgage on the building.

The landlord would subordinate his land to the building. I must admit that I was a bit skeptical. Why would a landlord want to do that? But I let Harry plunge ahead without interference. I believe that if you hire a man to do a job, you ought to get out of the way and let him do it. If you doubt his ability, you shouldn't have hired him in the first place. I knew that Harry had schooled himself thoroughly in the fundamentals of leasing agreements. In addition to the volumes he

poured over, he hired a consultant from Washington, D.C. and an expert in real estate deals named Dreyfus. Harry brought this fellow to Chicago and has spent a week talking to him for $300 a day. June Martino, who's working with them, was afraid I was going to blow my top and throw Harry and his consultant both into the street, but that was the farthest thing from my mind. I know that you have to spend money to make money, and as far as I was concerned,

Harry was simply doing the job I'd hired him to do. One of the reasons his subordinated lease idea worked so well was that in the late 50s, we didn't have the proliferation of franchise operations and the fierce competition for commercial fringe property that developed in the course of the next 25 years. Another reason was that both Harry and I were pretty good salesmen, and we could romance a property owner with the notion of earning at least a little something from his vacant land. This was the beginning of real income for McDonald's. Harry devised a formula for the monthly payments being made by our operators

that paid our own mortgage and other expenses plus a profit. We received this set monthly minimum or a percentage of the volume the operator did, whichever was greater. After a time, we began realizing substantial revenues from this formula and we could see that we were merely nibbling around the edges of this huge hamburger frontier we were exploring. So that's exactly why you've probably heard the saying that the McDonald's is in the real estate business,

not the hamburger business. They found a way to finance their operations by being a realty company first and then selling hamburgers on that land. So just jumping ahead, this is just a random little anecdote I liked. I'll just read it. June Martino believed, for example, that I once fired a member of our staff because he

didn't wear the right kind of hat and didn't keep his shoes shined. She was correct as far as it went. I didn't like those things about the man, but those weren't the reasons I fired him. I just knew that he wasn't right for us. He was prone to making mistakes and the hat and shoes were merely symptoms of his sloppy way of thinking. When I read that, it made me think of one of my all-time favorite quotes. I think it's attributed to Bruce Lee, but it's really hard to tell if it actually came from him or not. And it's how you do one thing is how you do all things.

And it's something I just kind of remind myself. If I find myself slacking or making a lot of mistakes in one area, it usually means I'm not focused about everything I'm doing. And so it just reminds me to take a look at everything I have going on. It's usually a sign like he was saying. The fact that he didn't wear the same hat, even though all of them were supposed to be in the same uniform, or a shine of shoes just means that he was sloppy so is that a reason to fire him no but it's probably an indicator of something else that he's doing incorrectly as well

this part i labeled 30 year a 30 year overnight success my years of experience in selling paper cups and multi-mixers paid off because I knew exactly what hands held the strings I wanted to pull to get the jobs done. People have marveled at the fact that I didn't start McDonald's until I was 52 years old and then I became a success overnight. But I was just like a lot of show business personalities who work away quietly at their craft for years and then suddenly get the right break and make it big. I was an overnight success all right, but 30 years is a long, long night. So some of this is just random business advice he has peppered throughout the book. This one is,

I have the note I wrote, is good idea on why to focus on details over grand design. I always felt comfortable working with Fred Turner because he's a detail man like I am. There is a certain kind of mind that conceives new ideas as complete systems with all their parts functioning. That sentence, I would say, describes Steve Jobs, who we covered on the podcast, and Edwin Land, who we also covered on the podcast. I don't think in that grand design pattern. I work from the part to the whole, and I don't move on to the large scale ideas until I've perfected the small details. To me, this is a much more flexible approach. For example, when I was starting McDonald's,

my original purpose was to sell more multi-mixers. If I had fixed that in my mind as a master plan and worked toward that end, my system would have been far different and in a much smaller scale creation. Once in a while, I have great ideas strike me in the middle of the night, sweeping plans that I could see complete or so it seemed. But every time, these things turned out in the clear light of the following days to be more fanciful than functional. And the reason usually was that some small but essential detail had been overlooked in my grand design. So at the risk of seeming of seemingly simplistic, I emphasize the importance of details. And here's his main point. You must perfect every fundamental of your business if you expect it to perform well. Here's his random thought on competition. My attitude was that competition can try to steal my plans and copy my style, but they can't read my mind, so I'll leave them a mile and a half behind.

