2 August 2017

Book review: Grinding it out - The Making of Mcdonald's

This month we chose to read Grinding It Out - The Making of McDonald’s by Ray Kroc, the man who took the McDonald’s brand and spread it across America.

by Sam Statham

Investment Assistant


Kroc was a hard worker, driven mainly by the thought of making money. Early on in his career he would be regularly working 19 hour days in two jobs. The first of which was playing the piano on a radio show in the evenings and secondly as a paper cup salesman, which he had selected because he “sensed from the outset that paper cups were part of the way America was headed.” 

Kroc left the paper cup company to move into Milk Shake Multimixers as he saw this as a more profitable business. However, he didn’t own the Multimixer contract personally; it belonged to his employer, Lily Tulip Cup. Af ter a while he was experiencing success selling Multimixers, but as only a 40% owner his previous employer was still effectively his boss. He offered to buy their 60% off them, and they demanded $68,000 for their share. After re-mortgaging his house to pay off the amount, he writes how this for him was the first stage of grinding it out.

Upon hearing about the San Bernadino McDonald’s restaurant buying a lot of Multimixers, Kroc flew out to meet the owners and was taken by the whole operation straight away. Mac and Dick McDonald founded this restaurant in 1940, starting life as a typical drive-in. The brothers realized that they were working hard just to stay in one place. They weren’t building volume even though their parking lot was always full. So they did something revolutionary and fraught with danger. They closed that successful restaurant in 1948 and reopened it a short time later with a radically different kind of operation. It was a restaurant stripped down to the minimum in service and menu, the prototype for legions of fast-food restaurants.

The brothers after some apprehension agreed to let Kroc be the one to start opening new stores. Kroc writes: “When I flew back to Chicago that fateful day in 1954, I had a freshly signed contract with the McDonald brothers in my briefcase. I was a battle-scarred veteran of the business wars, but I was still eager to go into action. I was 52 years old. I had diabetes and incipient arthritis. I had lost my gall bladder and most of my thyroid gland in earlier campaigns. But I was convinced that the best was still ahead of me. I was still green and growing.”

The success of McDonalds hinged on three very simple principles which Kroc employed effectively, the first of which was assembly line production. The first well-known implementation of this was by Henry Ford in his making of the Model T. As a result of developments in this method, Ford's cars came off the line in three minute intervals. It is therefore no surprise that Kroc moulded this idea into an efficiency tool in the food industry.

The second principle being a quality french fry, which he found to be less straight forward than you might imagine. When setting up his first McDonald’s restaurant Kroc discovered after following the McDonald brothers’ recipe step by step a “perfectly fine looking, golden brown potato that snuggled up against the palate with a taste like… well, like mush.” He consulted with the ‘Potato and Onion Association’, as we all would have done I am sure. At first they were baffled, but soon discovered how potatoes improve in flavour as they dry out after being dug, leading Kroc to devise a curing system of his own.

The third and final principle was a solid franchise model, creating a culture of small businessmen, many of whom operated several McDonald’s at once. Each franchisee pays a percentage of its gross sales to the McDonald’s corporation. The percentage was 1.9% when McDonald’s started, and by the time Kroc was writing his autobiography, which was 1977, it was 11.9%.

Kroc said that it would usually take less than two years for a site to be made available for the applicant. The applicant would then have to do another 500 hours working in a McDonald’s restaurant. Then they attended Hamburger University where “we award them a Bachelor of Hamburgerology degree with a minor in french fries.”

Despite having a very friendly and humorous writing style, one gets the feeling that Kroc is a ruthless businessman and possibly one you would not like to cross. He looked after loyal workers but had no issues in cutting ties with past friends who turned against him in business, or for that matter, wives who were surplus to requirements. Writing of a man who attempted to steal one o f his paper cup money making schemes “I couldn’t listen for a moment when he called later to plead for a chance to get into McDonald’s. A good executive does not like mistakes. He will allow his subordinates an honest mistake once in a while, but he will never condone or forgive dishonesty”.

There is a lot to be learned from his considered, calculated, but at times callous operating style. I would, however, love to read the accounts of his life from the perspective of those he has crossed. I suspect it would paint a far less glamorous picture.

The JM Finn book club, consisting of a dozen or so investment professionals across the firm, was conceived in 2017 with the hope being that, month by month, some of the wisdom of investing gurus such as Warren Buffet, Charlie Munger, and Mohnish Pabrai, might rub off on their eager selves.

 


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