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In 1937, Patrick McDonald opened "The Airdrome" restaurant at the Monrovia Airport in Monrovia, California. Hamburgers were ten cents, and all-you-can-drink orange juice was five cents. In 1940 his two sons, Maurice and Richard, moved the entire building 40 miles to the corner of 14th and E Streets in San Bernardino, California. The restaurant was renamed "McDonald's".
In 1948, the brothers Richard and Maurice McDonald introduced the "Speedee Service System" which established the principles of the modern fast-food restaurant. In 1954, Ray Kroc, a seller of Multimixer milkshake machines, learned that brothers Richard and Maurice (Dick and Mac) McDonald were using eight of his high-tech Multimixers in their San Bernardino, California, restaurant. His curiosity was piqued, and he went to San Bernardino to take a look at the McDonalds' restaurant.
The world's first McDonald's restaurant.
The McDonald Brothers had been in the restaurant business since 1937. In 1948, they closed down a successful carhop drive-in to establish the streamlined operation Ray Kroc saw in 1954. The menu was simple: hamburgers, cheeseburgers, french fries, shakes, soft drinks, and apple pie. The carhops were eliminated to make McDonald's a self-serve operation. Mac and Dick McDonald had taken great care in setting up their kitchen like an assembly line, to ensure maximum efficiency.
Believing that the McDonald formula was a ticket to success, Kroc suggested that they franchise their restaurants throughout the country. When they hesitated to take on this additional burden, Kroc volunteered to do it for them. He returned to his home outside of Chicago with rights to set up McDonald's restaurants throughout the country, except in a handful of territories in California and Arizona already licensed by the McDonald brothers. Kroc's first McDonald's restaurant opened in Des Plaines, Illinois, near Chicago, on April 15, 1955, the same day that Kroc incorporated his company as McDonald's Corporation.
Once the Des Plaines restaurant was operational, Kroc sought franchisees for his McDonald's chain. The first snag came quickly. In 1956 he discovered that the McDonald brothers had licensed the franchise rights for Cook County, Illinois to the Frejlack Ice Cream Company. Kroc was incensed that the McDonalds had not informed him of this arrangement. He purchased the rights back for $25,000, five times what the Frejlacks had originally paid and pressed forward. McDonald's grew slowly for its first three years. By 1958, there were 34 restaurants. In 1959, however, Kroc opened 67 new restaurants, bringing the total to 101 locations.
Phenomenal growth in the 1960s and 1970s
In 1960, the McDonald's advertising campaign "Look for the Golden Arches" gave sales a big boost. Kroc believed that advertising was an investment that would in the end come back many times over, and advertising has always played a key role in the development of the McDonald's Corporation. Indeed, McDonald's ads have been some of the most identifiable over the years. In 1962, McDonald's introduced its now world-famous Golden Arches logo. A year later, the company sold its billionth hamburger and introduced Ronald McDonald, a red-haired clown with particular appeal to children.
In the early 1960s, McDonald's really began to take off. The growth in U.S. automobile use that came with suburbanization contributed heavily to McDonald's success. In 1961 Kroc bought out the McDonald brothers for $2.7 million, aiming at making McDonald's the number one fast-food chain in the country.
In 1965, McDonald's Corporation went public. Common shares were offered at $22.50 per share. By the end of the first day's trading, the price had shot up to $30. A block of 100 shares purchased for $2,250 in 1965 was worth, after 12 stock splits (increasing the number of shares to 74,360), about $1.8 million by the end of 2003. In 1985, McDonald's Corporation became one of the 30 companies that make up the Dow Jones Industrial Average.
McDonald's success in the 1960s was in large part due to the company's skillful marketing and flexible response to customer demand. In 1963, the Filet-O-Fish sandwich, billed as "the fish that catches people," was introduced in McDonald's restaurants. The new item had originally met with disapproval from Kroc, but after its successful test marketing, he eventually agreed to add it. Another item that Kroc had backed a year previously, a burger with a slice of pineapple and a slice of cheese, known as a "hulaburger," had flopped. The market was not quite ready for Kroc's taste; the hulaburger's tenure on the McDonald's menu board was short. In 1968 the now legendary Big Mac made its debut, and in 1969 McDonald's sold its five billionth hamburger. Two years later, as it launched the "You Deserve a Break Today" advertising campaign, McDonald's restaurants had reached all 50 states.
In 1968, McDonald's opened its 1,000th restaurant, and Fred Turner became the company's president and chief administrative officer. Kroc became chairman and remained CEO until 1973. Turner had originally intended to open a McDonald's franchise, but when he had problems with his backers over a location, he went to work as a grillman for Kroc in 1956. As operations vice-president, Turner helped new franchisees get their stores up and running. He was constantly looking for new ways to perfect the McDonald's system, experimenting, for example, to determine the maximum number of hamburger patties one could stack in a box without squashing them and pointing out that seconds could be saved if McDonald's used buns that were presliced all the way through and were not stuck together in the package. Such attention to detail was one reason for the company's extraordinary success.