So jumping a little bit ahead in the book, this entire time he has a somewhat contemptuous relationship with the McDonald's brothers, and now he's devising a plan to get out of a contract and become the sole owner of McDonald's. Which now, the reason the movie is called Founders is because he really is the founder of McDonald's. He wasn't the first one to start the McDonald's hamburger stand in San Bernardino, but the actual McDonald's franchise system, which is why the company is so valuable, he's the one that came up with that. So the most important item in my plans for the company was to end our relationship with the McDonald's brothers. This was partly for personal reasons. Mac and Dick were beginning to get on my nerves with their business game playing. For example, I had introduced them to

my good friend and paper supplier, Lou Perlman, and they began buying all their paper products from him too. They would come to Chicago and visit Lou and ask him to drive them around to see all the McDonald's locations in the area, which he did, but they would not come by corporate headquarters or even call me on the telephone. Lou would fill me in later on where they'd gone and what they had said. But the main reason I wanted to be done with the McDonald's was that their refusal to alter any terms of our agreement was a drag on our development. They blamed their attorney for this lack of

cooperation, and he and I were certainly at daggers points all the time. But whatever the reason, I wanted to be free of their hold on me. I knew from conversations that I had with Lou Pearlman and others that the McDonald's boys could be persuaded to sell. Mac's health had not been the best, and Dick had expressed concern about that and talked about retiring. I wanted to help them retire, but I was afraid of what it might cost me. Harry and I had several long sessions hashing out over the pros and cons of it, deciding the best approach to take. Finally, we determined that we would hit them right between the eyes with it. No use shilly-shallying, which I have no idea what that means, because their lawyer would only waste a lot of time bickering about it, and we would come out at the same place in the end anyhow.

So I called Dick McDonald and asked him to name their price. After a day or two, he did, and I dropped the phone, my teeth, and everything else. He asked me what that noise was, and I told him that was me jumping out of the 20th floor of the building. They were asking $2.7 million. Well, we'd like to have a million dollars apiece after taxes, Ray, Dick explained. That's for all the rights, the name, the San Bernardino store, and everything. You know, we feel we've earned it. We've been in business over 30 years, working seven days a week, week in

and week out. Very touching, but somehow I just couldn't seem to work up any tears of pity. This was really going to take some financial wheeling and dealing. I asked Harry to take a run at the three insurance companies that had lent us a million and a half dollars. We had to anyhow, because they had first right of refusal on McDonald's borrowing for a period. But John Gossel said Paul Revere Life couldn't take any bigger bite than it had. So basically all of them said they couldn't do it. Three strikes and we were out on the street looking for some Santa Claus with a big bag full of money. I was feeling pretty low and then Harry found our money man in New York. His name was John Bristol, and he was a financial advisor to Princeton University,

Howard University, Carnegie Tech, and the Ford Foundation, as well as others. A total of 12 educational and charitable institutions. The deal we agreed on put a new wrinkle in American financial arrangements, but it was an extremely successful deal. So they get the money to buy out the McDonald's brothers. Here's the results. So these 12 institutions that lend them the money, they nicknamed them the 12 apostles. It says it was an extremely successful deal. They made about $12 million on that deal. So the institutions made tons of money on it, but it was also a good deal

for Ray. And here's why. Remember that we had been forking over 0.5% to the McDonald's brothers all along anyhow. The total cost of the transaction to us, about $14 million, was peanuts compared to what the corporation earned in the years that followed by retaining that 0.5% instead of paying it to Mac and Dick McDonald. On today's system-wide sales of more than $3 billion, that 0.5% would be over $15 million a year. So if the McDonald's brothers didn't sell out for $2.7 million total, they could have been making $15 million a year and having to do nothing, just sit back and collect. And this part of the book is just

his random, just thoughts on the effect of advertising. We had solved our supply problems in California and built more stores. Business gradually picked up, but it remained far lower than it should have been. In mid-summer of 1963, Nick Karros came to me with a proposal he had drafted for a television advertising campaign. The projected cost was $180,000, and he wanted to pay for it by raising the price of hamburgers in our company-owned stores a penny from 15 to 16 cents. Nick, this is a terrific plan, I said, but we're not going to raise the price. What I want you to do is go back to Chicago and present this to Harry Sonneborn, make him come up with the money. I knew he'd be able to do it because the logic of his one-page

memo was irrefutable. It demonstrated precisely how an ad campaign would repay its cost many times over, while failing to spend the money would cost us much more in the long run. Nick was successful, although Harry went along rather reluctantly. The advertising campaign we put together was a smash hit. It turned Californians into our parking lots as though blindfolds had been removed from their eyes, and suddenly they could see the golden arches. That was a big lesson for me in the effectiveness of television. That's definitely something you still see with McDonald's today.

