Welcome to this episode of Outliers.
I'm your host, Shane Parish.
Today, we're going to learn about Ray Kroc and the story of McDonald's.
Ray was 52 years old and selling milkshake machines for a living when he discovered McDonald's.
He didn't invent the hamburger.
He didn't invent the system.
He didn't even come up with the name.
Two brothers in California did all of that.
But those brothers are footnotes.
Ray Kroc built an empire.
This is a story about what it takes to see something everyone else missed and, more importantly, what it takes to act on it when you're already past the age when most people stop taking big swings.
Kroc was a rare combination ambition that never quit, persistence that bordered on obsession and a ruthlessness he didn't bother to hide.
He could charm you, outwork you, and destroy you, sometimes all in the same year.
He spent 30 years selling paper cups and milkshake machines before he found McDonald's.
30 years learning how restaurants worked and how they failed.
30 years 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.
Along the way, you're going to learn why he gave away information that made his bosses furious, why he refused quick profits to make money off his own franchisees, why he killed a product his executives loved, and why he opened a restaurant across the street from the men who gave him everything, just to destroy them.
This is Grinding It Out.
It's time to listen and learn.
They called him Danny Dreamer.
His mother would catch him staring into space.
What are you doing, Raymond?
Nothing.
Just thinking.
Daydreaming, you mean.
But these weren't idle dreams.
When Ray dreamed about having a lemonade stand, it wasn't long before he'd go build one.
Then he was working at a grocery store, then his uncle's drugstore, then a tiny music store.
He started with friends.
The store failed, but he didn't care.
He was already on to the next thing.
Ray Kroc was born in Oak Park, just west of Chicago in 1902.
His family wasn't poor, but they weren't careful with money either.
Ray was expected to help with the housework, and he didn't mind.
He prided himself on cleaning as well as anyone else in the house.
That pride and cleanliness would follow him everywhere.
It would become an obsession, and eventually that obsession would build an empire.
Work is the meat in the hamburger of life, he would later write.
For him, work was play.
He got as much pleasure from it as he did from baseball.
And he loved baseball.
When World War I began, Ray was 15.
He lied about his age to join the Red Cross as an ambulance driver.
In his company was another young man who had also lied about his age to get in.
While everyone else chased girls on leave, this kid stayed in camp drawing pictures.
His name?
Walt Disney.
The armistice was signed before he could ship out, so he went home wondering what to do next.
His parents talked him into trying school again.
He lasted one more semester.
In 1922, he wanted to marry a woman named Ethel Fleming.
His father told him it was impossible unless he had a steady job first.
So a few days later, Ray took a job selling Lily Brand paper cups.
For 17 years, that was his life.
He wasn't just selling flimsy paraffin-coated cardboard.
In his mind, he was selling human progress.
To the skeptical old-world restaurant owners still clinging to their washable glass.
He pointed out the obvious.
Glass meant washing.
Washing meant labor.
Labor meant time not spent serving customers.
Not to mention that glasses could break and customers could, and did, steal them.
A paper cup, on the other hand, brought something more valuable.
Speed and simplicity.
That became his pitch, and every day he pounded the pavement until 5.30 every afternoon.
Then he went to a radio station where he played piano until 2 in the morning.
He and his partner, Harry Sosnick, were the piano twins.
Their pictures even appeared on sheet music covers up at seven, selling until 530 on the air, from six until two, maybe four hours of sleep.
If he was lucky, six days a week.
Then winter came and his sales collapsed.
Cold beverages just didn't sell in Chicago winters.
So Kroc watched his customers stop buying because their own businesses had dried up.
He was an honest hustler.
He couldn't push products on people who didn't need them.
But he hated collecting a salary he felt he hadn't earned.
It felt like a violation of the meritocracy he believed in.
In order to focus on paper cups, he cut the piano.
And while this sounds like a simple decision, it wasn't.
The piano was something he loved, something he was good at, something that brought in money.
But he decided it was a distraction.
From now on, he would live and breathe paper cups.
And in the paper cup business, you quickly learn the margin on a single cup is negligible.
You had to sell a mountain of them to make any money.
And to do that, you had to find leverage.
So Ray started hunting.
In 1930, he found his leverage at Walgreens Drugstores.
Walgreens was expanding fast and their soda fountains were a zoo at lunch hour.
Customers packed the entryway waiting for a stool to open up.
Most people saw a crowd, but Ray saw something else.
All those impatient customers could be happy customers walking out the door with their drinks.
So he pitched the idea to the food service manager, a guy named McNamara.
Takeout, sell the drinks in paper cups with lids.
People can leave.
And Mac's response was immediate.
You're crazy.
I get the same 15 cents for a malted, whether it's drunk at the counter or not.
Why should I pay a cent and a half for your cup and earn less?
And Kroc tried to explain that his math was wrong because volume would go up.
You'd be selling to people who didn't take up a stool.
And Mac rolled his eyes.
You want me to waste my clerk's time putting covers on drinks and stuffing them in bags?
You're dreaming.
This was Danny the Dreamer at it again.