McDonald's spectacular growth continued in the 1970s. Americans were more on-the-go than ever, and fast service was a priority. In 1972, the company passed $1 billion in annual sales. By 1976, McDonald's had served 20 billion hamburgers, and systemwide sales exceeded $3 billion.
McDonald's pioneered breakfast fast food with the introduction of the Egg McMuffin in 1972 when market research indicated that a quick breakfast would be welcomed by consumers. Five years later the company added a full breakfast line to the menu, and by 1987 one-fourth of all breakfasts eaten out in the United States came from McDonald's restaurants.
Kroc was a firm believer in giving "something back into the community where you do business." In 1974 McDonald's acted upon that philosophy in an original way by opening the first Ronald McDonald House, in Philadelphia, to provide a "home away from home" for the families of children in nearby hospitals. Twelve years after this first house opened, 100 similar Ronald McDonald Houses were in operation across the United States.
In 1975, McDonald's opened its first drive-thru window in Sierra Vista, Arizona. This service gave Americans a fast, convenient way to procure a quick meal. The company's goal was to provide service in 50 seconds or less. Drive-thru sales eventually accounted for more than half of McDonald's systemwide sales. Meantime, the Happy Meal, a combo meal for children featuring a toy, was added to the menu in 1979.
Surviving the 1980s "Burger Wars"
In the late 1970s, competition from other hamburger chains such as Burger King and Wendy's began to intensify. Experts believed that the fast-food industry had gotten as big as it ever would, so the companies began to battle fiercely for market share. A period of aggressive advertising campaigns and price slashing in the early 1980s became known as the "burger wars." Burger King suggested that customers "have it their way"; Wendy's offered itself as the "fresh alternative" and asked of other restaurants, "where's the beef?" But McDonald's sales and market share continued to grow. Consumers seemed to like the taste and consistency of McDonald's best.
During the 1980s, McDonald's further diversified its menu to suit changing consumer tastes. The company introduced the McChicken in 1980. It was proved to be a sales disappointment, and was later replaced with the highly successful Chicken McNuggets a year later. Chicken McNuggets were introduced in June 1980, and by the end of 1983, McDonald's was the second largest retailer of chicken in the world. In 1985, ready-to-eat salads were introduced to lure more health-conscious consumers. The 1980s were the fastest-paced decade yet. Efficiency, combined with an expanded menu, continued to draw customers. McDonald's, already entrenched in the suburbs, began to focus on urban centers and introduced new architectural styles. Although McDonald's restaurants no longer looked identical, the company made sure food quality and service remained constant.
Despite experts' claims that the fast-food industry was saturated, McDonald's continued to expand. The first generation raised on restaurant food had grown up. Eating out had become a habit rather than a break in the routine, and McDonald's relentless marketing continued to improve sales. Innovative promotions, such as the "when the U.S. wins, you win" giveaways during the Olympic Games in 1988, were a huge success.
In 1982 Michael R. Quinlan became president of McDonald's Corporation and Fred Turner became chairman. Quinlan, who took over as CEO in 1987, had started at McDonald's in the mailroom in 1963, and gradually worked his way up. The first McDonald's CEO to hold an M.B.A. degree, Quinlan was regarded by his colleagues as a shrewd competitor. In his first year as CEO the company opened 600 new restaurants.
McDonald's growth in the United States was mirrored by its stunning growth abroad. By 1991, 37 percent of systemwide sales came from restaurants outside the United States. McDonald's opened its first foreign restaurant in British Columbia, Canada, in 1967. By the early 1990s the company had established itself in 58 foreign countries and operated more than 3,600 restaurants outside the United States, through wholly owned subsidiaries, joint ventures, and franchise agreements. Its strongest foreign markets were Japan, Canada, Germany, Great Britain, Australia, and France.
In the mid-1980s, McDonald's, like other traditional employers of teenagers, was faced with a shortage of labor in the United States. The company met this challenge by being the first to entice retirees back into the workforce. McDonald's placed great emphasis on effective training. It opened its Hamburger University in 1961 to train franchisees and corporate decision-makers. By 1990, more than 40,000 people had received "Bachelor of Hamburgerology" degrees from the 80-acre Oak Brook, Illinois, facility. The corporation opened a Hamburger University in Tokyo in 1971, in Munich in 1975, and in London in 1982.
