“The definition of salesmanship is the gentle art of letting the customer have it your way.”
As a young child, Ray Kroc went with his father to visit a phrenologist – someone who predicts someone’s future based on the shape of a person’s head. Kroc was told that he would end up in the food-service industry. Coincidence or not, Kroc would design the blueprint for the fast-food industry and lead the largest fast-food company in the world.
Kroc was hard working as a young child. He learned his salesmanship skills through his lemonade stand ventures and by taking jobs at a grocery store and his uncle’s soda fountain.
Kroc quickly grew tired with school and wanted to get into sales. As a teenager, he dropped out to work as a salesperson for the Lily-Tulip Cup Company. Working long hours and using his natural charisma, Kroc rapidly rose to become the top salesperson at the company.
While working at the Lily-Tulip Cup Company, one of Kroc’s clients was Earl Prince. Prince’s latest venture was trying to sell a new machine he invented called the Multimixer – a milkshake making machine. Immediately captivated by the invention, the 37 year old Kroc negotiated an agreement for the exclusive marketing rights and left Lily. Over the 15 years he then sold the Multimixer across the United States to soda fountain and restaurant owners.
Nearing 50 years of age a new trend began occurring in America – people were leaving the big cities and headed for the suburbs. As a result, many of the soda fountains and restaurants that Kroc targeted were closing down operations. With the future looking bleak, there was one small restaurant, in San Bernardino, California, that placed an order for eight Multimixers. The hamburger stand was run by brothers Dick and Mac McDonald.
Starting The Business
The McDonald brothers were of particular interest to Kroc not only because they were buying his Multimixers when everyone else was shutting down but because they had ordered eight Multimixers. This would allow them the capacity to make 40 milk shakes at the same time. Curious as to why a restaurant would need to make so many milk shakes simultaneously, Kroc decided to go to California and pay them a personal visit.
The restaurant was very different from the typical American fast-food drive-in at the time. It has no indoor seating, was self-service, and offered a very limited menu of hamburgers, cheeseburgers, french fries, sodas, and, of course, milk shakes. The McDonald brothers had perfected a system whereby each order would be put together in an assembly-line and would take less than a minute before the customer had their order in their hands.
Kroc’s entrepreneurial mind immediately went to work and he showed the McDonald brothers how they could expand their restaurant across the country. Kroc would be the obvious beneficiary by supplying them with all the Multimixers they would need. After presenting the brothers with his idea, they expressed that they did not have an interest in growing so large. As he had previously done with the Multimixers, Kroc offered to be their marketing expert and obtained the exclusive rights to sell the McDonald system.
Kroc’s first McDonald’s was opened in Des Plaines, Chicago in the spring of 1955. He ensured that the restaurant was kept spotlessly clean and used it as a show model to sell franchises across the country. Kroc’s model was to collect 1.9% of gross sales, 0.5% of which would go to the McDonald brothers.
After his first year in operation, he sold 18 McDonald’s franchises. He realized, however, that he was just breaking even after looking over his financials. The 0.5% he was giving the McDonald brothers was making it nearly impossible for him to turn a profit off of the remaining 1.4%. Kroc’s luck was about to change, however, as he met Harry Sonnenborne, the man who would show him the secret to making money in this industry.
Building An Empire
The brilliance behind Harry Sonnenborne’s model was to sell real estate and not hamburgers. His suggestion was to purchase or lease the land on which all the McDonald’s restaurants were built on. Franchisees would then pay the company either a monthly rent amount or a percentage of their gross sales, whichever amount was greater. Under this model, Kroc has assured himself of a profitable minimum baseline revenue stream from each franchisee. With the new profitable business model established, Kroc could now aggressively grow his new company.
Kroc believed very strongly that customers should have the same experience in every McDonald’s from coast to coast. He created ‘the McDonald’s Method’ and a 75-page manual that explained how the restaurant should be run – from how much meat to include in a hamburger to how to cut the french fries to how often to clean the restaurant. He would later open a Hamburger University where new franchisees went to learn how to operate a McDonald’s restaurant. Students earned a degree in ‘Hamburgerology.’
With rapid growth came excellent feedback from franchisees on how to make the system even more successful. The McDonald brothers, however, were against making any changes to the formula they created. After repeated arguments with the brothers, Kroc decided it would be best to buy them out and remove the conflict. In 1961, Kroc paid $2.7 million in cash to the brothers for complete ownership.
Having no further obstacles in his way, Kroc continued his aggressive expansion. He set a goal to establish 1,000 restaurants. By 1965, he had over 700 restaurants opened across America and McDonald’s was the first company in the fast-food industry to go public on the stock market. The share price quickly rose, making Kroc a millionaire. By 1970, over 1,500 McDonald’s were running around the world.
Part of Kroc’s true genius was his ability not to invent something new, but to take an existing product and refine the business model to the point where it could be immensely profitable. By the time of his death, the McDonald’s golden arches were more recognizable around the world than the Christian cross.