But Kroc came back with a slightly different approach.
And this is quite genius.
He didn't argue, he just said, I'll give you two or three hundred cups with covers for free.
Try it for a month at one store.
Your takeout customers will mostly be Walgreens employees from headquarters.
Run your own survey, see if they like it.
It costs you nothing.
Since Mac had no more objections, he reluctantly agreed.
The takeout counter was a hit from day one.
Mac became a convert, more excited about the concept than Croc ever was.
And here's what mattered.
Every new Walgreens store meant automatic new sales for Ray Kroc.
He didn't have to pitch them.
The system sold itself.
He called it multiplication.
Instead of chasing small vendors one by one, he could land a single big account and grow with them.
More territory, more money, and less grinding.
But then came a moment that tells you exactly who Ray Kroc was.
It happened in 1932, in the depths of the Depression.
The Lily Tulip Cup Company sent down an order from New York.
Times were tough.
Everyone was to take a 10% pay cut across the board.
And if that wasn't enough, car allowances would drop from $50 to $30.
Ray's boss, John Clark, called him into the office and delivered the news.
I'm sorry, Ray told his boss, but I can't accept that.
Ray, you have no alternative.
The hell I don't.
I'm quitting.
Two weeks notice, starting now.
Clark was shaken.
Come on, calm down.
You're not going to leave.
This is your life.
You belong here.
I know it's my life, Ray said.
Then he started shouting, but God damn it, I'm not going to hold still for this.
When times were good, I got little enough in the way of the rewards.
Those people who are cost problems to this corporation.
I'm not going to put myself in the same category with them.
And he walked out.
For four days, Kroc left his home each morning with his sample case.
He sat in an automat reading help-wanted ads over a cup of coffee.
He told no one.
His wife thought he was still going to work.
On the fourth day, Clark called the house.
This is how his wife found out.
When Ray came home that night, she demanded to know what was going on.
You blurted out, I can't take those cheapskates anymore.
I'm quitting.
She lit into him.
He was betraying her and their daughter.
His pride was jeopardizing their existence.
But Ray had taken a stand and he wasn't about to back down.
Ethel made him promise to see Clark the next morning and when he walked in, Clark made him an offer.
A little bit of a concession a special expense account that would make up for the pay cut plus the remaining balance of his car.
On that basis, I'll stay, Ray said.
He'd won.
Most people swallow what they're given.
Kroc negotiated from a position he created even when he had no leverage, especially when he had no leverage.
There's a small story from Ray's paper cup years that reveals how he operated.
He'd built a roster of loyal customers restaurant owners and soda fountain operators who ordered from him month after month.
When Lily Tulip was about to raise prices, Ray would warn them ahead of time.
Stock up now at the lower prices.
His bosses were furious when they found out, but Ray kept doing it anyway.
Here's how he saw it.
The company had the 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.
Now, invert it.
What if Ray had said nothing?
The price goes up.
The customer places their usual order.
All of a sudden, the invoice arrives at higher prices than expected.
Some customers shrug away and pay.
But most feel a small sting of betrayal.
Prices went up and nobody told me.
What else aren't they telling me?
Maybe I should get quotes from other suppliers.
Ray's sales that month would look fine, but he'd have poisoned the next month and the month after that.
He'd have lost the assumption of trust that makes all of these relationships work.
His bosses saw just transactions, but Ray was really interested in the relationship.
And relationships are built in the small moments where you could be selfish and choose not to.
In the mid-1930s, Kroc was selling paper cups to a man named Earl Prince who ran a chain of ice cream parlors called Prince Castle.
He had another customer in Battle Creek Michigan, a guy named Ralph Sullivan, who'd invented something interesting a milkshake made with frozen milk instead of ice cream.
The result was a thicker, colder shake, and customers loved it.
Lines wrapped around Ralph's store.
Ray started selling him 100,000 cups at a time.
Ray connected the dots.
More milkshakes meant more cups.
So he persuaded Earl Prince to visit Ralph's operation.
Earl resisted at first, but Ray kept pushing until he agreed.
Earl was converted immediately.
On the drive back to Chicago, he announced he'd create his own version.
He was going to call it the one in a million.
On that same drive, Kroc made his move.
I want you to charge 12 cents instead of a dime.
Earl shook his head.
People don't want to be bothered with pennies.
It's a big inconvenience.
But Kroc kept pushing.
This was a new product.
A higher price would signal that it was worth paying attention to.
A dime said ordinary.
Twelve cents said special.
Finally, Earl had enough.
Son of a bitch.
I'm going to teach this guy a lesson.
I'll sell it for twelve cents and let him watch it fall flat on its face.
They never reduced the price.
The drink took off immediately.
Kroc sold Earl five million cups that first year.
Those two extra cents meant an extra $100,000 in Earl's pocket.
Then success created a problem.
Prince Castle's single spindle machines couldn't keep up.
They'd been designed for thinner drinks.
Now they ran nonstop, churning out thick shakes all day, and so they burned out.