Braille menus were first introduced in 1979, and picture menus in 1988. In March 1992, Braille and picture menus were reintroduced to acknowledge the 37 million Americans with vision, speech, or hearing impairments.
Quinlan continued to experiment with new technology and to research new markets to keep McDonald's in front of its competition. Clamshell fryers, which cooked both sides of a hamburger simultaneously, were tested. New locations such as hospitals and military bases were tapped as sites for new restaurants. In response to the increase in microwave oven usage, McDonald's, whose name is the single most advertised brand name in the world, stepped up advertising and promotional expenditures stressing that its taste was superior to quick-packaged foods.
1990s: Growing pains
McRecycle USA began in 1990 and included a commitment to purchase at least $100 million worth of recycled products annually for use in construction, remodeling, and equipping restaurants. Chairs, table bases, table tops, eating counters, table columns, waste receptacles, corrugated cartons, packaging, and washroom tissue were all made from recycled products. McDonald's worked with the U.S. Environmental Defense Fund to develop a comprehensive solid waste reduction program. Wrapping burgers in paper rather than plastic led to a 90 percent reduction in the wrapping material waste stream.
It took McDonald's 33 years to open its first 10,000 restaurants. The 10,000th unit opened in April 1988. Incredibly, the company reached the 20,000-restaurant mark in only eight more years, in mid-1996. By the end of 1997 the total had surpassed 23,000 by that time McDonald's was opening 2,000 new restaurants each year, an average of one every five hours.
Much of the growth of the 1990s came outside the United States, with international units increasing from about 3,600 in 1991 to more than 11,000 by 1998. The number of countries with McDonald's outlets nearly doubled from 59 in 1991 to 114 in late 1998. In 1993, a new region was added to the empire when the first McDonald's in the Middle East opened in Tel Aviv, Israel. As the company entered new markets, it showed increasing flexibility with respect to local food preferences and customs. In Israel, for example, the first kosher McDonald's opened in a Jerusalem suburb in 1995. In Arab countries the restaurant chain used "Halal" menus, which complied with Islamic laws for food preparation. In 1996 McDonald's entered India for the first time, where it offered a Big Mac made with lamb called the Maharaja Mac. That same year the first McSki-Thru opened in Lindvallen, Sweden.
Overall, the company derived increasing percentages of its revenue and income from outside the United States. In 1992 about two-thirds of systemwide sales came out of U.S. McDonald's, but by 1997 that figure was down to about 51 percent. Similarly, the operating income numbers showed a reduction from about 60 percent derived from the United States in 1992 to 42.5 percent in 1997.
In the United States, the number of units grew from 9,000 in 1991 to 12,500 in 1997, an increase of about 40 percent. The growth is considered by some to be excessive. Although the additional units increased market share in some markets, a number of franchisees complained that new units were cannibalizing sales from existing ones. Same-store sales for outlets open for more than one year were flat in the mid-1990s, a reflection of both the greater number of units and the mature nature of the U.S. market.
It did not help that the company made several notable blunders in the United States in the 1990s. The McLean Deluxe sandwich, which featured a 91 percent fat-free beef patty, was introduced in 1991, never really caught on, and was dropped from the menu in 1994. Several other 1990s-debuted menu items, including fried chicken, pasta, fajitas, and pizza failed as well. The "grown-up" (and pricey) Arch Deluxe sandwich and the Deluxe Line were launched in 1996 in a $200 million campaign to gain the business of more adults, but were bombs. The following spring brought a 55-cent Big Mac promotion, which many customers either rejected outright or were confused by because the burgers had to be purchased with full-priced fries and a drink. The promotion embittered still more franchisees, whose complaints led to its withdrawal. In July 1997 McDonald's fired its main ad agency, Leo Burnett, a 15-year McDonald's partner after the nostalgic "My McDonald's" campaign proved a failure. A seemingly weakened McDonald's was the object of a Burger King offensive when the rival fast-food maker launched the Big King sandwich, a Big Mac clone. Meanwhile, internal taste tests revealed that customers preferred the fare at Wendy's and Burger King.
In response to these difficulties, McDonald's drastically cut back on its U.S. expansion. In contrast to the 1,130 units opened in 1995, only about 400 new McDonald's were built in 1997. Plans to open hundreds of smaller restaurants in Wal-Marts and gasoline stations were abandoned because test sites did not meet targeted goals. Reacting to complaints from franchisees about poor communication with the corporation and excess bureaucracy, the head of McDonald's U.S.A. (Jack Greenberg, who had assumed the position in October 1996) reorganized the unit into five autonomous geographic divisions. The aim was to bring management and decision-making closer to franchisees and customers.
