We Study Billionaires - The Investor’s Podcast Network - TIP753: The Relentless Vision That Made McDonald’s a Global Giant w/ Kyle Grieve

Episode Date: September 14, 2025

On today’s episode, Kyle Grieve discusses the rise of McDonald’s under Ray Kroc and the vision, systems, and persistence that transformed a small burger joint into a global empire. He explores Kroc’s leadership style, business model innovations, and the timeless lessons investors and entrepreneurs can learn from McDonald’s journey. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 03:34 - The grit, adaptability, and salesmanship that made Ray Kroc unstoppable 14:42 - How a hot dog stand inspired the first McDonald’s restaurant 19:04 - Why protecting brand image was so vital to McDonald’s growth story 20:06 - How McDonald’s pivot to real estate fueled expansion 25:21 - Why standardization and systems powered McDonald’s rapid growth 28:49 - Why Kroc’s struggles with the McDonald brothers show alignment is critical 30:22 - What Jobs, Schultz, and Musk shared with Kroc as visionaries 33:54 - How McDonald’s thrived for decades despite fierce competition 40:51 - How Hamburger University aligned franchisees with Kroc’s vision 42:42 - The story behind McDonald’s product innovation successes and failures Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join Clay and a select group of passionate value investors for a retreat in Big Sky, Montana. Learn more ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Buy a copy of Grinding It Out by Ray Kroc here. Follow Kyle on Twitter and LinkedIn. Check out all the books mentioned and discussed in our podcast episodes ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy ad-free episodes when you subscribe to our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses in just a few minutes each week through our newsletter, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠We Study Billionaires Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X (Twitter)⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Browse through all our episodes (complete with transcripts) ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance Tool⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our sponsors: SimpleMining HardBlock AnchorWatch Human Rights Foundation Linkedin Talent Solutions Vanta Unchained Onramp Netsuite Shopify HELP US OUT! Help us reach new listeners by leaving us a ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠rating and review⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Spotify⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! ⁠⁠⁠⁠⁠⁠⁠⁠⁠https://theinvestorspodcastnetwork.supportingcast.fm⁠⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Did you know that Ray Kroc didn't even found McDonald's? He first learned about the restaurant and the brand at the ripe age of 52, while lugging around milkshake machines searching for his next big break. And while he initially saw McDonald's as a means to just sell more milkshake machines, he quickly realized that McDonald's could be something that was truly special. But more importantly, Ray Kroc helped shape and engineer the DNA of McDonald's that we see today. multiple decades later, from his obsession with things like consistency, uniformity, and systems

to the real estate model, to its focus on brand and integrity, Crock created the framework that allows McDonald's to successfully operate over 38,000 restaurants across the globe today with nearly identical amounts of efficiency. Today we're going to explore some of Ray Crock's traits that made him a relentless and successful businessman, the critical importance of proper alignment between business partners, and the specific systems that turn McDonald's into a worldwide brand. We'll also explore how other visionary founders, such as Steve Jobs, Howard Schultz, and Elon Musk share many similar characteristics with Ray Kroc. Then we'll examine the importance of factors such as innovation and execution in scaling

a business. This episode is designed for investors and business professionals seeking to gain a deeper understanding of the DNA of an exceptional business. So whether you're an investor looking to understand the subtle nuances of a company's competitive advantages, an entrepreneur trying to scale their own business, or just someone who's curious about how an individual can scale a single idea into a global empire, you're going to love this episode. Now, let's get into this week's episode on the DNA of McDonald's and how Ray Kroc formulated it. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Now for your host, Kyle Greve. Welcome to the investors podcast. I'm your host, Kyle Greve, and today we're talking about the DNA at McDonald's and their founder, Ray Kroc. Let me start by asking you a question. What do you get when you mix affordable food, convenience, a founder with a vision and strong work ethic, and a positive association with the company's products, massive success and global reach. And that's precisely what has happened with one of the globe's best-known brands, McDonald's. I find it interesting that McDonald's is just so prevalent, given its relatively simple business model. Part of the draw for me to learn more about it is directly linked to the simplicity of the business. It's a case study that demonstrates that value can be created

when you just have a product that is consistent, convenient, and easy to acquire and consume. My first introduction to Ray Crock was through the movie about him, the founder. It depicted Ray as someone who worked incredibly hard to achieve his accomplishments. To many outsiders, it might have appeared that Ray found success quite sifely, but that wasn't the case. Ray once said I was an overnight success, but 30 years is a long, long night. To better understand McDonald's, we will examine the business's origins. And that all starts with the man who scaled it. Interestingly, they called the movie on him the founder because he didn't even create the idea of McDonald's. He actually partnered with the McDonald's brothers.

What he founded was the franchise model that McDonald's used to scale up. Without Ray Kroc, McDonald's might just be a single location in California today. Let's start by looking at some of the traits that Kroc brought to the table that helped McDonald's succeed. I see three key areas, grit, adaptability, and a strong focus on sales. Ray had been involved in industries adjacent to the industry for much of his early life. He traveled around the U.S. selling paper cups for a business called Lily Tulip Cup Co. And Croc had an incredible work ethic.

There was a time he'd sell paper cups from early morning until 5 p.m. Then go and play piano for a local radio station. Go home quickly eat, then go play piano at a bar afterwards. While working with Lily Tulip, Ray showed an affinity for helping himself by helping others. For instance, Ray felt that if he couldn't sell a customer by assisting them to increase their sales, he just wasn't doing his job correctly. He also hustled to find customers in non-traditional areas. For instance, he started selling to ice.

ice cream vendors where customers could squeeze the bottom of the cup to get more ice cream to lick. He even found Italian pastry shops that sold these squat-sized cups to use his holders for their pastries. Another contrarian move was to sell his paper cups to a Polish place to hold their prune butter. It was pretty obvious that Ray was just a very, very good salesman. He temporarily quit his job at Lily Tulips during the Depression because they were going to cut his pay. However, because they knew how good of a salesman he was, they found a workaround and he returned right away. But Ray wasn't happy with his current job at Lily Toolup and began leveraging the context that he made selling cups to move on from that work. One opportunity that would set the

course for his path towards McDonald's was a product called the Multimixer. So this is one trait you're going to notice in Ray. He likes to leverage one job as a salesman to find these new opportunities. So Ray first noticed one of his customers placing increasingly large orders of paper cups for use in their ice cream parlor. The owner named Ralph Sullivan had found a way to make milkshakes with this low butterfat content by using frozen milk. Ray then convinced another customer of his to have a look at the frozen milk in their own ice cream business. Since Ray stood to benefit if this ice cream business grew by selling them more cups, he was actually incentivized to sell them on that frozen milk idea. And it worked. But Ray had another interesting idea up his sleeve for the customer.

