Grinding It Out (14 page)

We demonstrated this emphasis on details, and saw it pay off, in our approach to hamburger patties. Now a hamburger patty is a piece of meat. But a McDonald's hamburger patty is a piece of meat with character. The first thing that distinguishes it from the patties that many other places pass off as hamburgers is that it is all beef. There are no hearts or other alien goodies ground into our patties. The fat content of our patty is a prescribed nineteen percent and it is rigidly controlled. There is much that could be written on the technical history of the McDonald's hamburger patty, the experiments with different grinding methods, freezing techniques, and surface conformations in order to arrive at the juiciest and most flavorful piece of meat we could produce for our system. But, fascinating as it is, that's another story.

I first became aware of the hamburger patty as an element of food purveying when I was a young man going to dances on Chicago's West Side. There was a White Castle on the corner of Ogden and Harlem Avenues, where we could go for hamburgers after a dance. They used a sort of tiny ice cream scoop to make a patty about one-inch square, and they sold their burgers by the bagful. Then, at the World's Fair in 1933, Swift & Company had all the concessions, and they introduced frozen blocks of ground beef that had five holes concealed in them. The holes allowed the concession operator to get two more patties to the block—eighteen instead of sixteen. It is possible, of course, to make money by employing such material-stretching methods. One time a McDonald's operator came to me with the idea he'd dreamed up to cut costs by producing a doughnut-shaped patty. His notion was to plug the hole with condiments, and cover it with a pickle so the customer wouldn't notice the hole. I told him we wanted to feed our customers, not fleece them, but I couldn't suppress a chuckle at the outrageous con artistry of the idea; a real Chicago fast one.

We decided that our patties would be ten to the pound, and that soon became the standard for the industry. Fred did a lot of experimenting in the packaging of patties, too. There was a kind of paper that was exactly right, he felt, and he tested and tested until he found out what it was. It had to have enough wax on it so that the patty would pop off without sticking when you slapped it onto the griddle. But it couldn't be too stiff or the patties would slide and refuse to stack up. There also was a science in stacking patties. If you made the stack too high, the ones on the bottom would be misshapen and dried out. So we arrived at the optimum stack, and that determined the height of our meat suppliers' packages. The purpose of all these refinements, and we never lost sight of it, was to make our griddle man's job easier to do quickly and well. All the other considerations of cost cutting, inventory control, and so forth were important to be sure, but they were secondary to the critical detail of what happened there at that smoking griddle. This was the vital passage in our assembly line, and the product had to flow through it smoothly or the whole plant would falter.

By the end of his first year in our office, Fred Turner had pretty much taken over the purchasing for us. Another thing he'd done in weeks when there were no stores opening was to visit existing stores and chat with the operators. He went down to Urbana first, then up to Waukegan, spending a day in each store. When he came back he gave me a little checklist he'd devised to show how these operations were doing. That list evolved into the format for our field consultations, which today is a vital part of our system-wide quality assurance.

I've sometimes wondered what would have happened if the Post-Turner Corporation had found a site all four partners could agree on and Fred had become an operator. I'm sure he would have done extremely well, just as other members of the group did: Joe Post, for example, is an operator in Springfield, Missouri. He and his wife have three stores, including one on the city's new Battlefield Mall that has five dining rooms on different levels, with fireplaces and fine paintings. It's a veritable Taj Mahal among McDonald's restaurants. Fred would have carved out an empire for himself no matter where he'd gone. I am sure of that, not only because I know him but because I know his wife. Patty Turner has allowed her husband to be successful. I know that she would have been right in there pitching with him if he'd chosen to become an operator. Since a McDonald's restaurant is a prime example of American small business in action, the husband-wife team is basic for us. Typically, the husband will look after operations and maintenance while his wife keeps the books and handles personnel. This mutual interest extends into all levels of the company, and I've always encouraged corporate executive wives to get involved in their husbands' work—two heads are better than one, whether a guy is manning a griddle and sweating out getting started in his own store or shuffling papers behind a fancy desk.

