Wall Street History

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Wall Street History

04/22/2005

McDonald's Turns 50

[Traveling overseas...next column May 6 after 5:00 PM ET]

April 15 marked the 50th anniversary of the opening of the first
McDonald’s franchise in Des Plaines, Illinois (first day sales
were $366.12, incidentally) and it’s a good time to reprise a piece
I did on the fast-food behemoth almost four years ago, updating
the tale where appropriate.

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Prior to World War I, when a guy went calling on a girl at her
home it constituted a “date.” By the 1940s, though, Americans
were becoming more accustomed to dates involving a movie and
maybe a restaurant meal, but still not on a regular basis. Middle
class families just didn''t eat out in those days.

After World War II this all began to change. First came take-
outs, where mothers would pick up items such as chicken to take
home. [“Don''t cook to-night. Call Chicken Delight!” Whatever
happened to them, anyway?] Then you had the drive-ins, where
waitresses raced about on roller skates while you sat in your car,
and, finally, restaurants added tables and counters. Two brothers
were able to take advantage of the new trends, Dick and Maurice
(Mac) McDonald.

In 1937 the McDonald brothers opened up a hot dog stand near
Santa Anita Racetrack in California. After the racing season
ended business slowed, so they erected a larger operation in San
Bernardino, selling hamburgers, barbecue, assorted sandwiches,
soft drinks and hot dogs. Their operation proved to be a great
success, but the service began to slip so the brothers realized they
had to become more efficient. They then purchased better grills,
cut the number of menu items, used paper plates and cups, and
stressed speed, cleanliness and low prices. It was a formula for
success and by 1951 they were selling more than $250,000 worth
of burgers and drinks out of that single location. The following
year they began to purchase other franchises.

Hamburgers were the great American food and while there were
lots of “hamburger heavens” before World War II, including
chains like White Castle, often they weren’t particularly
attractive and the owners lacked vision. Enter Ray Kroc.

Kroc invested his entire life savings to become exclusive
distributor of a five-spindled milkshake maker, the Multimixer.
He was having some success selling the machines to restaurants,
fast food operations, and drug stores, earning about $12,000 a
year, when one day he delivered a machine to the McDonalds.
Kroc knew that business was terrific and sensing an opportunity
he asked the McDonalds if he could become franchising agent.
The year was 1954. Ray Kroc was 52 years old.

Dick and Mac had perfected their system, using a simple menu
of shakes, burgers, and fries. Kroc bought the name and
proceeded to market it to the masses. Part of Kroc’s genius was
in recognizing that America was increasingly a society on wheels
and families were seeking entertainment outside the home. He
was going to turn McDonald’s into a family place, not just a
burger joint frequented by teenagers.

In 1954 the McDonald brothers granted Kroc an exclusive 10-
year franchise to license operators of the restaurants. The first
contract provided for Kroc to receive $950 for each franchise
sold plus 1.9% of the store’s gross revenues, with half of that
going to the McDonald brothers. The following year he opened
up the first franchise in Des Plaines, Illinois and also organized

McDonald’s System, Inc., and soon thereafter Hamburger
University. By 1957 Kroc had 14 McDonald’s up and running
(another source says about 35), with 100 in 1958 and 200 in
1959. Most of these original franchises were just stands, with
only a handful having seats because they were still catering to the
take-out and drive-in crowd.

The franchises agreed to accept McDonald’s guidance in all
matters, while purchasing supplies from companies approved by
headquarters. Whether it was food preparation and quality,
serving methods or advertising, Kroc and Company set the
standard. The huge expansion that was to follow was largely a
result of the policy of selling franchise rights for large territories
to entrepreneurs who then would sell the franchises to the local
operators. Ray Kroc was building his empire on what he would
call good old-fashioned elbow grease. “Work is the meat in the
hamburger of life,” he once said.

In 1961 Kroc bought out the McDonald brothers for $2.7 million
and by 1966 there were 800 restaurants. [Kroc claimed that there
were only 8 failures in the first 11 years.] Gross revenue was
about $35 million (I’ve also seen higher figures) and the
company went public on the New York Stock Exchange in ‘65.
$2,200 worth of stock bought in those early days is worth
roughly $3 million today. [The company needs to update their
corporate web site concerning this matter, by the way.] As for
the menu, even in 1966 there were still just 10 items on it, none
costing over 29 cents:

Hamburgers - 15 cents
Milk Shakes - 25 cents
Soft Drinks - 10 and 15 cents
Fish Sandwich - 29 cents

I didn''t know they had a fish sandwich back then? [It was
introduced in 1963.]

In the late 1960s McDonald’s began to widen its menu options,
introducing the “Big Mac” in ‘68 and then, in conjunction with
its big breakfast push, the Egg McMuffin in 1973.

Kroc was known to be a big stickler for cleanliness. One of his
more famous sayings was “If you have time to lean, you have
time to clean.” Parents out there may want to try this on their
kids.

By 1980 there were 6,500 outlets with revenue of $6.2 billion
and as Kroc spread his operation overseas, McDonald’s fast
became a symbol of American business around the world.

McDonald’s was also an important stepping stone for Americans
entering the labor force. The company claimed in 1998 that 1 in
8 Americans had worked or did work for them.

Today McDonald’s has 30,000 restaurants, serves 50 million
people a day in 120 countries and should top $20 billion in
revenue for 2005.

[Note: My earlier piece from four years ago had an incorrect
revenue figure which I just picked up on now. That means one
of my sources was off. I apologize.]

Ray Kroc died in 1984 at the age of 82, but not before he added
an interesting chapter to his life when he purchased the San
Diego Padres baseball franchise in 1974. He was one of the
more outspoken owners, once commenting in 1977 on
television’s control over baseball:

“Baseball has prostituted itself. Pretty soon we’ll be starting
games at midnight so the people in outer space can watch on
prime-time television.”

Or this one on the designated hitter:

“I believe a commissioner should be a dictator. If he’s a darn
good dictator, you give him a gold watch now and then. If he’s a
lousy dictator, you fire him. Bowie Kuhn is not a good dictator.
Authority only goes to those who have the guts to use it and he
doesn’t use it. How can he allow the American League to play
one kind of baseball with the designated hitter and the National
League play another type of baseball?”

And it’s still a problem today, for crying out loud.

Sources:

“The Pursuit of Wealth,” Robert Sobel
“The Great Boom,” Robert Sobel
“1,000 Years / 1,000 People,” Gottlieb and Bowers
“The New York Times Century of Business,” Floyd Norris
and Christine Bockelmann
McDonalds.com
“Baseball''s Greatest Quotations,” Paul Dickson

Brian Trumbore

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