McDonald’s: The Origins of a Fast Food Empire

McDonald’s is a real estate business. That might sound surprising:
After all, who hasn’t at least once in their lifetime indulged in the glorious experience
that is a Happy Meal? You might know McDonald’s as that fast food
chain that sells hamburgers and fries, but trust me, it goes way deeper than that. That’s why, this week on Behind the Business
we’ll be looking at the world’s second-largest restaurant chain, McDonald’s. Few things sound as Irish as the name McDonald. It’s an interesting name: the ‘mac’
part means son, while Donald comes from a Gaelic name that means ‘Ruler of the World’. Very ominous, right? The two ‘world-rulers’ that we’re interested
in are Richard and Maurice McDonald, two brothers from New Hampshire. In the 1920s they moved to California, where
they started a movie theater and a hotdog stand, but they eventually went bust when
the Great Depression came around. Their first big success came in 1940, when
they opened a barbecue joint in San Bernardino. Now at the time, virtually all restaurants
were mom-and-pop establishments, with their own unique taste and cooking methods. Drive-ins with roller skating waitresses were
all the rage back then, but they weren’t particularly efficient. You had to wait half an hour to get your order,
and half of the time they got it wrong. The McDonald’s barbecue was no different,
and although it did turn a profit, the brothers knew they could do better. They realized that most of their income was
coming from just three products: hamburgers, french fries, and coke, and after running
the place for 8 years, the brothers decided to make a radical makeover. They dropped most of their menu to focus on
their best sellers, and then they redesigned the entire kitchen around that. The cooking process started to look like an
assembly line, which allowed the brothers to fill customer orders in as little as 30
seconds. They abandoned the drive-in concept in favor
of a walk-up counter, and they stopped using cutlery and dishes entirely, replacing them
with disposable paper packaging. In an instant, their restaurant became a sensation,
drawing in attention from across the country. One of the people they attracted was this
guy, Ray Kroc. He was a natural-born hustler, who at the
age of 15 had lied his way into serving as a Red Cross ambulance driver during WW1. Interestingly enough, he served alongside
Walt Disney in France, but they didn’t really keep in touch after the war. Like most people from the postwar years Ray
had worked dozens of jobs: jazz pianist, radio DJ, paper cup salesman, you name it. In the early 1950s he was travelling cross-country
trying to sell expensive milkshake machines, but he wasn’t really doing a good job at
it. One day in 1954, however, he got an order
for 8 of them, and it was from none other than the McDonald brothers. When Ray made his way to San Bernardino, he
fell in love with their restaurant and immediately offered to franchise it. By that point the McDonald brothers had already
opened over 20 franchise locations, but none of them were doing as well as the original
restaurant: The lack of oversight made maintaining quality
impossible. The brothers decided to give Ray a shot, and
boy did he deliver. He handpicked only the best franchisees and
ran his operations like an army drill. In the span of just 6 years Ray built 100
McDonald’s restaurants, while the McDonald brothers were basically managing their own
joint. Ray eventually grew tired of them:
they’d reap 0.5% of all sales for doing nothing while roadblocking Ray’s suggestions
for improving the franchise. To cut them out, Ray figured out a brilliant
strategy. He’d buy the land all future restaurants
would be built upon, and then he’d lease it to his franchisees. This way Ray got to keep almost all of the
profits from the business, while leaving the McDonald brothers empty handed. Of course, the brothers weren’t very happy
at that, but there wasn’t anything they could do, and in 1961 they finally agreed
to sell their franchise to Ray for $2.7 million. With the brothers out of the way, Ray stepped
on the accelerator, implementing all the changes he had wanted like redoing the logo and creating
a mascot. He also expanded the menu, adding the Filet-O-Fish
in 1965 and the Big Mac in 1968. That same year Ray celebrated opening store
#1000, and adopted the modern iteration of the golden arches logo. Throughout the next decades McDonald’s would
keep expanding, and not just in the US. They pioneered breakfast fast food with the
introduction of the Egg McMuffin in 1972. They also added stuff like Chicken McNuggets
and the Happy Meal, which would eventually make them the world’s largest toy distributor. By 1988 they had 10,000 restaurants, and although
Ray was no longer alive, the company kept on growing without him. Thanks to their iconic Hamburger University,
the McDonald’s franchise had some of the best-trained managers in the fast food industry. This allowed them stay one step ahead of competitors
like Burger King and Wendy’s. Since then, McDonald’s have continued expanding
their menu into what we know today. In 2006 the franchise underwent its first
major redesign since the 1970s, adopting the so-called “Forever Young” design, which
features dining zones with comfortable sofas and armchairs. Interestingly enough, today McDonald’s isn’t
the world’s’ largest restaurant chain: That title goes to Subway, who have almost
45 thousand locations compared to 37 thousand for McDonald’s. The company itself owns only 15% of them,
the rest being franchised out. The restaurants ran by the company account
for 2/3rds of its revenue, but that’s not the whole story. In reality, it costs way more to run your
own restaurant than it does to sit back and collect rent. In 2014, for example, company-operated stores
generated $18.2 billion, but McDonald’s got to keep only 2.9 billion. In comparison, out of the $9.2 billion coming
in from franchisees, the company kept 7.6, a stunning 80%. So even though McDonald’s seems to be flipping
burgers, in reality they’re playing Monopoly instead. Thanks for watching and a big thank you to
all of you out there who are supporting us on Patreon! If you liked the history of McDonald’s feel
free to subscribe for more and to check out the full Behind the Business playlist for
the interesting stories of other big companies. Once again, thanks a lot for watching, and
as always: stay smart.

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