Learning From Ray KrocInvestment Master Class
We all know McDonald’s. And we’ve all probably eaten there; it’s a pretty rare person who hasn’t dined at one of their restaurants at some point in their life. And given there is more than 35,000 of them in 120 countries, and that they serve over 68 million of us every single day, it’s no surprise that they’re so well known and so successful.
Ray Kroc is the man behind the business. Like myself, you may have seen the recent film 'The Founder', which details the rise of this incredible iconic company. And like with the podcasts I listen to, having watched the movie, I was keen to find out more about Ray Kroc and how he came to grow the McDonald's brand into the most successful fast-food chain in history. Luckily for me there was a biography available which went into far more detail about his story and the secrets to his success. And I just finished that book, 'Grinding it Out', which is a fascinating read. Whilst the movie portrays Ray in a less than positive light at times, I found the book far more factual with some incredibly interesting parallels to other businesses and leaders I have reviewed in recent times.
Which is also no surprise.
Ray began his career selling paper cups and milk shake machines and stumbled across the Californian Hamburger bar run by the brothers, Dick and Mac McDonald in the 1950's. Realizing the incredible potential of the company, at the age of fifty-two, he negotiated franchising rights with the brothers and launched the McDonald's franchise in 1955.
Since then, the franchise idea has been copied so many times that these days Restaurant Franchises are a dime a dozen. There are so many of them about, in so many formats and brands, its almost impossible to work out which is the best. I know people who have ventured into the world of franchising, only to be bitten by over promising and under-performance, which over time led to them closing the doors and losing their initial investment. And many of the bigger franchise groups simply don't care. There are so many people on the waiting list for a franchise, that they can just sell that failed franchise to the next person. And then the next. As long as they are taking their cut and getting their fees, its doesn't matter to them whether an individual franchise fails. It doesn't matter, until it does.
One of the most striking things about the success of the McDonald's model is that Ray worked out that for the business to be ultimately successful, the franchisee had to make money. If the franchisee was making money, then the franchisor would, too. Warren Buffett, who once owned more than four percent of McDonald's, identified this trait in successful franchises as well.
"You want a franchise operation — you want the franchise operator to make money and you want him to create a capital asset that’s worth more than he’s put in it. That’s the goal." Warren Buffett, Berkshire AGM 1998
"Whereas Dairy Queen will, in most cases, receive 4 percent of the franchisee’s sales, in terms of a royalty, at a McDonald’s there’s more than that percentage, plus rentals and so on. So they’re two different — very different — economic models. They both depend on the success of the franchisee in the end. I mean, you have to have a good business for the franchisee to, over time, have a good business for the parent company." Warren Buffett, Berkshire AGM 1998
"A successful franchisee can sell his operation for significantly more than he has invested in tangible assets. And we want it that way, obviously, because that means he’s got a successful business, and it means that, over time, we will have a successful business." Warren Buffett
I have mentioned many times that the Investment Masters learn from their mistakes. Buffett himself has espoused the value of it and also mentioned that he made a mistake with McDonald's. A Billion Dollar mistake.
"The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald's was a very big mistake." Warren Buffett, Berkshire Letter, 1998
Following on from the recent posts about Walmart, Les Schwab Tires, Panera Bread, Nucor, Home Depot and Starbucks, I have added my favourite quotes and points from Ray Kroc's book below...
Love What You Do
"For me work was play. I got as much pleasure out of it as I did from playing baseball."
"There's nothing more fun for me than rubbing elbows with a bunch of operators and talking shop."
"In many corporations when the top guy moves it's to a figure-head role. He becomes chairman of the bored. Not me."
"I spent a lot of time thinking about things."
"I learned that you could influence people with a smile and enthusiasm and sell them a sundae when what they'd come for was a cup of coffee."
"No self-respecting pitcher throws the same way to every batter, and no self-respecting salesman makes the same pitch to every client."
"Too many salesman, I found would make a good presentation and convince the client, but they should have stopped talking. If I ever noticed my prospect starting to fidget, glancing at his watch or looking out the window or shuffling papers on his desk, I would stop talking and ask for his order."
"I stressed the importance of making a good appearance, wearing a nicely presented suit, well-polished shoes, hair combed, and nails cleaned. "Look sharp and act sharp," I told them. "The first thing you have to sell is yourself. When you do that, it will be easy to sell paper cups."
"There's almost nothing you can't accomplish if you set your mind to it."
Keep It Simple
"My first motto for McDonald's - KISS - which meant, 'Keep it simple, stupid.'"