He asked them to try selling their shakes for just 12 cents instead of the usual 10 cents. They had a heated discussion about it, but Ray's insistence paid off. They decided to give the 12 cent price point a try and rub it in Ray's face when they thought it wouldn't work. But they never actually ended up reducing their price. And as a result, Ray pointed out that they made an additional $100,000 solely from that price increase. Additionally, they also bought 5,016 ounce cups from Ray in their first year. Now, I find this interesting for a few reasons. One, Ray was willing to experiment with pricing to see what the market would accept.

And two, Ray was also on the lookout for any opportunity to make more money by helping others. He wanted to grow with his customers, not at his customer's expense. The testing of pricing is so necessary, especially when you have an established brand. If your product is seen as just some sort of commodity, then pricing above your competitors is just a death sentence. But if you have a superior product, in this case, the shakes that made the frozen, milk, which I assumed probably tasted better, that you can charge more for your product. Point two is strong because if you genuinely are looking to help others, you will find others

that gravitate towards also trying to help you back. It's the reciprocation tendency at work. If you go out of your way to help other people, the universe has a way of paying you back. Ray is an interesting example because he would find unconventional ways to help people that would also improve his own fortune. His customers, whom he had converted, made some innovations of their own. The traditional methods of making milkshakes involved pouring the mixture into a metal cup, then transferring it to a paper cup. Now, the innovation was to use a metal cup that acted as a kind of a collar on top of a paper cup, which could then be sold to customers. It was an ingenious way to help reduce the amount of cleaning required to service a growing number of milkshake consumers. Earl Clark, the same inventor of the metal collars, came up with yet another innovation.

So the machines used to mix milkshakes had a short lifespan. due to the high volume of work they were required to perform. So the shake was a heavier drink to begin with, and when the mixers were run continuously, they simply burned out. That situation is what inspired Earl Prince to invent the multi-mixer. At first, this machine had six spindles arranged around the central pedestal stand, and the top could be rotated to take the drinks off. But that resulted in too many drop drinks and other minor disasters.

So the top was made stationary and the spindles reduced to just five. This machine was powered by a one-third horsepower industrial-type electric motor with a direct drive. There was no carbon brushes to wear out. Ray writes, you could mix concrete with the damn thing if you had to. This was the invention that really made big volume milkshake production possible, and it changed the course of my life. So Crock brought the Multimixer to his boss at Lily Tullop, and they instantly fell in love with the product.

So Lily Tullop became the exclusive distributor of the Multimixer. Unfortunately, the higher-ups showed very little interest in actually expanding that product. So Ray had eventually become disillusioned with Lily Tulip because they just wouldn't allow Ray to give Walgreens, which was one of his largest accounts, a discount on their cups to help keep them as a customer. So he decided to quit Lily Tulip and sell multi-mixers. However, since Lily Tulip owned the distribution rights, he had to negotiate accordingly. Lily Tulip would therefore own 60% of his new company called Prince Castle Sales and seed the business with $6,000. Croc said he had to do the deal this way, but that soon it became an anchor around his neck.

As soon as Ray left Lily Tulip and started working full-time, selling multimixers, he noticed that the job was going to be an absolute grind. While he was able to convince some soda fountain operators and restaurant owners to buy multi-mixers, I got the feeling that he didn't convince quite as many as he thought he would. So the job really hadn't changed that much as Kroc was just still a traveling salesman, just selling a different product. The deal that he'd made with Lily Tulip gave him an ownership of the company, but it was too small and that was also starting to bother him. He thought that getting away from Lily Tulip might actually open things up for him

and allow him to make some more money. But since Lily Tulip was a majority owner of the company, they were still his boss, and they limited his salary to the exact same amount that he was making when he was selling their cups. Unknown to Ray, his former boss at Lily Tulip, had actually purchased the shares of Prince Castle sales from the owners of Lily Tulip

who had originally invested in Prince Castle sales. Ray came back to him to tell him that he wanted to buy him out so he had more control over his own business, perfectly reasonable. But his old boss, John Clark, told Ray he'd sell it to him, but it had to be for $68,000. And this was a figure that Ray felt was just outrageously high. So to pay Clark his share back of the company,

Ray had to actually mortgage his own house, which pissed his wife off who never supported his move away from Lily Tulip. When World War II started, Croc had to exit the Multimixir business entirely as copper, which was required to manufacture the multimixures, was all being used in the war effort. But once World War II ended, Croc was back at it. He was selling multimixes to notable franchises that you probably heard of, such as Dairy Queen and A&W. One interesting fact I'd like to discuss is how Ray thought about incentives. He writes, I didn't bother setting sales goals for the multi-mixer.

I didn't need any artificial incentives to keep me working at top speed. My estimates of when I was having a good year was when I sold 5,000 units, and I had several of those. One year, I think it was 1948 or 1949, I sold 8,000. This is a mindset that only someone who truly loves what they do will have. Croc believed in himself when just nobody else would, including his wife. But he was working incredibly hard, traveling around the country, dragging around around 50-pound multi-mixers to potential leads and selling a substantial number of them.

As the business started scaling, Ray realized that he would need some help. So he ended up hiring a bookkeeper to lighten his burden. Her name was June Martino, and she would later become one of the top female executives in America as part of McDonald's. As the 1950s rolled around, Ray observed that the multimixers was just not really a product that was going to stay in high demand. Many of his large customers were starting to remove soda machines from their locations, which would be a significant headwind for his current business.

So he looked into finding his next business venture. Here's where the official McDonald's story starts. So at the ripe old age of 52, Ray Croc learned about a burger and shake restaurant in San Bernardino. The two McDonald's brothers ran it. Ray knew about them because they had eight multi-mixers operating simultaneously just to meet their customer demand. Once Ray learned about them and given his bleak prospects in the multimixer industry, he booked a ticket to see their operation. Now, before we get into the McDonald's brothers,

I'd like to just go over some of the traits that I observe in Ray Crock pre-McDonnells. So the first one here is that Ray had endless grit and work ethic. Whether he was working multiple jobs simultaneously or selling a single product, he was working long and hard hours. He was willing to lug around a 50-pound multi-mixer across the country just to make his business a success. He was also an exceptional salesman. Lily Tulip wanted to keep around because they clearly

respected his ability as a salesman and as an entrepreneur. Now, while Ray felt like he was taken advantage of by his former employee, it does show that there were people who did believe in his abilities as a salesman. Next is that Ray was just unconventional. He would find interesting people in non-conventional areas to sell his products to, and he did it in kind of this win-win way. He always showed a remarkable ability to adapt to changing times as well. Look at his transition from selling cups to multimixers to taking a break due to World War II,

where he started selling Maltiplenty, a pre-mixed drink in a cup. We also see how opportunistic and entrepreneurial Kroc was. He leveraged his network, selling cups to eventually sell multi-mixers and always had people around him who could help supply him with new ideas or interesting connections to make. Kroc also saw innovation as an opportunity. The multi-mixer could have been a device used at just one single location, but Kroc thought it would take off, given the right push. We also see Ray having strong abilities and strong. strategic thinking. He observed whist of his customers were making large orders of his cups and why. Then he worked backwards from there to uncover new opportunities. He was also willing to test