On the marketing side, McDonald's scored big in 1997 with a Teenie Beanie Baby promotion in which about 80 million of the toys/collectibles were gobbled up virtually overnight. The chain received some bad publicity, however, when it was discovered that a number of customers purchased Happy Meals just to get the toys and threw the food away. For a similar spring 1998 Teenie Beanie giveaway, the company altered the promotion to allow patrons to buy menu items other than kids' meals. McDonald's also began to benefit from a ten-year global marketing alliance signed with Disney in 1996. Initial Disney movies promoted by McDonald's included 101 Dalmatians, Flubber, Mulan, Armageddon, and A Bug's Life. Perhaps the most important marketing move came in the later months of 1997 when McDonald's named DDB Needham as its new lead ad agency. Needham had been the company's agency in the 1970s and was responsible for the hugely successful "You Deserve a Break Today" campaign. Late in 1997, McDonald's launched the Needham-designed "Did Somebody Say McDonald's?" campaign, which appeared to be an improvement over its predecessors.
Failed turnaround: late 1990s
Following the difficulties of the early and mid-1990s, several moves in 1998 seemed to indicate a reinvigorated McDonald's. In February the company for the first time took a stake in another fast-food chain when it purchased a minority interest in the 16-unit, Colorado-based Chipotle Mexican Grill chain. The following month came the announcement that McDonald's would improve the taste of several sandwiches and introduce several new menu items. McFlurry desserts, developed by a Canadian franchisee in 1997, proved popular when launched in the United States in the summer of 1998. McDonald's that same month said that it would overhaul its food preparation system in every U.S. restaurant. The new just-in-time system, dubbed "Made for You," was in development for a number of years and aimed to deliver to customers "fresher, hotter food"; enable patrons to receive special-order sandwiches (a perk long offered by rivals Burger King and Wendy's); and allow new menu items to be more easily introduced thanks to the system's enhanced flexibility. The expensive changeover was expected to cost about $25,000 per restaurant, with McDonald's offering to pay for about half of the cost; the company planned to provide about $190 million in financial assistance to its franchisees before implementation was completed by year-end 1999.
In May 1998, Greenberg was named president and CEO of McDonald's Corporation, with Quinlan remaining chairman; at the same time Alan D. Feldman, who had joined the company only four years earlier from Pizza Hut, replaced Greenberg as president of McDonald's U.S.A. An unusual move for a company whose executives typically were long-timers. The following month brought another first, McDonald's first job cuts. As the company said it would eliminate 525 employees from its headquarters staff, a cut of about 23 percent. In the second quarter of 1998 McDonald's took a $160 million charge in relation to the cuts. As a result, the company, for the first time since it went public in 1965, recorded a decrease in net income, from $1.64 billion in 1997 to $1.55 billion in 1998.
McDonald's followed up its investment in Chipotle with several more moves beyond the burger business. In March 1999 the company bought Aroma Café, a U.K. chain of 23 upscale coffee and sandwich shops. In July of that year McDonald's added Donatos Pizza Inc., a midwestern chain of 143 pizzerias based in Columbus, Ohio. Donatos had 1997 revenues of $120 million. Also in 1999, McDonald's 25,000th unit opened, Greenberg took on the additional post of chairman, and Jim Cantalupo was named company president. Cantalupo, who had joined the company as controller in 1974 and later became head of McDonald's International, had been vice-chairman, a position he retained. In May 2000 McDonald's completed its largest acquisition yet, buying the bankrupt Boston Market chain for $173.5 million in cash and debt. At the time, there were more than 850 Boston Market outlets, which specialized in home-style meals, with rotisserie chicken the lead menu item. Revenue at Boston Market during 1999 totaled $670 million. McDonald's rounded out its acquisition spree in early 2001 by buying a 33 percent stake in Pret A Manger, an upscale urban-based chain specializing in ready-to-eat sandwiches made on the premises. There were more than 110 Pret shops in the United Kingdom and several more in New York City. Also during 2001, McDonald's sold off Aroma Café and took its McDonald's Japan affiliate public, selling a minority stake through an initial public offering.
Refurbishing and creating a healthier image: Early 2000s
As it was exploring new avenues of growth, however, McDonald's core hamburger chain had become plagued by problems. Most prominently, the Made for You system backfired. Although many franchisees believed that it succeeded in improving the quality of the food, it also increased service times and proved labor-intensive. Some franchisees also complained that the actual cost of implementing the system ran much higher than the corporation had estimated, a charge that McDonald's contested. In any case, there was no question that Made for You failed to reverse the chain's sluggish sales. Growth in sales at stores open more than a year (known as same-store sales) fell in both 2000 and 2001. Late in 2001 the company launched a restructuring involving the elimination of about 850 positions, 700 of which were in the United States, and some store closings.
