I have been fascinated with the McDonald’s story. After reading several books on McDonald’s and Ray Kroc I thought I knew something more than the average person who only buys their hamburgers. That’s why I was amazed by a recent piece from Zen Strategies by Ankesh Kothari, described as serial entrepreneur, angel investor and nomadic traveller, that gives the fascinating back story of the original McDonald’s brothers process to develop a profit-making business model. The review process is something any business – anyone for that matter – can learn from. Here’s the full piece published by with permission from Ankesh Kothari. – Chesney Bradshaw, publisher of ideaaccelerator.co.za and author of “Breakthrough Ideas”, published in 2016 by Bell & Cray Media.
The Story of Maurice & Richard & Ray & Harry
Maurice and Richard were two brothers with dreams of making it big in Hollywood. But after a few years of struggle, they gave up and opened a restaurant instead. The restaurant was named after their last name: “McDonalds Barbeque.”
The restaurant was doing well. After a few years of running the restaurant, the brothers took a bold decision to pause and evaluate things. They closed the restaurant down for a little while. They audited their receipts to see which of the items from their menu was selling more. And then they slashed their products down from 25 items to 9.
Furthermore, they calculated that paying salaries to the 20 servers they had on payroll was one of the most expensive things on their balance sheets. So they got rid of their servers and planned to make their restaurants self-serving ones. Customers would have to walk to a window and place their orders.
The brothers then started focusing on speed: how one person could fulfill as many orders as possible. They invested in machinery that would press the beef into patties. They hired a mechanic to build an automatic condiment dispenser that would dispense precise quantities of ketchup and mustard by pressing a button. And they invested in Prince Castle Multimixers that made five milkshakes together.
Because of these things, they were able to slash their prices and make food cheaper than their competition. And soon after reopening their restaurant again (calling it only “McDonalds” as barbeque was one of the things they cut from their menu), a lot more diners started showing up. The brothers started making a profit of $100,000 per year.
Soon the brothers bought 7 more milkshake machines. Which caught the attention of Ray Kroc.
A lot of people have heard of Ray Kroc. He is considered the real founder of McDonalds.
Ray Kroc was a 52 year old salesman who used to sell milkshake machines. Most restaurants bought 1 or 2 milkshake machines. When a restaurant bought 8 milkshake machines – it piqued Ray’s curiosity. He wanted to know what kind of a setup needed to churn out 40 milkshakes together.
So Ray flew down to check McDonalds out. And he was impressed with what he saw. He convinced the McDonalds brothers to allow him to sell franchises.
Each new franchise owner would pony up $950 to start the business. And on top of that, pay 1.9% of sales. The McDonalds brothers would earn 0.5% of it, and Ray Kroc would keep the other 1.4%.
Where the McDonalds brothers had focused on efficiency and speed, Ray focused on replication and standardization.
Ray opened up a food lab whose job was to find ways on how all franchise owners could provide the same taste and experience to each and every diner. How every pattie coming out from every kitchen would weigh exactly 1.6 ounces and have a diameter of exactly 3.875 inches.
Within the first 4-5 years, Ray managed to sell 200 franchises. But things were not going as well as he had expected. The restaurants had generated sales of over 75 million dollars. But Ray Kroc only made $159,000. This wasn’t enough to pay for all the employees, the lab, and to pay for advertising.
At the same time, Ray had raised a loan of 2.7 million dollars because he wanted to buy out the McDonalds brothers completely. The brothers were not following the exact specifications to provide standardized service to their diners. And they were selling franchise licenses themselves – sometimes to people who opened up shop very close to existing McDonalds outlets. Servicing that loan would require additional cash flow.
Things were looking bleak. When an ingenious solution was thought up.
A few people have heard of Maurice and Richard McDonalds. A lot more people have heard of Ray Kroc. But not many people have heard of Harry Sonneborn. Harry is the reason behind McDonalds real success.
Harry had joined McDonalds at a lowly salary of $100 a week as its first financial executive. But when Ray Kroc could not increase his salary over the years, he was given shares in the company instead.
Harry realized that royalty from franchises wouldn’t be enough to grow quickly enough. McDonalds would need other income streams.
And so he thought of a plan. McDonalds could sign long term leases for properties where new restaurants would come up. And turn around and sublease those properties to franchise owners at 20-40% markup. The initial $950 that franchises paid would be used to pay the first down payment.
Later on, McDonalds also started buying the properties outright instead of leasing them on a long term basis. And in essence, they got the franchise owners to pay for the real estate. Because of this strategy, McDonalds owned real estate valued at $38 billion by 2015!
McDonalds real business today is not selling hamburgers and fries. But it is real estate.
- Follow the 80/20 principle. Audit your books and focus on the 20% of products that earn 80% of revenue.
- Optimize things.
- Pay attention to unusual activities. Investigate anomalies.
- Don’t just aim to make a profit from your end product. Find hidden treasures. Audit everything you do and then think how you can make money off it. Bollywood movies make money from their music. Donald Trump makes money by licensing his name.
- What is your take away from this article? Let me know: firstname.lastname@example.org
- The Benjamin Franklin Method (How to learn to write)
That’s it for today. Thanks for reading 🙂
Read more on McDonalds here