out different pricing strategies to help customers maximize their returns. Croc also was constantly monitoring his surroundings for any significant changes that could affect his business. Now, as with most entrepreneurs, Ray also showed a tolerance for risk-taking. He mortgaged his own home against his own wife's wishes just to make sure that he could run his multimixer business. as he saw fit. He also left a stable job at Lily Tulip to run a more speculative operation selling these multi-mixers because he just believed in himself. Now let's move to McDonald's. To understand McDonald's, let's look at the backstory of their very first location, opened by Maurice and Richard McDonald's. So Dick recalls operating a movie theater for a time. And at that time,

it was a very lean period for the McDonald's brothers. That meant eating was just a luxury that they actually had to cut back on on a regular basis. There was a hot dog stand close by, and they would, frequently eat a hot dog for their daily meal. Dick was impressed that the hot dog stand was really the only one around and found that very, very interesting. This eventually helped give him the idea to start a restaurant. The original idea was actually a barbecue restaurant in San Bernardino. But after a few years, they realized a restaurant was always busy, but they weren't really moving much volume. So they pivoted. They closed down that restaurant and opened a new concept. Here's what Ray writes about it. It was a restaurant stripped down to the minimum in service and menu.

The prototype for legions of fast food units that later would spread across the land. Hamburgers, fries, and beverages were prepared on an assembly line basis, and to the amazement of everyone, Mac and Dick included, the thing worked. 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 saw it working that day in 1954, I felt like some latter-day Newton, who just had an Idaho potato carombed off his scum. Now, the interesting thing about Crocs 4A in the McDonald's was that he didn't yet have the vision of what McDonald's would become.

He mentions multiple times in the book that one of his primary interests in the proliferation of McDonald's was simply that each location would just have eight multi-mixers. So he was still focused on the multi-mixers and not necessarily on what McDonald's could be. One thing that Ray made very clear was that the McDonald's brothers wanted complete control, which he initially agreed to. So the new franchises that Ray opened had to resemble the plan drawn up by their own architect. New locations would have to display signs and menus that were authorized by the brothers. The agreement could not be deviated from unless changes were specified in writing signed by both brothers and sent to Ray by registered mail. For Ray's first location in De Plains, Illinois, things didn't start very smoothly. The architectural plans the McDonald's brothers wrote were meant for a desert climate.

So they kept their potatoes outside basically year-round, which just wasn't possible in Illinois. The plan also lacked a basement, which would have been required for this exact location. So when Ray called the McDonald's brothers to ask permission to install a basement, they told them to just proceed without obtaining a written approval. Next was the issue of the McDonald's French fries. So Croc couldn't actually replicate the taste that he had at the San Bernardino location. He said he followed their methods to a tea, but they just didn't taste the same. So Ray actually ended up contacting the potato and onion association, which I didn't even know existed, to see if they had any insight on what he was doing wrong.

He was asked to explain the exact process that the McDonald's brothers used in San Bernardino. And that's where it was discovered that since the potatoes were left outside, they were naturally cured. So Croc then created his own curing process for the potatoes by blasting them with air. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world. many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse,

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com slash WSB. All right. Back to the show. So it's worth noting here that Kroc had very little money at this time, as he essentially risked it all on opening the first McDonald's site. But since things were starting to go well, he wanted to continue opening new locations. But there was yet another problem.

The McDonald's brothers had licensed their restaurants to 10 locations in the western U.S. But they had failed to notify Ray that there was actually another location they had licensed in Illinois to someone else, even though they'd promised the rest of the U.S. to Ray. So here's what Ray writes. It cost me $25,000 to buy that area

from the frayjacks, and it was blood money. I could not afford it. I was already in debt for all that I was worth. I couldn't blame the frayjacks, of course. They were completely above board and fair, but I could just never forgive the McDonald's. Unwittingly or not, they had made an ass of me in the biblical sense.

I'd been blindfolded by their assurance and led to grind like some blind Samson in the prison house. Now, throughout this book, it's very evident that Ray respects the McDonald's brothers, and yet he takes several jabs at them. So Ray was a more serious businessman and I think took the job a lot more seriously than the McDonald's brothers did. There was definitely a bit of misalignment on that end, and I don't think it was ever corrected. However, let's return to an area of the book that I found particularly interesting, which is systems. I love systems, and I think Kroc figured out how to create the McDonald's systems

incredibly well and efficiently, although he indeed ran into numerous roadblocks while on this journey. So Ray also demanded a ton from his franchisees. For instance, many restaurants sought to increase their revenue by incorporating elements into their stores to generate passive income. So you can think of things such as, you know, pay telephones, jukeboxes, or vending machines. But Ray did not allow for any of that, because he believed it tarnished the fine brand of being a family restaurant that McDonald's had cultivated over the years. McDonald's had been a uniform operation. There was simply just no room for people who wanted to operate under the McDonald's brand, but take a different direction. He didn't want it to be a name used by various people haphazardly. Now, Ray needed to

create a restaurant system known for consistently high quality food and uniform methods of preparation. He needed to focus on repeat business driven by the system's reputation, rather than relying on a single store or operator. They also had to maintain a continuous program to educate and support operators, as well as to review their performance on a regular basis. To continue improving McDonald's, they needed a full-time research and development program as well. Now, while developing this program, Ray Kroc and his colleague Harry Sondaborne began to understand the bigger picture for McDonald's. Instead of just building out the locations on behalf of the franchisee, they would decide to have a slightly different model where they would find the location, develop it themselves, then lease the area back to the franchisee. It was a brilliant business plan that had massive success. To get this all started, Ray and Harry began at the Franchise Realty Corporation.

It was seated only with $1,000, and its success came from some pretty savvy financial engineering. So you could basically break it down to four parts. The first part, find a landowner. Second part, convince that landowner to lease the land back to them and agree to take a second mortgage, meaning they'd only get paid back after the bank. Third, use that agreement to get a first mortgage from a bank to build the restaurant on the land. And fourth, the landowner's rights to the land would be subordinated.

The bank would have first claim before the landowner. Crock didn't think the landlords would go for this deal at all, but he decided to let Harry try it anyways. Ray's management style reminds me a lot of Reed Hastings style at Netflix. If you hire a superstar, you give them responsibility and you let them take ownership of it. If you hire them for their expertise, you let them cook and see what kind of innovations they can do to help move your company forward. Harry Sona Born was Croc's first superstar inside a McDonald's. And the system worked incredibly well.