So Earl invented something new a machine with five spindles arranged around a stand powered by one third horsepower industrial motor with direct drive, no carbon brushes to wear out.
Kroc later wrote, you could mix concrete with the damn thing if you had to.
They called it the multi mixer.
It made high volume milkshake production possible for the first time.
Kroc took the multi-mixer to the Lilly Tulip office and demonstrated it.
His bosses loved it.
They signed a contract making Lilly the exclusive distributor.
Then headquarters in New York killed the deal.
They were getting calls from across the country asking about this multiple mixer or some such thing, and they wanted no part of it.
They were paper cup manufacturers.
That's what they intended to remain.
Kroc couldn't believe it.
The market was just getting started.
This is a moment worth pausing on.
Lilly sold paper cups.
This was their identity.
When a new opportunity appeared that didn't fit, they couldn't see it.
They looked at the multimixer and saw nothing but distraction.
And Kroc looked at the multimixer and saw the future.
It's the difference between defining yourself by what you sell and defining yourself by what problems you solve.
Lilly sold cups.
Crocs solved problems for people who served food and drinks.
That left room, in his mind, for the multi-mixer.
Left room for a lot of things.
Leaving Lilly Tulip proved harder than he expected.
His boss maneuvered him into a deal where the company owned 60% of Ray's new multi-mixer venture.
When Ray tried to buy that stake back, he discovered his boss had actually acquired it personally.
The price demanded was $68,000.
He felt so betrayed.
Ray didn't have that kind of money, though.
He'd refinanced his home.
He agreed to pay off the balance over five years while his salary stayed frozen.
He was handing over his profits to buy back what should have been his in the first place.
For me, Ray wrote, this was the first phase of grinding it out, building my personal monument to capitalism.
I paid tribute in the feudal sense for many years before I was able to rise.
For the next 17 years, Ray Kroc sold multimixers.
He had a tiny office in Chicago, but he was seldom there.
He traveled the country nonstop, hitting every restaurant and dairy convention.
His sample case weighed 50 pounds, so he put wheels on the bottom so he could pull it like a wagon.
He worked conventions until 2 in the morning, then woke up early the next morning to call the next client.
He had a secret technique for falling asleep that helped him.
I would think of my mind as being a blackboard full of messages, most of them urgent, and I practiced imagining a hand with an eraser wiping that blackboard clean.
If a thought began to appear, zap, I'd wipe it out before it could form.
He rarely averaged more than six hours of sleep.
Often he only got by on four, but he slept as hard as he worked.
World War II interrupted everything.
Copper was restricted.
You couldn't build motors without copper.
When peace came back, Kroc picked up where he left off.
America was booming.
Dairy Queen, Taste Freeze, A&W Root Beer, new soft serve franchises were starting everywhere.
In a good year, he sold 5,000 multi-mixers.
One year, he sold 8,000.
But by the early 1950s, Kroc could see an end coming.
Multimixers lived and died with soda fountains.
That's where milkshakes were made.
And soda fountains were disappearing.
Liquid Carbonic, one of the big manufacturers, had just voted to shut down their fountain division entirely.
Walgreens was ripping them out of stores.
The industry that had made Ray's living for 17 years was starting to shrink for the first time.
And there was nothing he could do to stop it.
He needed a new product.
Then calls started coming in from all over the country.
Operators wanted to know about this place in California, run by two brothers named McDonald.
And they were running eight multi-mixers simultaneously, 40 milkshakes churning at once.
Ray had been selling multimixers for 17 years and he knew every soda fountain, every dairy bar, every drive-in worth knowing.
Nobody ran eight multimixers.
What the hell, he thought.
So I'll go see it for myself.
To understand what Ray Kroc saw when he stepped onto that lot in San Bernardino, You have to understand what had been happening along America's roadsides.
The drive-in restaurant was a child of the automobile age.
In 1920, there were about 8 million cars in the United States.
By 1930, that number had tripled.
Henry Ford's Model T had made the automobile affordable for ordinary people.
And once Americans had cars, they didn't want to get out of them.
Not for anything, and certainly not to eat.
The first true drive-in opened in 1921 in Dallas.
Young boys in white shirts and black bow ties would hop onto customers' running boards before their cars had even stopped, take their orders and run back food when it was ready.
People called them car hobs.
By 1930, the roadside restaurant had become essential to American life.
Some were barely more than shacks.
Others were architectural fantasies shaped like giant oranges or airplanes.
Anything to catch a hungry motorist's eye.
But then came the depression.
Fine dining collapsed.
Bread lines stretched around city blocks.
But the drive-in still thrived.
Its formula was perfect for hard times.
Cheap food, serve fast, no need to dress up or tip.
You could feed a family in your car for less than a dollar.
Nowhere did the drive-in flourish more than in Southern California.
The weather was perfect for it.
By the early 1930s, Los Angeles alone had 200 drive-ins.
Operators hustled to outdo one another.
One place had car hops on roller skates.
Into the scene came the McDonald brothers, Maurice and Richard, a pair of transplanted New Englanders who would change everything.