It's About People
"[My management style] proceeded on the strength of my salesman's instinct and my subjective assessment of people... I've been wrong in my judgements about men, I suppose, but not very often."
"I liked to get people fired up, fill them with zeal for McDonalds, and watch the results in their work."
Tone At The Top
"I've never been too proud to grab a mop and clean up the rest rooms, even if I happened to be wearing a good suit."
"I've never submitted a personal expense account to McDonald's in my life. In the early days, of course, it would have been an empty exercise. I didn't take a salary; I was keeping the thing afloat with my income from Prince Castle Sales, But even in later years it never entered my mind that I should be reimbursed by the company. I pay most of my company expenses out of my own pocket, although, of course, I do use my company credit card. But by the same token, I have purchased a fleet of nineteen customised Greyhound buses, outfitted with kitchens, rest rooms, telephones, colour television, and lounge-style seating and I rent these to the corporation for one dollar a year. Each of our district books the use of one of these Big Mac Buses to its operators for worthwhile activities such as taking disadvantaged children and senior citizens on outings. I also bought the company plane, a Gulfstream G-2 jet. McDonald's rents it from me for the same low price, one dollar a year."
"I couldn't give [my first two employees, Harry Sonneborn and June Martino, who worked tirelessly and neglected their families] them raises to compensate them for their past efforts, but I could make sure they would be rewarded when McDonald's became one of the country's major companies, which I never doubted it would. I gave them stock - ten percent to June and twenty percent to Harry - and ultimately it would make them rich. At the time, of course, Chicago Transit Authority tokens would have been worth more."
Risks And Mistakes
"You have to take risks. I don't mean to be a daredevil, that's crazy. But you have to take risks, and in some cases you must go broke. If you believe in something, you've got to be in it to the ends of your toes. Taking reasonable risks is part of the challenge. It's the fun."
"If you are willing to take big risks, and I always have been, you are bound to blow one once in a while; so when you strike out, you should try to learn as much as you can from it."
"None of this is meant to sound as though I think I've never made a mistake, Far from it. I could probably write another book about my mistakes. But it wouldn't be very interesting. I've never seen negatives add up to a plus."
"I learned then [with early set-backs] how to keep problems from crushing me. I refused to worry about more than one thing at a time, and I would not let useless fretting about a problem, no matter how important, keep me from sleeping."
"A good executive does not like mistakes. He will allow his subordinates an honest mistake once in a while, but the will never condone or forgive dishonesty."
"Achievement must be made against the possibility of failure, against the risk of defeat. It is no achievement to walk a tightrope laid flat on the floor. Where there is no risk, there can be no pride in achievement and, consequently, no happiness."
No Master Plan
"There is a certain kind of mind that conceives new ideas as complete systems with all their parts functioning. I don't think in that 'grand design' pattern. I work from the part to the whole, and I don't move on to the large scale ideas until I have perfected the small details. To me this is a much more flexible approach. For example, when I was starting McDonald's, my original purpose was to sell more Multimixers. If I had fixed in my mind as a master plan and worked unswervingly toward that end, my system would have been far different and much smaller scale creation... At the risk of seeming simplistic, I emphasis the importance of details. You must perfect every fundamental of your business if you expect it to perform well."
Customer Comes First
"I thought of the customer first."
"My philosophy was one of helping my customer, and if I couldn't sell him by helping him improve his own sales, I felt I wasn't doing my job."
"[When you] Look at it strictly from the customers point of view, which is how I do it, because this guy is our real boss - you see the importance of every penny."
Look After The Stores
"There is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other. Once you get into the supply business, you become more concerned about what you are making on sales to your franchisee than with how his sales are doing. The temptation could become very strong to dilute the quality of what you are selling him in order to increase your profit. This would have a negative effect on your franchisee's business, and ultimately, of course, on yours."
"Many franchise systems came along after us and tried to be suppliers, and they got into severe business and financial difficulty. Our method enabled us to build a sophisticated system of purchasing that allows the operator to get supplies at rock-bottom prices."
"Convincing [suppliers in California] that we were an honest operation, that we protected our operators, and that we would take no kickbacks, was a big order. They could not be persuaded that if they would supply McDonalds restaurants with items the way we wanted them at prices that would allow us to sell hamburgers for fifteen cents, our growth would put them on Easy Street."
"I said [to Harry of Interstate Foods when he wanted to show his appreciation by giving a sign or a clock for the stores.] ".. let's get this straight, once and for all. I want nothing from you but a good product. Don't wine me, don't dine me, don't buy me any Christmas presents. If there are any cost breaks, pass them on to the operators of McDonald's stores."