It allowed franchise realty to scale up. And since there wasn't as much competition for real estate as there is today, they could secure their locations at much better prices than they could probably get today. Now, speaking of systems, the next curveball thrown at Ray was related to having a key person who could visit the newly set up franchisees to help them getting run properly. The man he found for this job was Fred Turner. In 1957, Crock opened 25 franchises and Fred Turner worked inside every single one of them. Fred bought other innovations to McDonald's just like Harry Sonobor. For instance, as McDonald's scaled up, the scale created numerous problems regarding uniformity. The hamburger buns are a good example.

So any McDonald's you go to is going to have the exact same buns. However, the problem was that as McDonald's scaled, they needed more and more buns and making them prove to be very, very challenging. As a result, Fred came up with the idea to have buns made in significant quantities by several suppliers, with McDonald's being their primary customer and I think in some cases being their only customer. And as McDonald's expanded, so did its suppliers. So I mentioned earlier that Ray was very good at helping his customers when he

was at Lily Tulip. He brought that same attitude to McDonald's. For instance, at the time, McDonald's was creating just nine products and required only 40 items to make those nine products. But Croc wasn't selling these inputs to his franchisees. Each franchisee was sourcing them directly from the supplier. Where McDonald's had the advantage was in making it cheaper for their suppliers to get their product to the franchisees. They did things like, you know, improving packaging, which could make the supplier more efficient, allowing them to charge McDonald's less. than other customers. Many of these relationships with suppliers came about because the suppliers were also

inside of the business as franchisees. This alignment of incentives worked very well between McDonald's, its franchisees, and its suppliers. For instance, in California, there was actually a massive discrepancy in sourcing buns and meat. So in California in the late 1950s, buns and meats were going for nearly 100% premium compared to the stores in Illinois. Ray resolved this issue by leveraging his entrepreneurial skills and connections. He basically just found a baker who had helped solve McDonald's problems elsewhere, who retired

and got him to come out of retirement to help McDonald's in California. Now for the Patty problem, he had to take a different approach. One supplier of meat for McDonald's named Bill Moore was actually experiencing cash flow problems and needed about a million dollars to avoid bankruptcy. Him and his partner asked that McDonald's would buy the company, but Ray said no, because he just didn't want to be part of the supply chain business. But what Ray did was basically just told him who I hang in there and that he'd be okay because they were partners with McDonald's and as McDonald's grew, the supplier would grow with them.

And it all ended up working out for Bill. So Bill ended up building multiple McDonald's franchisees with his partner. Bill then ended up selling his shares in the franchises to fund a new meat processing plant that Ray said processes over 300 million patties per year for McDonald's. The plan also made things like syrup for soft drinks and manufactured milkshake mix. Additionally, Bill then went on to create even more plants around the U.S., including locations in Atlanta, San Jose, North Carolina, and Hawaii. Now, like most small businesses, McDonald's had numerous cash flow problems as it scaled up. One such problem occurred when a McDonald's franchisee named Clem Boar, who was responsible

for scouting and leasing new sites for McDonald's, failed to secure a clear legal title to the properties. This oversight resulted in a mechanics liens totaling around $400,000 against the company. This was a significant financial setback for the very early franchise operation. Raised net worth at this time was only $90,000, so he just wasn't able to come up with that money himself. So they basically were forced to borrow money from a consortium of insurance companies and an acquaintance. This opened the door to McDonald's borrowing more money in the future, which helped further expedite their growth. Another way that McDonald's systematized was through its speedy service system.

So this system required a standardized store blueprint. This meant that every McDonald's location had nearly identical floor pants for the kitchen and the front counter. Additionally, equipment such as things like grills, friars, shake machines, and prep tables were placed in the exact same position in every store. This allowed staff to be trained to move more consistently regardless of their location. Next came the workflow system, which was based on an assembly line system. An example of this while cooking a hamburger might be, you know, the patty start on the grill, the cooked pies moved directly to the dressing station, burgers are then wrapped and placed in

warming bins for pickup. Each step was located just one to two steps away from the next, which reduced any wasted movement. Kitchens were laid out so that everything a worker needed was within an arm's reach. Additionally, equipment was placed to minimize traffic jams or collisions, which could slow down production. Quality control was also a massive part of McDonald's brand and success. Food had to be served while still hot, so grills were positioned near holding bins, allowing burgers to be served quickly while still warm. Now when thinking of fries, the fryers were placed close to the salt station and holding area to ensure crispiness and speed.

Shake and soda machines were near the front counter to minimize any delays in serving drinks. To add further uniformity, all major kitchen equipment was supplied or authorized by McDonald's, which ensured uniform cooking times, temperatures, and quality. This level of control made it easier to train crew members because every store operated in the same way. Kroc was basically just transforming the restaurant industry into an assembly line model. The best aspects of an assembly line are that it builds speed and consistency, lowers training time, reduces labor costs, improves the efficiency of space, and is more easily scalable. Without

this assembly line systems, McDonald's would have never been able to expand much further outside of California. Additionally, the assembly line system ensured a consistent product wherever it was eaten. This was vital in building McDonald's brand. When you visit McDonald's today, you expect a very, very specific product. And if you are wildly disappointed with that product in one location, the brand's reputation is going to be tarnished in all locations to that one customer. Another key theme that I really appreciated from Ray Crock was his ability to generate wealth for those around him. Many investors like myself are huge fans of individuals such as, you know, Mark Leonard,

the CEO of Constellation Software. He has helped over 100 Constellation Software employees become millionaires through the system that he created for Constellation. His ultimate goal is to create 500 CSU millionaires, which demonstrate how much runway he still thinks he has left. Now the similarity that I see between the two of them is that Ray also created several millionaires within McDonald's. However, instead of being purely employees of McDonald's becoming millionaires, they were also from the franchisees that he partnered with.

One person close to the McDonald's organization told Ray, he was certain research would show that Ray Kroc had made millionaires of more men in history than any other person. But Ray seemed like a modest person. In the book, he discusses that he didn't feel like he'd made millionaires out of his employees and franchisees. Instead, they made it themselves. But Kroc saw himself as someone who could just provide the means to the right person. person to attain wealth if they were willing to put in the work. I admire this humbleness and I think it's a very powerful trait in leaders that I'd like to invest in. Now let's focus here a little more on just how important it is to be aligned with the people that you do business with. Croc made a point

in his book as he helped scale McDonald's that he just wasn't aligned with the McDonald's brothers. He writes, the McDonald's brothers were simply not on my wavelength at all. I was obsessed with the idea of making McDonald's the biggest and best. They were content with what they had, and and they just didn't want to be bothered with more risks and more demands. But there wasn't much I could do about it. At one point, Kroc sent Fred Turner to the California area to observe the practices at the 10 locations that the McDonald's brothers had franchised before the deal with Kroc. Ray was absolutely appalled by what they were allowing at these locations.