 

9

I knew something was drastically wrong as soon as I heard the tone of June Martino's voice on the telephone. She said Harry Sonneborn had to talk to me immediately. I felt a queasy foreboding that this problem would have something to do with Clem Bohr. Harry and I had discussed Bohr and his recent strange behavior just before I'd left Chicago to look over some new locations on the East Coast.

Bohr now had eight sites on which he had McDonald's buildings in various stages of completion. He'd been giving us enthusiastic reports all along, but suddenly he'd grown remote and uncommunicative. He didn't return Harry's calls, and June had been trying to reach him for a couple of weeks without success.

Harry came on the line from our attorney's office. “Ray,” he said, “I'm afraid we are in deep trouble.”

“Don't tell me … is it Clem Bohr?” I asked.

“You guessed it. We have had mechanic's liens filed against us on the locations he's leased to us. The son of a bitch never got clear title to any of this property. He never had the things financed. Now the owners are coming back on us.” My reply to that probably melted a few miles of Bell System's wires. Suddenly our little company's promise of prosperity looked more like the brink of bankruptcy. “What the hell are we going to do, Harry?” I shouted. “How much money are we talking about?”

“Well, Ray, it's going to be at least $400,000,” he said.

“Jesus!”

“Ray, I have an idea that I think could pull us out of this,” he said. “We can ask for a loan from our McDonald's suppliers, I figure $300,000. Then I know a fellow in Peoria named Harry Blanchard. He married a widow who owns a big brewery, and he has some money to lend. I think he'll help us out.”

It made sense to me. If anyone stood to gain by our success and suffer if we failed, it was our suppliers. They knew McDonald's restaurants possessed the potential of becoming super customers, and they knew we played straight. So I told Harry, by God, to go full speed ahead with it. He did, and it worked like a charm. Lou Perlman of Perlman Paper Company (later to become the Martin-Brower Corporation), Les Karlstedt of the Elgin Dairy Company, Louis Kuchuris of Mary Ann Baking Company, and Al Cohn of CFS Continental all agreed to make loans. Harry's friend Blanchard and his associate, Carl Young, also lent us money.

I don't remember what happened to Clem Bohr. It seems to me that he went into the hamburger business in competition with us and lost his shirt. That happened to a number of sharpies who tried to spin off an operation they'd started with us in order to build a personal empire. Bohr probably would have done very well if he'd stuck by his original aggeement and been less greedy. The situation he forced us into is a good example of how adversity can strengthen you if you have the will to grind it out. It put us in a precarious financial condition, but we were eight fine locations to the good, and the spirit of mutual support it fostered with our suppliers would be very beneficial in the future. Perhaps the most positive result of the Bohr fiasco, however, was that it gave us courage to borrow heavily so we could expand McDonald's more rapidly.

My net worth in 1959 was about $90,000. This made it rather difficult to borrow money in the big amounts that Harry and I had in mind. I recall asking David Kennedy, chairman of the board of Continental Illinois National Bank of Chicago, for a loan. The man who would later become Secretary of the Treasury under Richard Nixon listened politely to my sales pitch on McDonald's vitality and growth potential. Then he asked to see my balance sheet. After glancing over the single page, he stood up, and I knew the interview was over. He was kind about it, and I suppose I really couldn't blame him. Yet I resented the rebuff, and you can be sure that I did my banking elsewhere from then on.

About this same time, Harry had been approached by an insurance salesman named Milton Goldstandt, who said he could arrange financing for us with the John Hancock Life Insurance Company. He wanted a pretty hefty fee for arranging the deal, plus a certain portion of our stock, and I was opposed to this. But Harry wanted to pursue it anyhow and see where it led.

First thing I knew, Goldstandt had brought in an older gentleman named Lee Stack, who had been a financial vice-president of the John Hancock Company and had retired to become a limited partner with Paine, Webber, Jackson & Curtis, the stockbrokers. Harry Sonneborn and Lee Stack began flying all over the damned country cooking up financial deals for McDonald's. As it turned out, I didn't have to worry about giving any stock to Goldstandt, because the big loan arrangement with the Hancock didn't work out. However, with Stack's help, Harry arranged more than a dozen mortgages with the John Hancock.