Mac and Dick McDonald grew up in New Hampshire, sons of an Irish immigrant who worked 42 years at a shoe factory, only to be laid off for being too old.
That lesson stayed with them.
They would never let anyone else control their fate.
They headed west in the 1920s, chasing Hollywood.
They found work at the movie studios, movie scenery, setting up lights, driving trucks.
You know the invisible labor that made the magic happen on screen.
They hoped to work their way up to directing or producing, but that didn't happen.
In 1932, they scraped together enough money to buy a run-down movie theater in Glendora.
It provided a really sparse living.
They sometimes ate only one meal a day, often a hot dog from a stand near their theater.
Dick later recalled watching that hot dog vendor one of the few businesses in town that seemed to be thriving in the Great Depression was probably what gave them the idea to get into the restaurant business.
By 1940, they had a drive-in in San Bernardino.
It developed a terrific business, especially among teenagers.
But after World War II, the brothers took a hard look at their situation.
The parking lot was always full, but revenue wasn't growing.
They dug into the books and found two problems.
First, the teenage crowd was driving away families.
And second, despite a menu of 25 items, 80% of sales came from one thing, the hamburger.
In the autumn of 1948, the McDonald's brothers did the unthinkable.
They closed the doors of a successful business.
They fired the car hops.
They shut off the grill.
For three months, the building sat dark while Mac and Dick redesigned everything.
They approached the kitchen like industrial engineers.
They went out on the tennis court behind their house with red chalk and drew the exact dimensions of the kitchens on the pavement.
They marked where the griddles would go, the fryers, the prep tables.
Then they brought in their employees to simulate making burgers, pretending to flip meat and dress buns, moving through the chalk outline like dancers rehearsing choreography.
When two workers bumped into each other, Mac and Dick erased the chalk and redrew the station.
They kept adjusting until the movement was seamless.
When they reopened in December 1948, the operation was radical.
They slashed the menu from 25 items to 9.
They cut the price of a burger in half.
And they made a decision that seemed crazy.
They 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.
A tenth of a pound of beef, two pickles, onions, mustard, ketchup.
By removing the variables, they removed the weight.
Inside the kitchen, everything was standardized.
Custom dispensers shot the exact same amount of ketchup and mustard onto every bun.
A lazy Susan let two men dress burgers simultaneously.
Infrared lamps kept the fries warm.
At first, customers hated it.
They drove up, honked for car hops, and when nobody came, they left angry.
The brothers had to stand in the window waving people towards the counter.
But once word spread that you could get a bag of burgers for a dollar, in 30 seconds flat the hesitation vanished.
No car hops, no silverware, no plates, no tipping, just speed, consistency, and volume.
By the early 1950s, their revenue had doubled.
Here's the thing.
The simplicity wasn't just about efficiency.
It allowed them to concentrate on quality at every step.
When you're only doing nine things, you can do all nine perfectly.
When Ray Kroc pulled up to the parking lot in 1954 he saw lines of people sneaking around the block for a 15-cent burger.
He felt, as he later wrote, like some Latter-day Newton who just had an Idaho potato bounce off his skull.
That night in his motel room, Ray Kroc couldn't sleep.
The brothers had shown him everything the assembly line, the limited menu, the speed, the cleanliness, the whole system stripped to its essentials.
Visions of McDonald's restaurants dotting Crosstown all over the country paraded through my brain.
In each store, of course, were eight multi-mixers whirring away and proddling a steady flow of cash into my pockets.
Even now, he was still thinking about multi-mixers.
The next morning, we went back and watched them open again.
This time, he paid attention to the french fries.
To most people, he wrote, a french fried potato is a pretty uninspiring object.
It's fodder, something to kill time chewing between bites of hamburger.
That's your ordinary french fry.
But the McDonald's french fry was an entirely different league.
He watched them peel the potatoes carefully to leave a little skin for flavor, cut them into strips, dump them in cold water and stir until the water went white with starch.
Then they would rinse them, then fry them in fresh oil.
It seemed simple enough.
After the lunch rush, he sat down with the brothers.
I've been in the kitchens of lots of restaurants and drive-ins, he told them.
I've never seen anything equal to the potential of this place.
Why don't you open a series of units like this?
There was silence.
Mac McDonald turned in his chair and pointed up to a hill overlooking the restaurant.
See that big white house with the wide front porch?
That's our home.
We love it.
We sit on the porch in the evenings and watch the sunset.
It's peaceful.
We don't need any more problems.
We're in a position to enjoy life now, and that's just what we intend to do.
Kroc tried to reorganize his arguments.
Finally, he suggested they could have someone else open the stores for them.
It'd be a lot of trouble, Dick McDonald objected.
Who could we get to open them for us?
Kroc leaned forward.
Well, what about me?
The brothers agreed.
They called in their lawyer and drew up an agreement.
Kroc got the rights to franchise McDonald's everywhere in the United States except territories the brothers had already sold.
The buildings would match the architect's new design exactly, complete with the golden arches.
The name would be McDonald's on every one.
Kroc even liked that.
He had a feeling it was a name people would remember.