The locations outside of the original just weren't following the brand closely enough, and Ray felt they were tarnishing the brand that he'd fought so hard to build. So they were doing things such as, you know, adding non-core items to the menu, such as pizza, burritos, and enchiladas. They were lowering the quality of the burgers by adding ground hearts to their ground beef mix, which changed the fat composition of the burger, making it greasier.

The operators refused to cooperate in volume purchasing, so they couldn't charge the same amounts. And they just wouldn't pony up additional revenue dollars to spend on advertising campaigns that were supposed to help all of McDonald's franchises. So Ray was infuriated by this because he was just running a tight ship and he felt contempt for the McDonald's brothers

for allowing these franchises to operate differently. But since they weren't his stores, there was nothing he could do. And that upset him because, like I mentioned before, when you go to McDonald's in one place, you expect the exact same experience in any location. And he could see that these other locations just weren't suitable for the brand as a whole. There are many parallels between Kroc and other high-performing founders,

such as Steve Jobs, Howard Schultz, and Elon Musk. All three of these guys wanted to concentrate a lot of their decision-making early on to help solidify their brand and product. Croc did the same thing, just decades ahead of these guys. So in Steve Jobs's case, he was utterly obsessed with product design and the user experience. While Jobs was much more prickly than Croc was, neither was afraid to clash with partners or internal executives who disagreed with their uncompromising standards. An example was when Jobs insisted on removing disc drives from the IMAC in the late 1990s,

which was an initiative that many other insiders first resisted. But Jobs' clarity of design helped protect Apple's brand identity, which was based on the principle of simplicity. Other rigid requirements that Jobs wanted included things such as having no fans on his computers. This made computers much quieter and less distracting to use. However, it also required a completely different method to keep the laptop cool, which necessitated considerable innovation. While Crock was nowhere near the innovator that Jobs ever was,

they were both keen on shaping their companies in their own mold, and they knew they had the best vision for providing the best product to customers based on the brands that they built. Starbucks is Howard Schultz with another pioneer who came after Croc and understood the power of the interplay of experience with the consumption of a beverage or food. In Schultz's case, Starbucks wasn't just a location to get coffee. He envisioned it as a third place to go between home and work. Schultz is an interesting case study because he stepped down as CEO, saw his brand, and results deteriorate as a result and then return to right the ship.

The corrections he made helped save the brand and are significant reasons that Starbucks remains the behemoth that it is today. Now, part of the strategy that Schultz used to bring Starbucks back to its rightful place was to ensure that operators were aligned. Small changes in a store were not part of Starbucks's core and were not to be tolerated as they altered the customer's core experience. When Schultz left, Starbucks initiated cost-cutting measures that led to a departure from his original vision. For instance, they started using ground beans instead of grinding them in-house

and sold food that overpowered the coffee smell for which Starbucks had been known. When Schultz came back, he was willing to go the extra mile to ensure that employees and customers knew that he was earnest about getting back to its roots. He famously shut down every U.S. Starbucks location for three hours to retrain baristas on how to make coffee the way that he thought it should be made. This clearly demonstrated two Starbucks employees and customers that they were very serious about improving the product and service. Then you look at the enigma that is Elon Musk. So where Musk and Kroc met was in the concept of risk,

Elon pushed for Tesla to be vertically integrated. He wanted control of everything, from battery production to the sales process. This was a pretty novel concept because the legacy automotive industry operates in a significantly different manner. They outsource heavily for manufacturing and parts, and they use dealerships to sell their products. However, Musk chose not to take this route because he knew that the traditional way of thinking didn't align with the concepts of first principles thinking. He understood that the best way to make a good product was just to do it all in-house.

But it was a rocky road to get Tesla to where it is now. The Gigafactory, for instance, was incredibly costly, and Tesla operated a loss for most of its existence. So while some people inside Tesla might have wanted to hit the brakes and maybe slow down growth or take fewer risks, Elon decided to push forward with his ambitious projects because he, he had the vision to see what could be possible. This vision and the ability to take risks are two similarities between these two exceptional value creators. The next topic that I would like to address is competition. McDonald's is not, never was, and never will be a monopoly. While its revenues are second only to those of Starbucks today, I would be hard pressed to admit that they have any sort of monopoly.

Are they positioned well? Yes. But they must continue to improve. Otherwise, they very well risk losing market share. So how they managed to stay near the top for multiple decades? Let's examine some of the concepts that Ray adopted, which are still prevalent today. So Ray specifically demanded to express the strengths of McDonald's through four things, quality, service, cleanliness, and value. This is one of those situations where I actually don't really think McDonald's had some sort of inherent competitive advantage that isn't available to basically any other well-scale competitor. Where they differentiate themselves, though, is in execution. So Crock points out that many former franchisees and copycats have tried to replicate

what they learned from working inside of a McDonald's franchise. But none of them really ever had that special sauce to make it big. This reminds me actually a lot of Evolution AB, a business that we've discussed quite often on TIP in which I used to be an investor in. Evolution upon analysis doesn't really seem to have a significant moat versus competitors. And similar to McDonald's, it operates in a very, very competitive industry. They have separated themselves and their ability to execute at a higher level than many of its competitors. Now, what exactly does this mean for a business? It means you must continue innovating and executing at an exceptionally high level. Even a minor mistake can allow competitors to seal market share and erode your business. For this reason,

it's not the best competitive advantage to have, but it can still be powerful when wielded by the bright leaders in business. Now, Kroc mentions that many of his competitors have attempted to clone the McDonald's system, but have been unsuccessful. Many competitors will even clone McDonald's real estate locations. Now, this is an interesting point because actually in the book, Ray doesn't discuss the rationale at all but timed choosing locations. I assume that he probably did this purposely for competitive reasons to prevent competitors from gaining any knowledge that could harm McDonald's.

But in reality, competitors can really just open shops on this exact same street as McDonald's and rely on McDonald's own research to find areas that have very, very high volumes of foot traffic to support a given restaurant. You know, it's really just no coincidence that you'll see in McDonald's next to several other fast food restaurants. There was a very good example from the book about a franchise in Knoxville, Tennessee. So a competing burger restaurant a few doors away was offering five burgers for 30 cents. And this was a price that the McDonald's franchisee just could not compete with.

But he was actually still turning a profit because while customers were going next door to buy hamburgers, they would actually end up going back to McDonald's for their fries and beverages. But then the competitor turned up the heat. They were offering burgers, fries, and milkshakes all for 10 cents each. So the franchisee visited Ray to inform him of his troubles and that he was thinking of taking legal action against the competitor as he found it to be anti-competitive behavior. But Ray let him know that he believed in entrepreneurship and didn't think that people should rely on the government to fight their own battles.