"[I told Frank Cottee when he was drafting the franchisee licensing agreement ..] "you can hogtie these guys with all the ifs, buts and whereases you like, but it's not going to help the business one goddamn bit. There'll be just one great motivator in developing loyalty in this operation. That is if you got a fair, square deal, and the guy makes money. If he doesn't make money, I'm in a peck of trouble. I'm gonna lose my shirt. But I'll be right out there helping him and doing all I can to make sure he makes money'. As long as I do that, I'll do just fine."
"We are an organisation of small businessmen. As long as we give them a square deal and help them make money, we will be amply rewarded."
Cultivate Win-Win Relationships
"Fred would go out to Milwaukee or Molina or Kalamazoo or wherever a new operation was starting, and he'd call on a baker there and tell him about McDonald's and the buns we would like him to make for us. Fred had the figures laid out cold, so the baker could see why our way was better and how it would save him money. He'd never heard of the kind of box we wanted, so Fred would set up a meeting with the box manufacturer. Supplying buns to McDonald's was the break of a lifetime for many of these men."
"Our stores were selling only nine items, and they were buying thirty or forty items with which to make the nine. So although a McDonald's restaurant's purchasing power was no greater than any other in a given area, it was concentrated. A McDonald's bought more buns, more ketchup, more mustard, and so forth, and this gave it a terrific position in the marketplace for those items. We enhanced that position by figuring out ways a supplier could lower his costs, which meant of course, that he could afford to sell to a McDonald's for less. Bulk packaging was one way; another was making it possible for him to deliver more items per stop."
"Whenever Fred came up with a better idea of handling a product, I'd see to it that our suppliers implemented it in all their operations. My years of experience in selling paper cups and Multimixers paid off here, because I knew exactly what hands held the strings I wanted to pull to get the job done. I didn't start McDonalds until I was fifty-two years old, and then I became an overnight success. But I was just like a lot of show business personalities who work away quietly at their craft for years, and then suddenly, they get the right break and make it big. I was an overnight success all right, but thirty years is a long, long night."
"I've always dealt fairly in business, even when I believe someone was trying to take advantage of me. That's one reason I have had to grind away incessantly to achieve success. In some ways I guess I'm naive. I always try to take a man at his word unless he's given me reason not to, and I've worked out many a satisfactory deal on the strength of a handshake."
"I like people who level with me and speak their minds. I always say exactly what I think; it's a trait that's gotten me in trouble plenty of times, but I never have problems getting to sleep at night with a guilty conscience."
"[When I re-asserted myself as Chairman and President] I removed that misguided moratorium on building new stores. In reviewing our real estate picture, I discovered all kinds of locations we had purchased and sort of stockpiled for future development. When I was told we were waiting for the local economy to improve in those areas, I hit the ceiling. 'Hell's bells, when times are bad is when you want to build!' I screamed. 'Why wait for things to pick up so everything will cost more? If a location is good enough to buy, we want to build on it right away and be in before the competition. Pump some money and activity into a town, and they'll remember you for it."
"It has always been my belief that authority should be placed at the lowest possible level. I wanted the man closest to the stores to be able to make decisions without seeking directives from headquarters."
"Authority should go with the job. Some wrong decisions may be made as a result, but that's the only way you can encourage strong people to grow in an organisation. Sit on them and they will be stifled. The best ones go elsewhere. I knew that from my past experience with [my boss] John Clark at Lily Tulip Cup. I believe that less is more in the case of corporate management; for it's size, McDonald's today is the most unstructured corporation I know, and I don't think you could find a happier, more secure, harder working group of executives anywhere."
Focus on Your Core Competency
"Another judgement I made early in the game and enforced through the years would be no pay telephones, no juke boxes, no vending machines of any kind in McDonalds restaurants. Many times operators have been tempted by the side income some of these machines offer, and they have questioned my decision. But I've stood firm. All of those things create unproductive traffic in a store and encourage loitering that can disrupt your customers."
Innovate & Experiment
"A well-run restaurant is like a winning basketball team, it makes the most of every crew member's talent and takes advantage of every split-second opportunity to speed up service. Once our bun-box was finalised, Fred kept coming up with refinements on it."
"Fred applied the same sort of thinking he'd used on the buns [individual rather than clusters and pre-sliced] to all the other supplies being purchased. It's important to make clear Fred wasn't buying these items on behalf of the corporation and we weren't selling to the operators. We set the standards for quality and recommended methods for packaging, but the operators themselves did the purchasing from suppliers."