There were further black eyes as well. McDonald's was sued in 2001 after it was revealed that for flavoring purposes a small amount of beef extract was being added to the vegetable oil used to cook the french fries. The company had cooked its fries in beef tallow until 1990, when it began claiming in ads that it used 100 percent vegetable oil. McDonald's soon apologized for any "confusion" that had been caused by its use of the beef flavoring, and in mid-2002 it reached a settlement in the litigation, agreeing to donate $10 million to Hindu, vegetarian, and other affected groups. Also in 2001, further embarrassment came when 51 people were charged with conspiring to rig McDonald's game promotions over the course of several years. It was revealed that $24 million of winning McDonald's game tickets had been stolen as part of the scam. McDonald's was not implicated in the scheme, which centered on a worker at an outside company that had administered the promotions.
McDonald's also had to increasingly battle its public image as a purveyor of fatty, unhealthful food. Consumers began filing lawsuits contending that years of eating at McDonald's had made them overweight. McDonald's responded by introducing low-calorie menu items and switching to a more healthful cooking oil for its french fries. McDonald's franchises overseas became a favorite target of people and groups expressing anti-American and/or antiglobalization sentiments. In August 1999 a group of protesters led by farmer José Bové destroyed a half-built McDonald's restaurant in Millau, France. In 2002 Bové, who gained fame from the incident, served a three-month jail sentence for the act, which he said was in protest against U.S. trade protectionism. McDonald's was also one of three multinational corporations (along with Starbucks Corporation and Nike, Inc.) whose outlets in Seattle were attacked in late 1999 by some of the more aggressive protesters against a World Trade Organization (WTO) meeting taking place there. In the early 2000s McDonald's pulled out of several countries, including Bolivia and two Middle Eastern nations, at least in part because of the negative regard with which the brand was held in some areas.
Early in 2002 Cantalupo retired after 28 years of service. Sales remained lackluster that year, and in October the company attempted to revive U.S. sales through the introduction of a low-cost Dollar Menu. In December 2002, after this latest initiative to reignite sales growth failed and also after profits fell in seven of the previous eight quarters, Greenberg announced that it would resign at the end of the year. Cantalupo came out of retirement to become chairman and CEO at the beginning of 2003.
Cantalupo started his tenure by announcing a major restructuring that involved the closure of more than 700 restaurants (mostly in the United States and Japan), the elimination of 600 jobs, and charges of $853 million. The charges resulted in a fourth-quarter 2002 loss of $343.8 million, the first quarterly loss in McDonald's 38 years as a public company. The new CEO also shifted away from the company's traditional reliance on growth through the opening of new units to a focus on gaining more sales from existing units. To that end, several new menu items were successfully launched, including entree salads, McGriddles breakfast sandwiches (which used pancakes in place of bread), and white-meat Chicken McNuggets. Some outlets began test-marketing fruits and vegetables as Happy Meal options. Backing up the new products was the launch in September 2003 of an MTV-style advertising campaign featuring the new tag line, "I'm lovin' it." This was the first global campaign in McDonald's history, as the new slogan was to be used in advertising in more than 100 countries. It also proved to be the first truly successful ad campaign in years; sales began rebounding, helped also by improvements in service. In December 2003, for instance, same-store sales increased 7.3 percent. Same-store sales rose 2.4 percent for the entire year, after falling 2.1 percent in 2002.
In December 2003, McDonald's announced that it would further its focus on its core hamburger business by downsizing its other ventures. The company said that it would sell Donatos back to that chain's founder. In addition, it would discontinue development of non-McDonald's brands outside of the United States. This included Boston Market outlets in Canada and Australia and Donatos units in Germany. McDonald's kept its minority investment in Pret A Manger, but McDonald's Japan was slated to close its Pret units there. These moves would enable the company to concentrate its international efforts on the McDonald's chain, while reducing the non-hamburger brands in the United States to Chipotle and Boston Market, both of which were operating in the black.
McDonald's continued to curtail store openings in 2004 and to concentrate on building business at existing restaurants. Much of the more than $1.5 billion budgeted for capital expenditures in 2004 was slated to be used to remodel existing restaurants. McDonald's also aimed to pay down debt by $400 million to $700 million and to return approximately $1 billion to shareholders through dividends and share repurchases. Cantalupo also set several long-term goals, such as sustaining annual systemwide sales and revenue growth rates of 3 to 5 percent. In a move to both simplify the menu and make its offerings less fattening, McDonald's announced in March 2004 that it would phase out Super Size french fries and soft drinks by the end of the year.
In 1929, shortly after they graduated from high school, Maurice "Mac" and Richard "Dick" McDonald left their native New Hampshire for California. Attracted by the motion picture industry, their first jobs were as stage hands. Their first business was a small movie theater in a rented building in Glendora, California, on the east side of Los Angeles. Four years later, they still had not turned a profit, so they began to look around for a business that might be more lucrative.