*   *   *

Somewhere in the course of our loan discussions, the idea emerged that we should build and operate ten or so stores as a company. This would give us a firm base of income in the event the McDonald brothers claimed default on our contract (I had yet to receive a single registered letter from them authorizing our buildings to be constructed with basements and furnaces). If worse came to worst, the thinking went, we could always retrench and operate our company stores under some other name. The germ of this idea, too, might have sprung from our dealings with Clem Bohr, in which case I thank him in the same spirit one thanks the robber who at least spared his life.

Establishing company stores, of course, would require a truly massive infusion of capital. But Harry said he thought he could arrange it with the help of his friend Lee Stack.

The proposition that Harry finally brought to me was for three insurance companies to lend us $1.5 million in exchange for about 22½ percent of our stock. Harry introduced me to Fred Fideli, who represented State Mutual Life Assurance, and John Gosnell of the Paul Revere Life Insurance Company. These two men explained how they had arranged with their firms and the Massachusetts Protective Association to make the loan. I was intrigued by the proposal, and I was impressed with Fideli and Gosnell. The only problem seemed to be how we would handle the deal among ourselves. My Bohemian frugality fought with the idea of giving up any part of the stock in the company I had struggled so desperately to build; yet the appeal of $1.5 million was irresistible. The arrangement we came up with, after a lot of discussion, was that I would contribute 22½ percent of my remaining stock (leaving me with 54¼ percent), Harry would put in 22½ percent and June Martino would give up 22½ percent of hers.

It turned out to be the best deal those three insurance companies ever made. They sold their stock a few years later for between $7 and $10 million. That is one hell of a return on investment. (However, if they'd waited until 1973 to sell, they could have gotten over five hundred million dollars!)

That loan could be called the liftoff of McDonald's rocketlike growth in the sixties. It took a lot more financial thrust to put us into orbit, but we would never have gotten off the ground without it. Our first McOpCo (McDonald's Operating Company) store was purchased from an operator in Torrence, California. A short time later, in the summer of 1960, we opened our first company-built store in Columbus, Ohio.

I took my hat off to Harry Sonneborn then for negotiating that loan, and I still do today. Yet the results of it, in terms of the posture Harry was giving the company, contained the seeds of a philosophical clash that eventually would split Harry and me and nearly destroy McDonald's. It was then that Harry's view of the corporation as just a real estate business, rather than a hamburger business, began to crystalize. As he had set it up, we would not take a mortgage for more than ten years, even on a subordinated basis. We had twenty-year leases on all the property. This meant, of course, that after ten years when our mortgages were paid off, we would have all the income from a store free and clear to the corporation. That was fine. But Harry's line of thought had this annex: Since we were not obliged to renew licenses, at the expiration of the licenses the company could wind up operating all of the stores. I would not agree with that. I never did and I never will. It can't happen so long as my influence and that of Fred Turner enforce the view that the corporation is in the hamburger restaurant business, and its vitality depends on the energy of many individual owner-operators. The corporation has purchased stores—many of them, as I will show in later chapters. But our procedures for doing so are clearly spelled out to franchisees. We bend over backward to be fair in every case. We recognize that it would be unwieldy and counterproductive for the corporation to own more than about thirty percent of all stores. Our slogan for McDonald's operators is “In business for yourself, but not by yourself,” and it is one of the secrets of our success.

A curious circumstance developed for the company in the momentum generated by the loan from the three insurance companies. We could show that we were making a profit now. At the same time, we had no cash flow.

The reason for this was simply that the accounting regulations were weak in the area of deferred expenses you could carry on your books. We were capitalizing all the real estate overhead and all the construction overhead for a period of eighteen months. We called this “Developmental Accounting,” and it allowed us to show a bottom line profit. But it was distorting our profit and loss statements.