"The purpose of all of these refinements [for the beef patties - i.e. specific wax packaging paper, optimal stacking etc], 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 the 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."
"Some of my detractors, and I've acquired a few over the years, say that my penchant for experimenting with new menu items is a foolish indulgence. They contend it stems from my never having outgrown my drummer's desire to have something new to sell. 'McDonald's is in the hamburger business,' they say. 'How can Kroc even consider serving chicken?' Or, 'Why change a winning combination?'
"Of course, it's not difficult to demonstrate how much our menu has changed over the years, and no-body could argue with the success of additions such as the Filet-O-Fish, the Big Mac, Hot Apple Pie, and Egg McMuffin. The most interesting thing to remember about these items is that each evolved from an idea from one of our operators. So the company has benefited from the ingeniuity of its small businessmen while they were being helped by the system's image and our co-operative advertising muscle. This, to my way of thinking, is the perfect example of capitalism in action. Competition was the catalyst for each of the new items. Lou Green came up with Filet-O-Fish to help him battle against the Big Boy chains in the Catholic parishes in Cincinnati. The Big Mac resulted from our need for a larger sandwich to compete against Burger king and a variety of specialty shop concoctions."
"I keep a number of experimental menu items in the works all the time. Some of them now being tested in selected stores may find their way into general use. Others, for a variety of reasons, will never make it."
"Back in the early days when we first got a company airplane, we used to spot good locations for McDonalds stores by flying over a community and looking for schools and church steeples. After we got a general picture from the air, we'd follow up with a site survey. Now we use a helicopter and it's ideal. Scarcely a month goes by that I don't get reports from whatever districts happen to be using our five copters on some new locations that we would never have discovered otherwise. We have a computer in Oak Brook that is designed to make real estate surveys. But those print outs are of no use to me. After we find a promising locations, I drive around it in a car, go into the corner saloon and into the neighbourhood supermarket. I mingle with the people and observe their comings and goings. That tells me what I need to know about how a McDonalds store would do there. Hell, if I listened to the computers and did what they proposed with McDonalds, I'd have a store with a row of vending machines in it."
Complacency And Humility
"Business is not like painting a picture, you can't put a final brush stroke on it and then hang it on the wall and admire it. We have a slogan posted on the walls around McDonald's headquarters that says, 'Nothing recedes like success. Don't let it happen to you'."
"Change has been our history, and you can't consider our growth without taking into account the context in which it occurred, an America in which tremendous social changes were taking place. McDonald's is vastly different now from the company it was back in the early days, and that's good."
"You can learn all you ever need to know about the competition's operation by looking in his garbage cans. I am not above that, let me assure you, and more than once at two o'clock in the morning I have sorted through a competitor's garbage to see how many boxes of meat he'd used the day before, how many packages of buns, and so forth.
"My way of fighting the competition is the positive approach. Stress your own strengths, emphasize Quality, Service, Cleanliness, and Value, and the competition will wear itself out trying to keep up. I've seen it happen many times."
"My attitude was that competition can try to steal my plans and copy my style. But they can't read my mind; so I'll leave them a mile and half behind."
"The thing that has made this country great is our free enterprise system. If we have to resort to this - bringing in government - to beat our competition, then we deserve to go broke. If we can't do it by offering a better fifteen cent hamburger, by being better merchandisers, by providing faster service and a cleaner place, then I would rather be broke tomorrow and out of this business and start all over again in something else."
I like what Charlie Munger says about McDonald's and the impact its educational style has had on people.
"I had fun once at a major university when I said I thought McDonald’s succeeded better as an educator than the people in the university did. And what I meant was McDonald’s hires a lot of people who are quite marginal at the very start of their working career. And they learn to show up on time for work and observe the discipline. A lot of them go on in employment to much higher jobs. And they’ve had an enormous constructive effect about educating into responsibility a lot of people who were threatened with not making it. So I think we all owe a lot to the employment culture of McDonald’s. And it’s not enough appreciated." Charlie Munger
In over fifty years of investing, there just isn't a lot Buffett and Munger haven't worked out. Which means that their ideas and opinions on business and investing are usually on the money.
Likewise, if I found just one company that had succeeded using the successful and ethical traits I have listed above, it would just be an anomaly. Its a sample of one and whilst unique, could hardly be called a trend. But when you have so many businesses from so many different industries who have those same traits and beliefs, and are successful because of it, its kind of hard to refute don't you think?
Article by Investment Masters Class