He felt that if a competitor could put a McDonald's franchise out of business using this strategy, the McDonald's didn't deserve to be in business and should shut down. Instead, he suggested things like being a better merchandiser, providing a better service, and a cleaner place. The franchisee took this to heart and became a much larger franchisee, so apparently this speech lit a real fire under him. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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All right. Back to the show. Now, he's spoken a lot here about how critical alignment is in business. So let's now look at Ray's dissolution of his partnership with the McDonald's brothers, as it's a key story to Ray Crock. He decided that he no longer wanted to be in business with Mac and Dick because they were playing just too many games and just getting on his nerves. From the sound of it, the feeling was actually mutual.

So Ray gave an example of one of the suppliers that he shared with Mac and Dick, who they used, and they would visit. And when they would visit, it was actually near McDonald's headquarters. But whenever they visited, they didn't bother calling Ray or visiting the HQ, which was a behavior that Croc found very irritating. Now, the McDonald's brothers were interested in retiring, and their price was set at about $2.7 million. This was a figure that Ray felt was unfair.

Now, it's pretty challenging to really evaluate this deal as I couldn't find any reliable statistics for that time, but we're going to revisit this shortly. So I'm not sure if Ray felt the agreement was unfair or was just upset that he'd have to find the money from someplace. He eventually found a lender and purchased a McDonald's brother's stake at the agreed upon price. Now, the original deal was for all locations, including the San Bernardino location, which was the cash cow. However, at the last minute before the deal was completed, the McDonald's brothers demanded that they retained, the San Bernardino location for themselves and allow their employees to run it. This angered Ray, as he felt that they'd gone back on their word and changed the deal. But the McDonald's brothers were happy. His quote here shows what he thought of the agreement and how cutthrow he was as a business

man. So I was happy to, except for one part of the deal that stuck in my throat like a fishbone. That was the McDonald's brother's last minute insistence on retaining their original restaurant in San Bernardino. They were going to have their employees run it for them. What a goddamn rotten trick. I needed the income from that store. There wasn't a better location in the entire state. I screamed like hell about it, but no way. They decided they wanted to keep it and they were willing to pull the plug on the whole arrangement if they didn't get it. Eventually, I opened up a McDonald's across in that store, which they had renamed the Big M and ran it out of business. But that episode is why I can't feel charitable or forgiving towards the McDonald's brothers. They went back on their

promise, made on a handshake, and forced me into grinding it out, grunting and sweating like a for every inch of progress in California. Here's some figures from the book that may provide insights to the economics of McDonald's in its early days. So in 1958, a news column mentioned that Crock had built a $25 million business. He said that a successful store had an average net profit of about $40,000 on an annual gross of $200,000. The average customer's payment was about $0.66.

And not a single franchise had failed at that time. He also mentioned that if a franchise were to fail, McDonald's would just come in, and take it over anyways. What Ray didn't disclose was that McDonald's business was actually showing a paper profit, but nothing in terms of cash flow. He noted that out of the 160 stores they had, they were only receiving income from 60 locations that had been internally developed. The remaining 100 were owned, developed, and operated by the operators themselves.

At this time, they collected about a 1.9% service fee, which I assume is just a franchise fee. The 60 they were receiving income from had significant development-related costs. However, by 1963, they had resolved the cash flow issue and were generating sufficient profits to address it. This was done through scale efficiencies. Now, another way that McDonald's developed itself was in the culture that it created for its franchisees. Much of this culture was created at Hamburger U. Now, I mentioned earlier that Ray placed a massive emphasis on standardization.

Hamburger U was created specifically to help people get trained to adopt Ray's mindset when it came to consistency. But credit goes to Fred Turner who actually founded Hamburger U. Now, instead of focusing purely on how to cook hamburgers and fries, Hamburger U looked more broadly at a multitude of different things, such as operations, service, and leadership. It was at Hamburger U that managers were taught about the speedy service system, quality, control and cleanliness, customer service, and employee management. The course was a six-week intensive.

Now let's fast forward here to 1959. Ray had made Harry Sonoborn president and CEO of McDonald's. But Rift was beginning to form between the two. These rifts can mean a lot of bad news, as they generally indicate that the chairman, who I would assume would be Ray at this time, is misaligned with the CEO. As we've discussed, alignment within a corporation is key to its success. Part of the Rift was due to perception. So Ray had actually moved to California to help develop stores in that specific state. But this was far away from McDonald's HQ.

And Harry felt Ray was just wasting his time in California. The Rift began to widen, and McDonald's executives were informally categorized as either crock people or sonoborn people. However, the Rift seemed to be put on the back burner as raised efforts in California ultimately proved to be successful, and McDonald's was now flirting with the notion of going public. The reason that McDonald's went public is this pretty much the exact same reason that most businesses go public, which was to reward the hard work of a lot of the insiders inside

of the corporation. We'll get back to going public shortly, but I want to tackle another key concept of McDonald's. Innovation. While it might not be the same innovation as a tech business such as an Apple or Tesla, McDonald's had its own version of innovation that it utilized to help grow its business. The first significant innovation in terms of product was the Filo Fish. Now, the idea for the filetal fish was quite novel. One of the McDonald's franchisees named Lou Groin was noticing that business was very slow on Fridays. And that was because the franchise was in Cincinnati, which had a large Catholic population where meat wasn't supposed to be consumed on Friday.

Friday. Another chain called Big Boys had a sandwich called the Big Boy sandwich that became a big seller on Fridays. So Lou was losing significant amount of business to Big Boy and wanted to innovate to find a way to keep up or even beat them. And the Filet O Fish was his innovation. The reason that he was allowed to have the Filet-O-Fish was that he owned the territorial licensing rights to that area. At first, Ray was hell-bent against the idea. But Lou convinced a few other key executives that he either have to sell fish burgers or sell the store. They decided to proceed with the idea and began rolling it out on a very limited basis, initially on just Fridays. However, the burgers were so successful that it became a mainstay product where it still is today.

But in any successful business, it's evident that you won't be rolling in wins all the time. You're going to have to get through a number of roadblocks on the way to success. And that was no different in innovation. So Ray talks about a burger that was around a long time ago called the Hula Burger. It was a slice of grilled pineapple surrounded by two slices of cheese. Ray actually thought that it would contend with the flayo fish, but it was just a major flop and was removed nearly immediately. Now, back to going public here. So going public for a business is often kind of a circus because many companies that go public have little to no experience in capital markets.

So navigating that potential minefield can be an absolute headache. Luckily, McDonald's had really good connections and found suitable partners to work with. Now, the first issue they had with going public came from their auditors. They had been using what they called the development accounting, which was not certifiable by their accountant. Now, the book doesn't mention what exactly development accounting is, but from my research, I would actually completely agree with the accountants. So development accounting enabled McDonald's to recognize revenue basically before it was even earned.

For instance, if they knew they were adding 50 new franchises, they would include the revenue from those franchises in their numbers to give an idea of where revenues would be in the near future. They also recorded income from franchise fees and property leases as assets prior to that restaurant's commencement of operations. So they did this not for nefarious reasons, but just because it made the business look better rather than relying on trailing numbers. I see the rationale for doing this, as you know, it would have helped potential investors understand the business's growth potential.