They're one of the largest spenders on advertising in the world. Moving ahead a little bit in this book, this is a highlight of a passage that the note I left was, this guy's a little nuts. Some people are bachelors by nature. I am not. I guess I need to be married to feel complete. That's why I fell so hard for Jane. Her name was Jane Dobbins Green. She was John Wayne's secretary. A mutual friend introduced us, and I was charmed by Jane's sweet disposition. We had dinner together the night after we met, and the next night, and the night after that. In fact, we had dinner together five nights in a row. I was enchanted. Within two weeks, we were married. Okay, so this is when McDonald's is preparing for an IPO. And there's also Ray's thoughts on the difference between decentralization and centralization. He's a favor of decentralization.

The reason for going public, in addition to raising capital for the company, was to give us some funds ourselves. We had put this tremendous money-gathering machine in motion, and it was running at a fantastic rate. But we hadn't been taking anything out. We were plowing it all back in, so as not to slow down the company's expansion. So Harry spent his days closeted in meetings with bankers, brokers, and lawyers. I was busy trying to decentralize our management structure. We had 637 stores now,

and it was an unwieldy to supervise them all from Chicago. It has always been my belief that authority should be placed at the lowest possible level. I wanted the man closest to the stores to be able to make decisions without seeking direction from headquarters. Harry didn't see things my way in this matter. He wanted tighter corporate controls, a more authoritarian posture. I maintained that authority should go with a job. Some wrong decisions may be made as a result, but that's the only way you can encourage strong people to grow in an organization. Sit on them and they will be stifled. The best ones will go

elsewhere. I knew that very well from my past experience with John Clark at the Lily Tulip Cup when he was selling paper cups. I believe that less is more in the case of corporate management. For its size, McDonald's today is the most unstructured corporation I know and I don't think you could find a happier,

more secure, harder working group of executives anywhere. So this disagreement between Harry and Ray, the first of many, and it winds up leading to their dissolution of their partnership. So they have their initial public offering, and they went to market at $22.50 a share. They become wealthier than they ever could have imagined. Something interesting was the McDonald's IPO was the first time that women were ever allowed on the floor of the Stock Exchange, the New York Stock Exchange. And that was in July 1966. Also, a little note about their performance. At this time in 1966, they were doing over $200 million in sales,

and they had served over 2 billion customers at that time. So this is the end of the partnership. There's 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. So they're having a disagreement because Ray's always about expanding

and Harry is always about being more physically conservative. So 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 33 locations in the works. They are all good ones. We can't afford to lose them. What shall I do? Tell him something vague, Luigi. String him 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, and the result was that he resigned. It was a hell of a mess, and I stewed about it all the way back to California. 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 that the company would go down the chute that when he left, he sold it all. And here's the result of that. 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 10 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 to him.

So now at this point, Harry was his partner, one of the first few people that were hired and built when McDonald's only had one store and now they have hundreds and he's out. So Ray's running it by himself. He does this for a while and after the IPO, he let somebody else take over at CEO. At last I felt like a complete person. Now I told myself I could take life a little easier and enjoy it. I was finished grinding it out. But business is not like painting a picture.

You can't put a final brush stroke on it and then hang it on the wall and admire it. We have a slogan posted on the walls around McDonald's headquarters that says, nothing recedes like success. Don't let it happen to us or you. I wasn't about to let it happen to me. Fred Turner, who is, Fred's the guy he named CEO,

Fred Turner was doing a fine job of running the company, as I know he would, but there were lots of areas that needed my attention. In many corporations, when the top guy moves up, it's to a figurehead role. He becomes chairman of the board, not me. In fact, Ray goes to work, even after he has a stroke and he's in a wheelchair, he goes to work every day until he dies in his 80s.