He also agreed to follow their plan down to the last detail.
Signs, menus, everything.
But buried in the contract was a clause that would later haunt him.
He could not deviate from their specifications unless changes were approved in writing, signed by both brothers and sent by registered mail.
Kroc would later reflect.
There's an old saying that a man who represents himself has a fool for a lawyer, and it certainly applied in this instance.
I was just carried away with the thought of McDonald's drive-ins proliferating like rabbits, with eight multi-mixers in each one.
The economics were thin.
Kroc would take 1.9% of gross sales from franchisees.
He proposed 2%, but the brothers talked him down.
Tell a franchisee 2%, they said, and he'll balk.
Say 1 and 9 tenths, and it sounds like less.
Out of that 1.9%, the brothers would receive 0.5%.
It seemed fair.
If they played their cards right, that half percent would have made them unbelievably wealthy.
Kroc was elated.
He stopped to visit an old friend from his lily tulip days who had retired to California.
His friend listened politely, but years later he admitted what he'd really been thinking.
In that moment i thought you'd gone soft in the head.
Was this a symptom of male menopause?
I asked myself what is the president of prince castle sales doing running a fifteen-cent hamburger stand?
Ray's wife was less polite.
The quarrels they'd had over Prince Castle, over refinancing the house, those had been skirmishes.
Now it was war.
It closed the door between them.
In a few years, their marriage would be over.
But Ray had no time for that now.
He needed a site for his first location, a model for everything that would follow.
He found a lot in Des Plaines, Illinois, seven minutes from his house.
Then, trouble started.
The minute Kroc sat down with his contractor, a problem became obvious.
The McDonald's Brothers building was designed for California.
It was a concrete slab.
There was no basement, a swamp cooler on the roof.
Illinois was not California.
Where am I going to put the furnace, Mr. Kroc?
The contractor asked.
Damned if I know, what do you suggest?
The contractor suggested a basement.
He'd need one for storage anyway.
He couldn't leave potatoes sitting outside like they did in San Bernardino.
Kroc called the brothers and explained, well, sure, you need a basement, they said, so build one.
He reminded them that the contract required any changes to be documented by a registered letter.
They waved it off.
They weren't much good at writing letters.
They couldn't afford a secretary.
Just go ahead.
Kroc hung up and hoped they both sent the letter anyway, but they never did.
He spent far more time in the first building than he planned, but he had no choice.
He told himself he'd fly out later and sort out the contract problems all at once.
When he finally sat down the brothers and their lawyers, they acknowledged the issues but refused to put anything in writing.
We have told you by telephone that you may go ahead, their attorney said.
But the contract calls for a registered letter, Kroc's counsel replied.
Mr. Kroc does not have that.
He is put in jeopardy.
That's your problem.
Kroc's attorney gave up on the situation.
He hired another lawyer, and that one quit too, saying Kroc was plain crazy to continue working with them under such circumstances.
He could not protect his client if the McDonald's brothers chose to close in on him.
Let em try, crock said, and he plunged ahead for years after people asked crock, why didn't you 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 disarmingly 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.
Customers who'd eaten at McDonald's in one location would recognize it in another location.
A copy wouldn't have that.
Copy was just another hamburger stand.
The brothers had invented something remarkable, but they weren't willing to do what it took to spread it across the country.
At this point, Kroc admitted he was mostly thinking about multimixers.
Every new McDonald's still meant eight more machines.
Think how crazy that is in hindsight.
He still thinks the path to wealth at this point is multimixers.
But in his quest to sell the multimixers, he would go on to build one of the largest companies in the history of the world.
On April 15th, 1955, Ray Kroc opened his first McDonald's.
The lot was mediocre.
There was no established traffic pattern.
There was very little public exposure.
Just a red and white building with golden arches, a tiny kitchen and 52-year-old saleswoman who had bet everything on a 15-cent hamburger.
Art Bender, the McDonald's Brothers manager, flew out to help.
What they learned would prove invaluable for future openings.
But first, they nearly didn't survive this one.
The problem started with the building.
The furnace ran constantly, but the exhaust fans for the griddle and fry vats blew out all the heat and kept killing the pilot light.
Gas accumulated.
The temperature inside hovered around 40 degrees.
When the weather warmed up, the reverse happened.
The fans exhausted the cool air and the kitchen climbed to 100 degrees.
But those were just equipment problems.
The real crisis was the food.
Ray had memorized the McDonald's Brothers procedure for making fries and he followed it exactly to the T, But the result was different.
It was mush.
It was like golden brown, perfectly shaped.
It was tasteless, but it was just mush.
It didn't have the same kick.
He tried again and again and get the same thing.
He called the brothers, but they couldn't figure it out either.
His whole idea depended on replicating the McDonald's standard, and here he was unable to get the fries right in his very first store.
Finally, he called the Potato and Onion Association.
One of their lab men asked him to walk them through the entire process, starting when the potatoes were bought.
When Ray got to the part about the chicken wire bins where the McDonald's stored their potatoes in the desert breeze, the man stopped him.
