How McDonald's Took Over America | Ray Kroc [Outliers]

“Harry Sonnenborn's solution: control the real estate. They would find the land, negotiate a lease with the landlord, build the restaurant, then sublease it to the franchisee. The franchise would pay rent on top of the service fee, a monthly minimum or percentage of sales, whichever was greater. Landlords with vacant land were happy to earn something from it. McDonald's now had real income, not just royalties, but stable rent, cash that kept coming even when the store had a bad month.”

Business & Entrepreneurship · Economics & Markets · Strategy & Decision Making

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Real estate turned thin margins into empire

“When the McDonalds reopened in December 1948, they slashed the menu from 25 items to 9. They cut the price of a burger in half and took away the customer's ability to choose. No substitutions. You couldn't have it your way. You had to have it the McDonald's way. By removing the variables, they removed the wait. At first, customers hated it. They drove up, honked for carhops, and when nobody came, they left angry.”

Operations & Execution · Strategy & Decision Making

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Removed variables to remove wait time

“Kroc warned customers ahead of time when Lily Tulip was about to raise prices. His bosses were furious, but he kept doing it. The company had warehouses full of cups made at the old cost. Selling them this week or next week made almost no difference to Lily. But to the customer, it made all the difference. It told them, I'm on your side. It told them, you can trust me. Invert it: if Ray had said nothing, the price goes up, the customer feels a small sting of betrayal.”

Business & Entrepreneurship · Psychology & Behavior · Strategy & Decision Making

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Small betrayals avoided build trust compound

“In 1930, Kroc found leverage at Walgreens. He pitched takeout drinks in paper cups. The manager refused, saying he got the same 15 cents whether drunk at the counter or not. Kroc tried to explain volume would go up, but the manager dismissed him. Then Kroc changed approach: I'll give you 200 or 300 cups free. Try it for a month at one store. It costs you nothing. The takeout counter was a hit from day one. Every new Walgreens store meant automatic new sales for Kroc. He called it multiplication.”

Business & Entrepreneurship · Strategy & Decision Making · Operations & Execution

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Free trial converts skeptic into evangelist

“Kroc refused to get McDonald's into the supply business. Many franchisors make money by marking up the supplies they sell to operators. Kroc thought that was a betrayal. You can't serve two masters. Either you're trying to help your franchises succeed or you're trying to make money off them. So McDonald's worked with suppliers to lower their costs. Better packaging, better delivery, better products. The savings got passed on to franchisees.”

Strategy & Decision Making · Business & Entrepreneurship

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Refused to make money off franchisees

“Mac and Dick McDonald closed their successful drive-in in autumn 1948. For 3 months, the building sat dark while they redesigned everything. They went out on the tennis court with red chalk and drew the exact kitchen dimensions. They marked where griddles, fryers, and prep tables would go. They brought in employees to simulate making burgers, moving through the chalk outline like dancers. When two workers bumped into each other, Mac and Dick erased the chalk and redrew the station.”

Operations & Execution · Creativity & Innovation

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Chalk simulation eliminated workflow friction

“The first store was a disaster. The furnace ran constantly, but the exhaust fans blew out all the heat. When weather warmed up, the reverse happened: fans exhausted the cool air and the kitchen climbed to 100 degrees. But the real crisis was the fries. Ray followed the McDonald's procedure exactly, but the result was mush. He called the Potato and Onion Association. A lab man asked him to walk through the process starting when the potatoes were bought.”

Operations & Execution

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Environment created accidental quality boost

“People asked Kroc why he didn't just copy the system. The brothers showed you everything. You could have built your own chain and kept all the profits. But Ray's answer was simple: I was so naive or so honest that it never occurred to me. But there was more to it. Kroc understood something the brothers missed. The system was valuable precisely because it was theirs, because it had a name, an identity, a track record.”

Strategy & Decision Making · Business & Entrepreneurship

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Brand creates customer recognition across locations

“The best ideas didn't always come from headquarters. In Cincinnati, an operator was getting destroyed on Fridays. His competition had a fish sandwich. In Catholic neighborhoods where the church ordained meatless Fridays, that mattered. Lou went to Kroc with an idea: sell a fish sandwich. Kroc's response was unprintable. I don't care if the Pope himself comes to Cincinnati. We're not going to stink up our restaurants with any of your damned old fish. But Lou kept pushing.”