Skipping ahead, there's just this one part that I thought was interesting. I labeled it, you can't always be right. Hell, if I had 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, but we never will. They're actually putting in, getting rid of cashiers in I think like 15,000 stores right now with automated kiosks. So maybe the food's not prepared automatically,

but they're definitely diving headfirst into automation. Okay, so we're almost done. There's only a couple more parts I want to highlight. At this part, I just thought this made me chuckle. He's extremely wealthy, and you'll see he wants to buy the San Diego Padres, the baseball team. 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. 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. So he's already at that. He was talking about that story came from after he bought the team. This is before he buys the team. 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 $7 million of McDonald's common stock, which is selling for about $55 a share. So if you do the math, that's $385 million. And this is 1974. This section I want to include because although McDonald's is a massive success, people think maybe everything you touch is going to be successful.'s is a massive success, people can think maybe everything you touch is going to be successful. This is a list of all his failures, which I thought was

really interesting that he put at the end of the book. One time, Harry, June, and I invested in a beer garden restaurant on the south side of Chicago. That was a loser. I tried my hand with an idea for an elegant hamburger restaurant called Raymond's. The corporation opened two of them, one in Beverly Hills, the other in Chicago. They didn't take hold, so I cut our losses and got out. One good thing came of Raymond's. It gave us the prototype for the in-city McDonald's restaurant that are now growing so popular. Part of the problem with Raymond's was my insistence on quality and a restricted kind of operation, which kept the profit margin as thin as the skin on a hot dog. The same was true of a venture we started back in my California days,

the Jane Dobbins Pie Tree chain. Hell of an idea. Great pies too. In fact, they were so good, we were growing broke selling them. I've also come up with some pretty big flops for McDonald's. Roast beef was another bust. We were pretty excited about it at first, but roast beef is difficult for our kind of operation to deal with. It went well in a few stores, but it simply did not adapt to our system. We learned a lot about testing requirements in that roast beef fiasco though. That's important, because if you are willing to take big risks, and I always have been,

you are bound to blow one once in a while. So when you strike out, you should try to learn as much as you can from it. I think we probably found out enough about our own methods from the roast beef experiment to more than make up for what we lost on it. So as he became really wealthy, he gave a lot of money to charity. And in the book, they talk about, I think they gave over $1 billion to NPR and other charities like the Ronald McDonald House, St. Jude's Children's Hospital, stuff like that. But this part I highlighted was interesting. One thing I flatly refuse to give money to is the support of any college. I've been wooed by some of the finest universities in the land, but I tell them they will not get a cent from me unless they put in a trade school. Our colleges are crowded with young people who are learning a lot about liberal

arts and little about earning a living. There are too many baccalaureates and too few butchers. Educators get long faces when I talk like this and accuse me of being anti-intellectual. That's not quite right. I'm anti-phony intellectual, and that's what many of them are. I include that part because I think this book was written 20, what, 30 years ago? Yeah, this book was written a few years before he died, and he died in 1984. So I put that in there because I think it's true. It's very true today. When you look at the rise of education costs, at least in the United States, and then the stagnating wages, and then you look at I like the idea of colleges preparing you For jobs that actually exist

And it was really interesting To hear him talk about this So I want to end here And it's the best place to end I think Because it sums up what he thinks It takes to be successful The key element In these individual success stories

And in McDonald's itself Is not knack or education, it's determination. This is expressed very well in my favorite homily. Press on. Nothing in the world can take the place of persistence. Talent will not. Nothing is more common than unsuccessful men with talent. Genius will not. Unrewarded genius is almost a proverb. Education will not. The world is full of educated derelicts.

Persistence and determination alone are omnipotent. I don't think it's a surprise that he's going to prioritize persistence and determination, considering the name of his memoir is Grinding It Out. I definitely recommend buying the book. It's a really fast read. I think it's like 200 pages. I read it in like two days. And as you can see from the parts we highlighted, it's really plain language, easy to understand,

and it goes into way more detail. As a reminder, these podcasts are not meant to be summaries. This is just to highlight the parts I found interesting, to give you some ideas, and hopefully get you excited about reading. Because I do think reading more books and less social media is important. If you find this podcast valuable, there's many ways you can support this podcast. You can leave five-star reviews on iTunes or anywhere else the show appears. You can tell your friends about it or link to it on social media. Or you can sponsor the podcast directly by becoming a patron.

And if you become a patron, you get every episode early, and you'll receive exclusive access to patron-only episodes, which every other episode I create is just for patrons only. I appreciate it. You make this show possible, and I will talk to you next week.