That's it.
Potatoes improve as they dry out.
The sugars convert to starch.
The brothers had stumbled on a natural curing process without even knowing it.
So Ray devised his own system.
He stored the potatoes in the basement with a big electric fan blowing on them, then blanched each batch in hot oil before the final fry.
It took three months, but when he finally got it right he thought they were even better than the original McDonald's fries.
One of his suppliers told him, Ray, you know you aren't in the hamburger business at all.
You're in the french fry business.
I don't know how the living hell you do it, but you've got the best french fries in town and that's what's selling folks on your place.
You know, I think you're right, Ray replied.
But you son of a bitch, don't you dare tell anybody about it.
In May 1955, a man named Harry Sonnenborn called Ray's office.
He'd heard about the operation and driven out to see it and watched from across the street.
And he liked what he saw and he wanted a job.
Harry was 39.
He was tall and angular with German military haircut.
He'd been vice president of Tasty Freeze, which meant he understood franchising.
Kroc told him he couldn't afford to hire anybody, but Harry said he'd go home and figure out the lowest salary he could possibly live on.
And a few days later, he called back and he said $100 a week.
Kroc hired him.
Harry would become one of the most important figures in McDonald's history.
He devised the financial structure that made everything possible.
Years later, he and Ray would clash so badly that one of them would have to go.
But in 1955, there were just two guys in a tiny office trying to build something new.
The idea that changed everything came from Harry.
McDonald's was selling franchises, the right to use the name and the systems.
But franchises were finding their own locations, leasing their own buildings.
So Kroc collected $950 per license and then 1.9% of sales.
And he had to give half a percent to the brothers.
It was enough to survive on, but it wasn't quite enough to build an empire on.
So Harry's solution to this was they could 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.
Kroc was skeptical.
Why would landlords go along with this?
And Harry studied real estate law.
He hired consultants.
He learned the mechanics of commercial leasing.
And then he went out and convinced property owners one by one.
Landlords with vacant land were happy to earn something from it.
McDonald's now had real income, not just royalties, but now stable rent.
Cash that kept coming even when the store had a bad month.
The insight was simple.
Operators didn't want to hunt for locations and negotiate leases.
They wanted to run restaurants.
If McDonald's did the hard part, the franchise became far more valuable, and everyone won.
They started Franchise Realty Corporation with 1000 in capital and Harry would eventually turn it into over 170 million worth of real estate.
I want to stop here and explain something that's easy to miss.
Ray Kroc didn't invent the hamburger.
He didn't invent the drive-in.
He didn't invent the system that made McDonald's famous.
Mac and Dick McDonald did that.
What Kroc invented was a way to replicate the system across an entire country.
A structure that aligned the interests of the company, the franchisee, the supplier and the customer.
A machine for turning one restaurant's success into 10000.
We are not basically in the food business, Harry liked to say.
We're in the real estate business.
And this confused people.
But he was right.
The franchise fee was small.
The royalty on sales was thin.
What made McDonald's wealthy was owning or controlling the land under every restaurant.
Franchisees paid rent.
That rent was McDonald's real income.
It was steady.
It was predictable.
And it was growing with every new location.
Kroc understood the math, but he never saw it that way himself.
To him, McDonald's was in the hamburger business.
The real estate was just the engine that let them serve more hamburgers to more people.
He never lost sight of the customer.
The tension between Harry's financial engineering and Kroc's product obsession was what made the company work, at least for now.
By the late 1950s, McDonald's was growing fast.
New stores were popping up in Illinois, California and Tennessee, but growth created its own problems.
The landlord at the first Midwest location.
For instance, a banker was skeptical about the prospects of a 15-cent hamburger business.
The franchisee was also incredibly nervous.
Before opening day, Ray got this angry phone call from them.
You guys are trying to ruin me, the operator yelled.
You've got more meat and buns in this place than I'll use in a month.
On day one, they ran out.
They had to make a panic run to another store just to get through the weekend.
The operator was happy to be wrong.
The landlord, he spent the next 20 years wishing he had demanded more rent.
But the McDonald's brothers were still a problem.
They refused to send registered letters authorizing changes, which meant technically every store he built was in violation of their original contract.
Their attorney could shut them down at any moment.
And Ray was bleeding cash.
We were in the trough between our heavy outlays for land and buildings and the income from those properties.
He wrote.
Gross sales climbed.
Many units were prospering at the same time.
We were barely able to meet payroll.
Harry Sonborn issued an order.
No bill came over $1,000 would be paid in full.
Everything else went on installments.
One week, they were overdrawn and couldn't make payroll at all.
The accountant switched from weekly to bi-monthly 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 for a late-night meeting.
Someone brought barbecued ribs, and Ray was looking at the numbers, but his mind was somewhere else.
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.
The accountant froze mid-bite.
He went home and told his wife that Ray Kroc was either a nut or a dreamer or both.
And they couldn't make payroll.
And meanwhile, he's talking about billion-dollar company.
A year later, the accountant was offered a job at another chain at twice his salary.
But he turned it down.