Creativity & Innovation · Business & Entrepreneurship

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Operators invented the signature products

“When Lily Tulip ordered a 10% pay cut across the board, Kroc refused. His boss said he had no alternative. Kroc replied: The hell I don't. I'm quitting. For 4 days, he sat in an automat reading help wanted ads, telling no one, not even his wife. When his boss called offering a concession, Kroc negotiated from a position he created, even when he had no leverage, especially when he had no leverage.”— Ray Kroc

Leadership & Management · Psychology & Behavior

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Manufactured leverage through willingness to walk

“In 1960, Ray called Dick McDonald and asked him to name a price. A day or two later, Dick called back: $2,700,000. We'd like to have $1 million apiece after tax. Ray dropped the phone. He didn't have that kind of money. Harry spent weeks searching for financing. He finally found 12 institutions willing to lend the money in exchange for 0.5% of gross sales. McDonald's would pay down the principal out of that half percent. They projected it would take until 1991. They paid it off in 1972.”

Economics & Markets · Strategy & Decision Making

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Half percent became worth billions

“Kroc refused to put any pay telephones, jukeboxes, or vending machines in any McDonald's. Many operators were tempted by this side income, but Ray stood firm. All of those things create unproductive traffic and encourage loitering that disrupts your customers. It would downgrade the family image we wanted to create. There was another reason too. In some areas, vending machines were controlled by the crime syndicate. Ray wanted no part of that.”

Strategy & Decision Making · Operations & Execution

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What you refuse defines you

“Kroc was 52 years old and selling milkshake machines when he discovered McDonald's. He spent 30 years learning how restaurants worked and failed, watching operators cut corners, ruin good products with sloppy execution, and slowly go broke. When he walked into that parking lot in San Bernardino, he wasn't seeing a hamburger stand for the first time. He was seeing the answer to a question he'd been thinking about his whole life.”

Business & Entrepreneurship · Psychology & Behavior

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30 years preparation made recognition possible

“Kroc persuaded Earl Prince to charge 12 cents instead of a dime for the new milkshake. Earl resisted, saying people don't want to be bothered with pennies. But Kroc kept pushing: a higher price would signal that it was worth paying attention to. A dime said ordinary, 12 cents said special. Finally, Earl agreed. They never reduced the price. The drink took off immediately. Those 2 extra cents meant an extra $100,000 in Earl's pocket.”

Economics & Markets · Psychology & Behavior

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Price signals novelty and value perception

“When Lily Tulip's New York headquarters killed the Multimixer distribution deal, saying they were paper cup manufacturers and that's what they intended to remain, Kroc saw the difference between defining yourself by what you sell and defining yourself by what problems you solve. Lily sold cups. Kroc solved problems for people who served food and drinks. That left room in his mind for the Multimixer, left room for a lot of things.”

Strategy & Decision Making · Psychology & Behavior

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Identity limits what you can see

“A competitor opened next door and announced a special: 5 hamburgers for 30 cents, 6 cents each. They kept it up for a month. Then: 10 hamburgers, 10 milkshakes, and 10 fries for 10 cents each. A lawyer told the operator it was a clear violation of federal trade regulations, offered to take it to the government. The operator flew to Chicago to ask Kroc what to do. Kroc let him have it: If we have to resort to bringing in the government to beat our competition, then we deserve to go broke.”— Ray Kroc

Strategy & Decision Making · Philosophy & Reasoning

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Win on merit or deserve to lose

“In the basement of one store, they set up their first classroom. Prospective operators sat at desk armchairs among potato sacks and listened to lectures. At noon they went upstairs and worked the line. They called it Hamburger University. The first class had 18 students. They were awarded a Bachelor of Hamburgerology degree with a minor in French fries. And it sounds like a joke, but it wasn't. By the time Kroc died, Hamburger University had trained tens of thousands of operators and managers.”

Operations & Execution · Leadership & Management

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Training was the product replication

“Fred Turner spent months working with bakers to develop the exact perfect bun. It had to be the right texture, the right height, the right color, and it had to be sliced all the way through so the grill man didn't waste time separating them. It had to be packaged in boxes that stacked efficiently and kept the buns fresh. It requires a certain kind of mind to see beauty in the hamburger bun, Kroc wrote. McDonald's insisted the beef be 19% fat.”

Operations & Execution

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Beauty in perfecting mundane details

“Harry Sonborn issued an order: no bill over $1,000 would be paid in full. Everything else went on installments. One week they couldn't make payroll at all. The accountant switched from weekly to bimonthly pay and posted a notice that anyone strapped for cash could borrow up to $15 from petty cash. That same week, Kroc gathered his executives. One of these days, he said, we're going to hit grosses of $100,000 a month. We're going to be a billion-dollar company.”— Ray Kroc

Leadership & Management · Psychology & Behavior

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Impossible vision in crisis tests belief

“The simplicity wasn't just about efficiency. It allowed them to concentrate on quality at every step. When you're only doing 9 things, you can do all 9 perfectly. When Ray Kroc pulled up to the parking lot in 1954, he saw lines of people snaking around the block for a 15-cent burger. He felt like some latter-day Newton who'd just had an Idaho potato bounce off his skull.”

Operations & Execution · Strategy & Decision Making

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Simplicity enables perfection at scale