small beginnings #2

Ray Kroc grew up and spent most of his life in Oak Park, Illinois. During the First World War he lied about his age and became a Red Cross ambulance driver at 15. During the war, Kroc served in the same regiment as Walt Disney. Between the end of the war and the early 1950s he tried his hand at a number of trades including paper cup salesman, pianist, jazz musician, band member and radio DJ at Oak Park radio station WGES.  At one time, Ray worked for room and board at one of Ray Dambaugh’s restaurants in the Midwest to learn the restaurant business. Years later, he returned the favor by coming to Ray Dambaugh’s funeral in Evans City, Pennsylvania to pay his respects. He eventually became a multi-mixer milkshake machine salesman, traveling across the country.

With Prince Castle Multi-Mixer sales plummeting because of competition from lower-priced Hamilton Beach products, Ray took note of the McDonald brothers who had purchased 8 of his Multi-Mixers. Immediately after visiting the San Bernardino store, Ray became convinced that he could sell mixers to every new franchise restaurant that they opened, and so he offered his services to the McDonald brothers who were looking for a new franchising agent following the departure of agent Bill Tansey due to health issues.

Kroc eventually became frustrated with the brothers’ willingness to accept their chain having only a handful of restaurants. In 1961, he bought the company for $2.7 million (enough to pay each brother $1 million each after taxes), plus an overriding royalty of 1.9% on gross sales to the McDonald’s. (When negotiating the contract the McDonald brothers said that 2% sounded greedy; 1.9% was more attractive.)

The agreement was a handshake with split agreement between the parties because Kroc insisted that he could not show the royalty to the investors he had lined up to capitalize his purchase. At the closing table, Kroc became annoyed that the brothers would not transfer to him the real estate and rights to the original unit. The brothers had told Kroc that they were giving the operation, property and all, to the founding employees. Kroc closed the transaction, then refused to acknowledge the royalty portion of the agreement because it wasn’t in writing. The McDonald brothers consistently told Kroc that he could make changes to things like the original blueprints but despite Ray’s pleas, the brothers never sent any formal letters which legally allowed the changes in the chain. Kroc also opened a new McDonald’s restaurant near the McDonald’s (now renamed “The Big M” as they had neglected to retain rights to the name) to force it out of business.

Kroc wisdom

▪    Kroc defined salesmanship as “the gentle art of letting the customer have it your way.”

▪    “If you have time to lean, you have time to clean,” was a common reproach to idle employees.

▪    “I was an overnight success all right, but 30 years is a long, long night.”

▪    “It’s easy to have principles when you’re rich. The important thing is to have principles when you’re poor.”

▪    “Luck is a dividend of sweat. The more you sweat, the luckier you get.”

Kroc … popularised the mantra “In business for yourself, but not by yourself”, successfully balanced the need for central control over franchisees, ensuring that they followed a rigid, proven formula, with the need to empower restaurant owners to suggest improvements to the business model.