In 1940 the brothers opened a drive-in hotdog stand in Pasadena, but shut it down to open a larger carhop drive-in with a barbecue pit on the corner of 14th and E streets in San Bernardino (50 miles east of Los Angeles). Within five years, with sales of $200,000 per year, they were among the richest families in town. Dick and his wife, with the single Mac, lived in a 25-room mansion with a view. Every year, they bought three brand new Cadillacs. With an annual income of more than $100,000 between them, they were content. In 1954 the McDonald brothers turned over the franchising rights of McDonald's to Ray Kroc. In return, they received one-half percent of the gross income until they were totally bought out by Kroc in 1961. In 1970 they sold their mansion and the lot at 14th and E, and moved back to New Hampshire.
After World War II, drive-in restaurants with carhops were a growing phenomenon, especially in southern California. The McDonald's carhop drive-in could easily serve 125 cars at a time, offering a menu that included barbecued pork and beef sandwiches, barbecued ribs, and hamburgers. Despite their prosperity, the McDonald brothers were not happy. According to John F. Love, "The brothers longed for a less complicated operation without the annoyances of unreliable carhops and the leather-jacketed customers they attracted."
In 1948 the McDonalds closed their drive-in for three months in order to streamline the operation. The new menu was very simple: hamburgers and cheeseburgers (which had been 80 percent of their business), french fries, shakes, soft drinks, and apple pies. The remodeled building, shaped like an octagon, had only 600 square feet. There were no tables to sit at, no jukebox, no cigarette vending machines, no payphones, no newsstands, and no carhops. As a result, the McDonalds succeeded in discouraging teenagers from patronizing their business.
Perhaps the most impressive aspect of the restaurant was the efficiency with which the food was prepared. Specially designed equipment included two 6-foot grills, stainless steel lazy susans, spatulas suited for volume flipping, and a stainless steel pump dispenser for squeezing a premeasured portion of ketchup and mustard evenly onto each bun. The tasks of the kitchen crew were broken down into clearly defined steps which untrained cooks could follow. The savings in preparation time allowed the McDonalds to lower the price of a hamburger from $.30 to $.15. A bag of french fries was $.10, a cup of coffee was $.05. Since all hamburgers were prepared with the same condiments, they could be prepared before they were ordered and kept warm along with the fries under infrared lamps. Orders could now be filled in 15 seconds. Children pressed their noses up against the glass windows to see the commercial kitchen while their parents were reassured that although the food was inexpensive, the kitchen was spotless, and the hamburger was fresh. For the first time, working class families could afford to eat out. Three years after their conversion to fast food outlet, the McDonald brothers were grossing $277,000 per year.
The unique automation of McDonald's and its high level of profitability received some press coverage which in turn brought numerous visitors. Many who toured the San Bernardino operation opened imitations in various parts of southern California. Glen Bell, a telephone repairman, was a regular customer whose Taco Bell restaurant grew into an international chain of more than 10,000 outlets. Dick and Mac sold a few franchises, and for the first licensee, they designed a rectangular building with a red-and-white tiled front, a roof that slanted downward from front to back, and solid glass from counter to roof. The architect, Stanley Meston, refused to add what the McDonald brothers really wanted: two enormous arches, one on each side of the building. George Dexter, a sign maker, was hired to add the bright yellow arches with neon lighting.
Chronology: Mac McDonald Dick McDonald
1929: Brothers left New Hampshire for California.
1940: Opened drive-in hotdog stand in Pasadena, California.
1943: Opened drive-in carhop in San Bernardino, California.
1945: Lived in a mansion and had three Cadillacs.
1948: Closed the carhop and reopened it as a fast-food restaurant without tables.
1951: Enjoyed a 40 percent rise in profits.
1954: Licensed the McDonald's name, architecture, and efficient kitchen system to entrepreneur Ray Kroc.
1961: Bought out by Kroc for $2.7 million.
1970: Returned to New Hampshire.
1971: Mac McDonald died.
1984: The 50 billionth McDonald's hamburger was served to Dick McDonald.
1998: Dick McDonald died at age 89.
In 1954 Ray Kroc, a seller of milkshake machines, learned that the McDonald brothers were using eight of his Multimixers in their San Bernardino restaurant. When the brothers ordered two more Multimixers, Kroc decided the time had come to see the operation in person. By this time, the McDonald brothers were grossing $350,000 per year and had sold 15 franchises. Two days of observation, along with a formal tour and long conversations with the proprietors, were enough to convince Kroc that the McDonald formula was a ticket to success. When Kroc suggested that they increase their effort to franchise their efficiency system, he envisioned each new McDonald's restaurant with eight Multimixers. Upon further reflection, though, he began to see the real potential behind the franchises. Selling hundreds of $.15 hamburgers every day was a lot better than selling one $150 milk shake mixer every 10 years.
