Grinding It Out

4 ideas

1. Eight Multimixers Lead Kroc to San Bernardino

   In 1954 Ray Kroc, a 52-year-old salesman of five-spindle Multimixer milkshake machines, drove to San Bernardino to see why one hamburger stand had bought eight of them. He found the McDonald brothers running a stripped-down menu of 15-cent hamburgers, fries and shakes, made on an assembly-line system with no carhops, and he negotiated the national franchising rights himself. His 1955 terms charged franchisees $950 up front plus 1.9% of gross sales, of which 0.5% went to the brothers, which left Kroc's franchising company barely able to cover its own costs.

2. Franchisor as Landlord, Not Royalty Collector

   Because a thin percentage of franchisee sales could not sustain the company, Harry Sonneborn set up Franchise Realty Corporation to lease or buy restaurant sites and sublease them to operators. Operators paid a marked-up base rent or a percentage of sales, whichever was greater. The company's real income and borrowing power came from controlling land and leases, which also gave it leverage over operators who broke standards.

3. Franchisor Profits Must Depend on Franchisee Success

   Kroc argued that a franchisor should not make money by selling supplies or equipment to its operators at a markup. Doing so gives the franchisor an interest opposed to the operator's margins. Tying company income to operators' sales volume means the franchisor gains only when operators prosper, and that alignment justifies enforcing strict standards on them.

4. QSC&V: Uniform Standards as the Product

   Kroc reduced the system to Quality, Service, Cleanliness and Value, and enforced them through detailed specifications for patty fat content, fry cooking times and lot cleanliness, backed by inspections. In a chain, the customer buys predictability, so any deviation by one operator damages the brand for everyone. The standards function as the product itself, not as the operators' personal preferences.

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