Why, the recruiter asked.
Because you don't have Ray Kroc.
In 1960, Ray Kroc decided he was done with the McDonald's brothers.
He was tired of their games, tired of the attorney's threats, tired of watching them visit Chicago and drive past his headquarters without even calling, tired of pouring every ounce of energy of his life into building something great, while two men in California collected a half a percent of every dollar he earned made.
He called Dick McDonald and asked him to name a price.
A day or two later, Dick called back.
He said $2,700,000.
We'd like to have a million dollars apiece after tax, Dick explained.
That's for all the rights, the name, the San Bernardino store, everything.
Ray dropped the phone.
He didn't have that kind of money.
Neither did the company.
The insurance companies that had been lending to McDonald's couldn't swing it either, but he had to be rid of them.
Harry spent weeks searching for financing.
He finally found a group of 12 institutions, including Princeton Howard University, Carnegie Tech, the Ford Foundation, willing to lend the money in exchange for half a percent of gross sales.
McDonald's would pay down the principal out of that half percent.
They projected it would take until 1991, 30 years.
They paid it off in 1972.
The lenders made about $12 million.
McDonald's got to keep the half percent it had been paying the brothers on today's sales and that half percent is worth billions.
But one thing stuck in Ray's throat.
At the last minute, the brothers insisted on keeping their original restaurant.
They'd agreed to sell everything, and now they were carving out an exception.
What a goddamn rotten trick, Ray wrote.
They went back on their promise, made on a handshake.
This is one of the reasons there was no love lost between Ray Kroc and the McDonald's brothers.
In fact, Ray would go on to open a McDonald's across the street from them and run them out of business.
In 1960, a former Marine Corps major named Lytton Cochran opened McDonald's store number 200 in Knoxville, Tennessee.
A few doors down was a competing hamburger chain.
The day Lytton opened, they announced a special, five hamburgers for 30 cents, six cents each.
They kept it up for a month.
Lytton wasn't selling hamburgers, but he noticed something strange.
He was still showing a profit.
Customers were buying the cheap burgers from the competition, then coming to his place for soft drinks and fries.
He figured he'd hang in there.
They couldn't keep it up forever.
Then things escalated.
A new special.
10, 10, and 10.
10 hamburgers, milkshakes, and fries.
10 cents each.
Linden was staggered.
A lawyer friend told him it was a clear violation of federal trade regulations.
The competition was trying to drive him out of business, and once he was gone, they'd raise prices.
The lawyer offered to take it to the government.
So Lytton flew to Chicago to ask Kroc what he should do, and Kroc let him have it.
Lytton, you're getting your ears beat down, and it's not right.
We can agree on that, but I'm going to tell you something I feel very strongly about.
The thing that has made this country great is our free enterprise system.
If we have to resort to bringing in the government to beat our competition, then we deserve to go broke.
If we can't do it by offering a better 15-cent hamburger, by being better merchandisers, by providing faster service and a cleaner place, then I would rather be broke tomorrow and start all over again in something else.
Lytton flew back to Tennessee and got to work.
He never complained about competition again.
By the time Kroc wrote his book, Lytton owned 10 McDonald's locations in Knoxville.
Ray Kroc was obsessed with every detail inside a McDonald's.
The thickness of the buns, the temperature of the fries, the number of pickles on a burger, the cleanliness of the parking lot.
No detail was too small to escape his obsessive attention.
His philosophy was simple.
You must perfect every fundamental aspect of your business if you expect it to perform well.
He had a saying about competition.
You can learn all you ever need to know about the competition's operations by looking in its garbage cans.
And he wasn't kidding.
More than once.
At two in the morning, Ray Kroc sorted through a competitor's trash to count out how many boxes of meat they'd used the day before.
Fred Turner shared this obsession.
He started working at the grill and now was in headquarters.
Together, he and Kroc transformed McDonald's from a collection of restaurants into a fine-oiled machine.
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 a beauty in a hamburger bun, Kroc wrote.
Yet is it any more useful to find grace in the texture and softly curved silhouette of a bun than to reflect lovingly on the hackles of a favorite fishing fly?
It brought in the same obsession to everything.
McDonald's insisted the beef be 19% fat.
They developed a testing device called the Fatalyzer so operators could check their meat on the spot.
If a shipment failed, the whole thing was rejected.
Suppliers learned to get it right the first time.
They even made the system self-auditing.
Every bun was balanced against every patty.
If the numbers didn't match, the manager knew immediately something was being wasted or stolen.
One choice Kroc made was he 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 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.
This savings got passed on to franchisees.
Figuring out ways a supplier could lower his costs meant that he could afford to sell to a McDonald's for less.
Everyone pulled in the same direction and suppliers grew with McDonald's because McDonald's helped them grow.
Kroc made another decision early on that turned out to be crucial.
He refused to put any pay telephones, jukeboxes, or vending machines of any kind 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, he explained.
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.
It's the same principle that Sol Price used at FedMart and Price Club.
Price knew that he was losing sales by not carrying every skew of the product.
He called it the intelligent loss of sales.