Kroc continued to pester the McDonald brothers regarding expansion. When they said they liked it fine in San Bernardino and had no desire to scout out new locations or hire managers for these outlets, Kroc said he would do it. He would do everything and just send them a check every month. Kroc's persistence paid off: the brothers started to talk numbers. Kroc suggested the parent company take two percent of gross sales of any franchised outlet. Until this time, the brothers had merely sold their name and their "speedy service system" for a one-time fee of $1,000. The McDonalds said this was too high, and insisted on 1.9 percent, of which Kroc would get 1.4 percent and the brothers would get 0.5 percent. Kroc successfully negotiated a 10-year contract which gave him the right to set up McDonald's restaurants throughout the country, except in a handful of territories in California and Arizona already licensed by the McDonald brothers.
Kroc's first McDonald's restaurant opened in Des Plaines, Illinois, near Chicago, on April 15, 1955. Adapting the McDonald's building design to a cold climate was easy enough, but according to their contract Kroc was not supposed to make any changes without written permission from the brothers. The brothers gave verbal approval for the addition of a furnace, basement, and winter enclosure around the ordering area so customers would be sheltered from the winter winds. Since the contract required written approval and the brothers refused to put anything in writing, Kroc's apprehensiveness grew.
Kroc's Des Plaines restaurant grossed $158,000 the first year, plus now he had a showplace to use in his effort to sell franchises for his McDonald's chain. All sales were made on the condition that owners manage their restaurants and strictly follow the automated system of food preparation spelled out by the McDonald brothers. Kroc's chain grew slowly at first, but within four years he had a hundred outlets. As he passed the six-year mark of his 10-year contract with the McDonald brothers, Kroc began to fear that his growing chain would be taken away when the contract expired. He had also come to realize that his profit, after the expense of managing the chain, netted him a lot less money than the McDonald brothers' one-half percent.
With 228 outlets and gross sales of $37.8 million since signing the contract, Kroc's share amounted to $718,200. Of this, $189,000 had gone to the McDonalds. In 1960 Kroc's net profit after expenses was $77,000, $23,000 less than the McDonald brothers' profit at its San Bernardino outlet alone. Kroc was bothered by the financial inequity of the agreement, but he also wanted complete control of the operation. In 1961 Kroc offered to buy out the McDonald's for half a million dollars. Dick and Mac considered the offer for a long time, then told Kroc the asking price was $2.7 million. Although he was already deeply in debt, Kroc successfully negotiated a loan; the interest he ultimately paid brought the cost up to $14 million.
Kroc's takeover set the stage for the rapid expansion of the chain throughout the United States and the world. Unfortunately, when the history of McDonald's began to be recorded, Ray Kroc's version took precedence. His outlet in Des Plaines, described as the "original" McDonald's, was turned into a museum. If the brothers were mentioned at all, it was only as someone who contributed the name. John F. Love quotes a letter written in 1983 by Dick McDonald to corporate headquarters: "Over the years, I have received letters and phone calls from television stations, radio stations, authors, reporters, et cetera, and they all told me the same story. It seems that if they contact your company in Oak Brook regarding my present address, they have been told that the company has no idea where I live or if I am even alive. On several occasions they have been told that there really was never a McDonald. They were told that McDonald's was only a fictitious name that was chosen because it was easy to remember."
In an effort to set the record straight, the company welcomed Dick McDonald back into the fold (Mac had died in 1971). In a widely covered 1984 media event, Ed Rensi, then president of McDonald's USA, cooked the company's 50 billionth hamburger at the Grand Hyatt in New York City and served it to Dick McDonald. Ray Kroc had died earlier that year.
Social and Economic Impact
As the world's largest quick-service restaurant organization, McDonald's contributed to a dramatic change in Americans' eating habits. Mac and Dick McDonald refined their kitchen production techniques so they could sell prepared food quickly, through a counter window, without using plates: quick service, self service, and paper service. This had never been done before and totally revolutionized the food service industry. In addition to speed, their efficient restaurant was a model of cleanliness that is still followed by McDonald's stores today. The McDonald brothers also brought families and children to fast-food restaurants. Today, special kids' meals with prizes and intense movie promotions suggest that the market that they introduced continues to be an important one.