But, you know, this is not a system that I ever really be that comfortable with. So I can see how the accountants require them to do away with it. Now, the issue was that McDonald's only had two weeks to rewrite their finance. to meet their deadline, which they achieved by working nearly 24-7. The next annoyance with going public related to the question of what the shares would be priced at. The underwriters suggested 17 times earnings, but Ray thought that anything less than 20 times earnings was just ridiculous.

But, you know, when you go public, it doesn't really matter what you think. It matters what the market thinks. And the market actually agreed with Ray here. So shares opened at about 2250 and closed the same day at $30. And in the first month, shares actually climbed. to $50. McDonald's chose a very, very good time to go public, as it was right at the beginning of the go-go years. Euphoric markets are the best possible time to IPO, as investor sentiment is at its absolute highest and you can increase your chances of having a successful IPO, which McDonald's

did. Now, after McDonald's IPO, there were new forces at play that would help it grow. For instance, McDonald's had no indoor seating until 1966 when it was introduced to a few locations. The stores were also in need of a facelift, which meant some pretty significant KAPX was going to be needed. With indoor seating, increased square footage and new buildings, McDonald's would increase its revenue generated per restaurant, and the market would welcome any news on that front. Now, as I've learned from researching the franchise business model, restaurants key into one specific sales figure, which is called system sales. So why not just sales?

Because system sales represents the total revenue generated by the franchise and its franchisees as opposed to just a franchisor. As I mentioned earlier, franchise fees for McDonald's at inception were just 1.9%. So that means if there were $100 million in system sales, McDonald's revenue was just $1.9 million. Now, if you're looking to attract investors, would you be more likely to use $100 million in systems revenue or $1.9 million in franchise revenue? Probably the former. But, you know, all franchises will show both.

Let's get back to the rift here between Harry Sonoborne and Ray Crock. So there are a few forces at play, and the first was a personal. issue for Harry. So his health, unfortunately, just wasn't very good in 1966, which forced him to spend more and more time away from the business. More related to the corporation was the fact that Harry and Ray would buttheads over things such as, you know, who to appoint as the next vice president. Then they had other issues with more minor things such as compensation and a proposal for the removal of McDonald's gold marches. However, the most significant sticking point between Ray and Harry had to do with real estate. So Ray felt that Harry had been overly conservative.

because Harry was listening too closely to bankers who were telling him that the U.S. was headed into a recession in 1967. So Harry concluded that if that were true, McDonald's should slow down their growth and hoard cash. It culminated in Harry putting a moratorium on any new store openings. But their man in charge of locations complained to Ray because he already had 33 really good locations lined up to go. So Ray promised him that he'd go and try to talk to Harry and see what he could do. And they ended up arguing about it, resulting in Harry actually stepping down. Ray eventually got Harry to come back for a short time, but Harry just didn't have it in him anymore, and he left for good.

Ray noted that Harry thought McDonald's shares would plummet after he left because the aggressive growth plan that Ray backed would backfire. And that was a massive error, but, you know, Harry was very well taken care of. He just didn't have as much money as he would have if he'd kept his shares. There was an interesting quote from the book that really highlighted House Guild and operator Ray was. This was after Harry stepped down and Ray took over as president. I really had my work cut out for me now.

I took the title of president and chairman of the board, and I removed the misguided moratorium on building new stores. In reviewing our real estate picture, I discovered all kinds of locations we had purchased and sort of stockpiled for future development. When I was told that we were waiting for the local economy to improve in those areas, I hit the ceiling. Hells, bells, when times are bad, is when you want to build, I screamed. Why wait for things to pick up so everything will cost you more? If a location is good enough to buy, we want to build it right away and be there before the competition. pump some money and activity into a town and they'll remember you for it. This is just good stuff and I think it shows that Ray was thinking independently rather than succumbing

to the institutional imperative that just so many executives fall for. So if Harry Sondaborne had followed the bankers advice, which may have been standard practice for the industry, he would have ended up just waiting for the recession risk to subside and then resumed investing in new stores afterwards. But this just shows short-term thinking. I completely sighed with Ray on this. I prefer to have operators who act countercyclically. When times are bad, they are the best possible times to invest.

This applies both to individual businesses and to just investing in general. Poor sentiment offers the best upside and the highest margin of safety, but most investors and executives are just too afraid to take advantage of that. Ray then told Fred Turner that once he had finished a few things inside of McDonald's, he would turn over the presidency role to Fred, which he gladly accepted. Now, what were the changes that Ray wanted to make? So the first one here was that he wanted to recapture some of the territory that he knew would help with the expansion of the business. So there were two partners that owned a company that had licensing rights for the entire District of Columbia, as well as a few counties in Maryland and Virginia.

So since they had these exclusive rights, McDonald's couldn't expand into these territories. So Ray wanted to just buy them out. McDonald's ended up buying them out for $16.5 million in cash, but ended up doubling their stores from 43 to 90 over a very short period of time. as well as adding significant talent to McDonald's from the people that were already involved in those stores. So Ray felt like that purchase was very, very well justified. The next one was price increases. So Ray wanted to increase the price of some of the items that McDonald's sold, and he wasn't sure, unfortunately, how customers would react.

So the example that he gives is a 15% hamburger that he wanted to increase to just 18 cents. But it actually sounds like this price increase was more of a result of compressing margins. So Ray writes, we were in the midst of Lyndon Johnson's muddled guns and butter economy with the war in Vietnam. And even our increasingly sophisticated purchasing operations could not cope with inflation. So Ray had conducted some internal modeling to see what he could expect from these price increases. So the theory was that volume would initially surge as regular customers came in and paid the increased pricing. But once they were accustomed to the increased pricing, they would look elsewhere.

Then competitors would follow suit increasing their own pricing and customers would eventually return. And this is exactly what happened when they did the price increase. It took about a year for things to stabilize. And this was part of the reason that Ray didn't want to hand the company over to Fred Turner during that week point. Now, the last part here was to roll out a national advertising and marketing plan. So McDonald's was developing a program to support all of its franchisees. The spending would be supported by the franchisees who would contribute 1% of their revenue

to support the program. Ray liked this, but I've spoken to some franchisees and they don't always like it because it obviously eats into their margins. Some locations also just don't believe that an advertising plan will necessarily benefit them at their exact location and at that price. So by 1968, the business was thriving under Fred Turner's leadership as president and CEO, who did a superb job. I find this story interesting because generally, when a CEO steps down from a business, it's a red flag at worst and typically a yellow flag at best. But in this case, it was a blessing. Now, it's hard to have an intimate understanding of what is going on inside of a business when you're

just an investor, you know, the problems that Ray and Harry had would have probably been surprising to investors during this time. But to McDonald's insiders, it was probably very evident to everyone that there was a growing rift and that there was some sort of event that was likely to happen that would cause an explosive change to either towards the direction of Ray Croc or to Harry Sonoborne. This is why, you know, scuttlebutt is so essential. When you can talk with competitors or former employees, you can learn these types of hidden dynamics that are going on that just aren't shared with a general public. You unfortunately need a network and connections to talk with the right people to get this kind of information. Now, Ray shared a quote at the end of the book that I

thought was powerful. Press on. Nothing in the world can take 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. Now, I'd like to conclude this episode by discussing my seven primary takeaways from Ray Croc and his business experience. The first one is just vision over product. So while Ray cared a lot about the end product, without his vision where he felt McDonald's could eventually go, the story would have never unfolded as it did. Croc could have gone into the business of just selling hamburgers and fries, but he knew the big picture was the real estate.