But he more than made up for it with simpler operations and more volume.
Fewer products meant less complexity, which meant faster service and lower costs.
Sometimes what you refuse to do matters more than what you do.
Kroc and Turner realized early that they needed a way to train the operators, not just to show them the basics, but to drill them until every detail became second nature.
So in the basement of one store, they set up their first classroom.
Perspective operators sat at desk armchairs among potato sacks and listened to lectures.
And at noon, they went upstairs and they'd 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.
It had a campus in Oak Brook, Illinois, with classrooms with the latest teaching equipment.
Its graduates were running McDonald's in countries Kroc never even visited.
The system was the product.
The training was what made it work.
People have marveled at the fact that I didn't start McDonald's until I was 52 years old and then became a success overnight.
Ray wrote.
But I was just like a lot of show business personalities who work away quietly at their craft for years and then suddenly they get the right break and make it big.
He paused.
I was an overnight success, all right, but 30 years is a long night.
In 1965, McDonald's went public at $22.50 a share.
By the end of the first day, it was trading at $30.
By the end of the first month, it was trading at $50.
Ray Kroc was wealthier than he'd ever dreamed, but he still wasn't satisfied.
Like every other outlier, he never would be.
There's always another store to open, another system to perfect, another problem to solve.
When he saw a light at a McDonald's sign at dusk, he got furious.
When he saw litter in a parking lot, he screamed at the manager.
Perfection is very difficult to achieve, he wrote, and perfection was what I wanted in McDonald's.
Everything else was secondary.
There's something else important about how McDonald's kept growing.
The best ideas didn't always come from headquarters.
In Cincinnati, an operator named Lou Groen was getting destroyed on Fridays.
His competition, Big Boy, had a fish sandwich.
And in Catholic neighborhoods were the church-ordained meatless Fridays that mattered.
McDonald's had nothing for those customers.
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 Luke kept pushing.
He worked on Fred Turner.
He worked on the operations people.
He told them either McDonald's sells fish or I sell my store.
And that's how much he believed in it.
So he developed a sandwich, North American whitefish breaded and fried with tartar sauce on a bun.
One day in the test kitchen, someone mentioned that a crew member had tried it with cheese.
Of course, Ray explained, that's exactly what it needs.
No, make it a half slice.
And that's how the Filet-O-Fish was born.
Lou Gorin invented the Filet-O-Fish.
Jim Delgatti in Pittsburgh invented the Big Mac.
Herb Peterson in Santa Barbara invented the Egg McMuffin.
The best product innovations that McDonald's ever had came from operators solving local problems.
The company just gave them a system in scale.
They gave the company its future.
Rick Rock wasn't a saint by any means.
He drove away his first wife with his relentless work ethic.
He drove away his second wife with the same thing.
He was temperamental, demanding, impossible to please.
He pushed people until they broke or until they became exactly what he needed them to be.
But the people who stayed loved him.
They adored him.
They loved working with him and they became really rich.
More importantly, many of them became inversions of him.
They were driven.
They were detailed, obsessed.
They were relentless.
I gave a lot of men the opportunity to become millionaires, Ray wrote.
They did it themselves.
I merely provided the means.
The McDonald's brothers, however, ended up bitter.
They felt Ray had taken their creation and pushed them out.
And there's maybe some truth to that.
He built McDonald's into something they never could have built, but he did it with their name, their system and their idea.
I'm not a fast foods man, Dick McDonald once said.
I'm a production man.
I saw my opportunity in the hamburger, but my brother and I never wanted it to be this big.
That's part of the difference.
The McDonald's brothers saw a restaurant, and Ray Kroc saw a system that could feed the world.
By the time he would die in 1984, McDonald's had nearly 8,000 restaurants worldwide.
Annual sales were approaching 9 billion.
Now, that number seems staggering low compared to today, but that was 1984.
Late in life, Ray Kroc would fly over cities in a helicopter looking for new locations.
He'd see a bare piece of ground and imagine what could be built there.
That was his favorite thing in the world to do.
Finding locations for McDonald's is the most creatively fulfilling thing I can imagine, he wrote.
I go out and check out a piece of property.
It's nothing but bare ground.
It's not producing a damn thing for anybody.
But I put a building on it and the operator gets into business there employing 50 or 100 people.
And there's a new business for the garbage man, the landscape man and the people who sell the meat and buns and potatoes.
So out of that bare ground comes a store that does say a million dollars a year in business.
And let me tell you, it's a great satisfaction to see that happen.
There's a sign at McDonald's headquarters that said, nothing recedes like success.
Don't let it happen to us or you.
And Ray Kroc wrote those words.
He believed them until the day he died.
Even in a wheelchair in his final years, he went to the office nearly every day.
He scrutinized sales reports.
He argued about building sites and he had a saying he repeated constantly.
As long as you're green, you're growing.
And as soon as you're ripe, you start to rot.
Ray Kroc never got right.
Thank you for listening and learning with me.
If you're looking for the lessons for this episode, head to the website.
The link is in the descriptions.
I will see you next week.