The rapid growth of the McDonald's chain shows how quickly a brand can become popular. A mere 20 years after the McDonald brothers perfected their fast food system, the name "McDonald's" was known throughout the world. The success of McDonald's also shows that the less tangible entrepreneurship can be more influential than a product. Hamburgers weren't new; rather, the way hamburgers were made and sold was new. Though Ray Kroc built McDonald's national and international presence, it was the McDonald brothers who started it; and because they insisted that their restaurant be surrounded by the golden arches, a symbol that is recognized worldwide was created.
Richard McDonald, who with his brother Maurice revolutionized the way that billions of people around the world eat in fast-food restaurants, died on Tuesday at a nursing home in Manchester, N.H. He was 89 and lived in nearby Bedford, N.H.
From a single hamburger stand in San Bernardino, Calif., in 1948, the systematized approach the McDonald brothers developed to offer customers reasonably priced food at a rapid pace formed the cornerstone of the fast-food business.
Today, the business they created, built, and sold in 1961, the McDonald's Corporation, has more than 23,000 outlets in 111 countries and sales in excess of $33 billion.
While they worked very much in tandem, Richard McDonald, who was known as Dick, is credited with two talismans of the McDonald's empire: the Golden Arches and the sign that proclaims how many hamburgers the chain has sold -- a figure now high in the billions.
''Our whole concept was based on speed, lower prices and volume,'' Mr. McDonald once said, adding hypothetically: A ''guy comes in, you ask him what he wants on his burgers; he says, 'I got to go back to the car to ask my wife.' Wouldn't work.''
It was not an idea the two brothers arrived at quickly. Born poor in rural New Hampshire, Richard and Maurice (Mac) McDonald migrated to California in the late 1920's, equipped with high school diplomas and the desire to make $1 million before they reached 50.
A number of odd jobs on the periphery of the movie business failed to pan out. In the late 1930's they opened a hot dog stand near the Santa Anita race track in Arcadia, Calif., northeast of Los Angeles.
In 1940, they opened a small drive-in barbecue restaurant in San Bernardino, a growing blue-collar city. Business was brisk, yet after a few years the McDonalds became convinced that they could do better by doing things faster.
In the fall of 1948 they shut down their restaurant, dismissed the carhops, streamlined the menu and began to reinvent the way they would deliver their food.
''Inside the kitchen, everything was mechanized,'' wrote David Halberstam in ''The Fifties,'' his 1993 book. ''Much of the food was preassembled; the slack time between the rush hours was used to prepare for the next onslaught.''
In addition to a revolutionized-pace kitchen, they wanted a symbol. What Richard McDonald came up with was the Golden Arches. ''I thought the arches would sort of lift the building up,'' he told an interviewer from The Chicago Tribune in 1985. ''Our architect said, 'Those arches have to go.' But they worked -- it was luck, I guess.''
Soon, there were long lines to buy what were then 15-cent hamburgers, 19-cent cheeseburgers, 20-cent milkshakes and 10-cent french fries.
By 1954, the McDonalds had sold 21 franchises and opened nine outlets. At that time, Ray Kroc was a milkshake-machine salesman who was not selling many machines, except to the McDonalds. He traveled to San Bernardino to see why, and was so impressed that he asked for a job as their franchise agent.
In 1955, Mr. Kroc founded the Franchise Realty Corporation, and opened his first McDonald's restaurant in Des Plaines, Ill. In 1960, he changed the name to the McDonald's Corporation. A year later, he bought the business from Dick and Mac McDonald for $2.7 million.
After the sale, Dick McDonald returned to his native New Hampshire. His brother Maurice died in 1971.
Mr. McDonald is survived by his wife, Dorothy, of Bedford; a stepson, Gale French, of Belchertown, Mass; and two step-grandchildren.
A contretemps of sorts blew up in the late 1970's, after publication of Mr. Kroc's biography, ''Grinding it Out: The Making of McDonald's.'' In it, Mr. Kroc, who has often been thought of as the driving force behind McDonald's, dates its birth to the first restaurant in Des Plaines.
''Up until the time we sold, there was no mention of Kroc being the founder,'' Richard McDonald told The Wall Street Journal in 1991. ''If we had heard about it, he would be back selling milkshake machines.''
Mr. Kroc died in 1984. Later, the company came to a meeting of the minds with Dick McDonald on who did what.
''We mutually agreed that Dick and Mac were the pioneers of McDonald's and helped to found the fast-food industry,'' said Chuck Eberling, a McDonald's spokesman. ''Mr. Kroc was the entrepreneur who founded what today is known as McDonald's Corporation.''
Years after the brothers sold to Mr. Kroc, someone asked Richard McDonald if he had any regrets. None, Mr. Halberstam relates.
''I would have wound up in some skyscraper somewhere with about four ulcers and eight tax attorneys trying to figure out how to pay all my income tax,'' Mr. McDonald replied.