He created the franchise model, systematized it, and made it highly scalable. This allowed him to focus more on expanding McDonald's, while leaving many of the product innovations to those within the company who were highly customer-facing and understood customer needs at a deep level. Second, having relentless standards can create a wide moat. If McDonald's were a disconnected franchise with various franchisees selling different products, it's unlikely the brand would have ever achieved a critical mass. Raise ability to get all franchisees to follow the system that he supported was tremendous for the success of the McDonald's brand. Croc was obsessed with uniformity and consistency. And while there is a place for innovation, it had to be rolled out

conservatively before being released to all franchise locations. Third is the power of real estate. Even though things didn't work out with Harry Sonoborne, Harry was massively important for providing crock with this insight. Gaining funding to open a new restaurant wasn't easy. But using financial engineering to own a property, a franchise sat on, was much easier. This system allowed McDonald's to focus on collecting royalty fees rather than being the sole operator of the franchise. So, even though McDonald's is seen as a fast food chain, it's really a real estate business disguised as a fast food chain. I'd like to add that I've studied many quick service restaurants. And one thing I find interesting is that franchises with a high number of corporate owned stores

often, not always, but often struggle to achieve profitability. A couple really notable examples would be something like Kava or Sweet Greens, which have just nosebleed evaluations. However, when you look at their margins, they're incredibly subpar, despite the fact that they have hundreds of locations. Now, I've concluded that the franchise model is just better than operating with all locations centrally owned. The margins on franchise revenue are fat, and you don't have to deal with a number of headaches and expenses involved with operating the restaurant. The fourth here is that people and culture often trump strategy. Croc knew that surrounding himself with the right people would be the key to long-term success of McDonald's. This is how he found hungry young

franchisees and corporate people like Harry Sonoborne and Fred Turner. Ray also understood that he could help motivate his franchisees to success by following many of the systems that he had implemented. While Croc was very demanding of his people, he also inspired them to continue performing at a high level, which often resulted in a win-win situation. And fifth is that expansion requires ruthless amounts of focus. It would have been easy for Ray to adopt too many innovations that were thrown at him, which would have taken him off the course of his grand vision for McDonald's, which was to continue growing its store count in his system sales. When McDonald's first began expanding, its menu is incredibly simple, you know, burgers, fries, and beverages.

He could have diversified the menu more, but that would have taken focus away from his vision. This speaks to Buffett's exceptional ability to just, you know, say no to everything. This helps Buffett keep his schedule clear so he can read and learn things that he needs to educate himself on to be to be the best possible investor that he can be. Croc also said no to several things. He didn't want to diversify. Six is the power of systems. I already mentioned how much focus Ray put on things like uniformity and consistency.

If you scale a brand up significantly, you have to have systems in place, otherwise you risk drifting away from what truly works. McDonald's initiatives such as Hamburger You and how they set up in design stores were a tool to accentuate consistency. If you're building a brand, you should closely examine what your people are doing to move you towards or away from your vision. Buffett has said, I try to invest in businesses that are so wonderful that an idiot can run them because sooner or later one will.

Now, I'm not saying McDonald's has any idiots who have run the show. in the present or the past, but they've gone through 11 CEOs and remained still a great business today. I think this is a testament to the power of systems in building a resilient business. While Kroc understood that the business required different leaders at different times, he established many guardrails to ensure that regardless of whoever was in control, the company would succeed. And lastly, is that just contrarian thinking pays off? I love contrarians, because no matter where you look, most outperformers in businesses and investing are just natural contrarians. And Croc was just, you know, a different person. While he spent

much of his career trying to find that edge that would allow him to truly take off, he didn't see it until he was 52 years old. While many business people flocked to young guns who have built these enormous tech empires today, many lessons can be learned from contrarians like Croc, who took a few more decades than Zuckerberg or must to find his footing. Now before Croc, nobody thought a quick service restaurant would reach nearly every corner of earth. Heck, I don't think anyone thought, a fast food restaurant would even be in every U.S. state. But Croc thought this was a possibility and did everything in his power to make this vision a reality. And even though he didn't have the support from those closest to him, his wife, for instance, thought he was crazy for getting into

McDonald's at his age, he had the inner fire to help motivate himself. The original McDonald's brothers initiated the idea for McDonald's. But without Ray's understanding and frankly backbreaking work, the business would have never probably left the state of California. The example I gave earlier in this episode about Crox's ability to think countercyclically is a potent example of that contrarian mindset. I love seeing businesses and founders participate in initiatives like this. One great example in my portfolio was Dino Polska, which invested heavily in its distribution centers. Despite Poland being in a state of deflation with a war next door in Ukraine, the GDP growth having stalled, the company just continued to expand. They could have sat on their hands

and waited, but they invested heavily in the company's future development. So far, it's proven to be a very successful investment, which should allow the business to continue expanding its new store development for many years to come. Now, when I take a step back and look at Ray Kroc's story, it's clear that McDonald's was never just about burgers and fries. It was about vision, discipline, and building systems that could outlast one person. Croc didn't invent fast food. He just saw the potential to scale it in a way that no one else was willing to do. And that's a big lesson for us as investors and business builders. Execution and scale often matter more than the original idea. For entrepreneurs, the lesson is straightforward. Systems often outperform individual

genius. For investors, it serves as a reminder to look beneath the surface. Sometimes, the real money isn't made where you expect, like the real estate model at McDonald's. And for anyone chasing success, Ray's story is proof that there's no such thing as an overnight success. His overnight took more than 30 years of grinding it out, risking everything, and betting on himself. So when you see the golden arches, don't just think about a fast food joint. Think about what happens when someone refuses to compromise on standards, builds alignment across stakeholders, and focuses on execution day in and day out. That's the real engine behind McDonald's, and it's a blueprint I think we can all take on our own investing in business journeys. That's all I have

for you today on Ray Kroc and the building of McDonald's. Want to keep the conversation going? Follow me on Twitter at Irrational MRKTS or connect with me on LinkedIn. Just search for Kyle grief. I'm always open to feedback, so feel free to share how I can make the podcast even better for you. Thanks for listening and see you next time. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before

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