The McDonald's Story: How Ray Kroc's Vision Became a Global Giant w/ Kyle Grieve (TIP753)

Summary

• Ray Kroc's Vision: Ray Kroc's relentless pursuit of success and his innovative franchise model transformed McDonald's from a single location into a global giant.
• Franchise Model: Kroc's development of the franchise model allowed McDonald's to scale rapidly, focusing on real estate and consistent quality across locations.
• Systematization: McDonald's success was built on standardized systems and processes, ensuring uniformity and efficiency in operations, which were crucial for scaling.
• Innovation and Adaptability: Kroc's willingness to experiment with pricing and adapt to market needs, such as introducing the Filet-O-Fish, demonstrated his innovative approach to business.
• Strategic Real Estate: McDonald's strategic focus on real estate, led by Harry Sonneborn, provided a financial backbone that supported its expansion and profitability.
• Leadership and Culture: Kroc's leadership style emphasized empowering talented individuals and fostering a culture of high standards and alignment with the company's vision.
• Competitive Execution: McDonald's competitive edge lay in its execution and ability to maintain quality, service, cleanliness, and value, rather than having a unique competitive advantage.
• Persistence and Long-term Vision: Kroc's story exemplifies the importance of persistence and a long-term vision in achieving business success, highlighting that there is no such thing as an overnight success.

Transcript

(00:00) Ray story is proof that there's no such  thing as an overnight success. His overnight   took more than 30 years of grinding it out,  risking everything, and betting on himself.   So when you see the golden arches, don't just  think about a fast food joint. Think about what   happens when someone refuses to compromise on  standards, builds alignment across stakeholders,   and focuses on execution day in and day out. (00:20) That's the real engine behind McDonald's,   and it's a blueprint I think we can all take on  our own investing and business journeys. [Music]   Hey, real quick before we jump into today's  episode. If you've been enjoying the show,   please hit that subscribe button. It's totally  free, helps out the channel a ton, and ensures   that you won't miss any future episodes. (00:43) Thanks a bunch. We're talking about   the DNA of McDonald's and their founder, Ray  Croc. Let me start by asking you a question.   What do you get when you mix  affordable food, convenience,   a founder with a vision and strong work ethic,  and a positive association with a company's   products? Massive success and global reach. (01:02) And that's precisely what has happened   with one of the globe's best known brands,  McDonald's. I find it interesting that McDonald's   is just so prevalent given its relatively  simple business model. Part of the draw for   me to learn more about it is directly linked  to the simplicity of the business. It's a case   study that demonstrates that value can be created  when you just have a product that is consistent,   convenient, and easy to acquire and consume. (01:25) My first introduction to Ray Croc was   through the movie about him, the founder. It  depicted Ry as someone who worked incredibly   hard to achieve his accomplishments. To many  outsiders, it might have appeared that Ry   found success quite syphily, but that wasn't the  case. Ray once said, "I was an overnight success,   but 30 years is a long, long night. (01:44) " To better understand McDonald's,   we will examine the business's origins. And  that all starts with the man who scaled it.   Interestingly, they called the movie on him  the founder because he didn't even create the   idea of McDonald's. He actually partnered with  the McDonald brothers. What he founded was the   franchise model that McDonald's used to scale up. (02:04) Without Ray Croc, McDonald's might just be   a single location in California today.  Let's start by looking at some of the   traits that Croc brought to the table that helped  McDonald's succeed. I see three key areas. Grit,   adaptability, and a strong focus on sales. Ray  had been involved in industries adjacent to   the industry for much of his early life. (02:23) He travel around the US selling   paper cups for a business called Lily Tulup  Cupco. And Croc had an incredible work ethic.   There was a time he'd sell paper cups from early  morning until 5:00 p.m., then go and play piano   for a local radio station, go home, quickly  eat, then go play piano at a bar afterwards.  (02:40) While working with Lily Tulip, Ray showed  an affinity for helping himself by helping others.   For instance, Ray felt that if he couldn't sell  a customer by assisting them to increase their   sales, he just wasn't doing his job correctly. He  also hustled to find customers in non-traditional   areas. For instance, he started selling to ice  cream vendors where customers could squeeze the   bottom of the cup to get more ice cream to lick. (03:02) He even found Italian pastry shops that   sold these squat-sized cups to use as holders  for their pastries. Another contrarian move   was to sell his paper cups to a Polish place to  hold their prune butter. It was pretty obvious   that Ry was just a very, very good salesman. He  temporarily quit his job at Lily Tulips during the   depression because they were going to cut his pay. (03:23) However, because they knew how good of a   salesman he was, they found a workaround and  he returned right away. But Ry wasn't happy   with his current job at Lily Tulip and began  leveraging the contacts that he made selling   cups to move on from that work. One opportunity  that would set the course for his path towards   McDonald's was a product called the multi-mixer. (03:42) So, this is one trait you're going to   notice in Ray. He likes to leverage one job as  a salesman to find these new opportunities. So,   Ray first noticed one of his customers placing  increasingly large orders of paper cups for use   in their ice cream parlor. The owner named Ralph  Sullivan had found a way to make milkshakes with   this low butter fat content by using frozen milk. (04:03) Ray then convinced another customer   of his to have a look at the frozen milk in  their own ice cream business. Since Ry stood   to benefit if this ice cream business grew  by selling them more cups, he was actually   incentivized to sell them on that frozen  milk idea. And it worked. But Ry had another   interesting idea up his sleeve for the customer. (04:20) He asked him to try selling their shakes   for just 12 cents instead of the usual 10  cents. They had a heated discussion about it,   but Ray's insistence paid off. They decided to  give the 12cent price point a try and rub it in   Ray's face when they thought it wouldn't work, but  they never actually ended up reducing their price.  (04:35) And as a result, Ray pointed out that  they made an additional $100,000 solely from   that price increase. Additionally, they also  bought 5 million 16oz cups from Ry in their   first year. Now, I find this interesting for a  few reasons. One, Rey was willing to experiment   with pricing to see what the market would accept. (04:55) and two, Ry was also on the lookout for   any opportunity to make more money by helping  others. He wanted to grow with his customers,   not at his customers expense. The testing of  pricing is so necessary, especially when you   have an established brand. If your product is seen  as just some sort of commodity, then pricing above   your competitors is just a death sentence. (05:14) But if you have a superior product,   in this case the shakes that made the frozen  milk, which I assumed probably tasted better,   then you can charge more for your product.  Point two is strong because if you genuinely are   looking to help others, you will find others that  gravitate towards also trying to help you back.  (05:31) It's the reciprocation tendency at work.  If you go out of your way to help other people,   the universe has a way of paying you back. Ray  is an interesting example because he would find   unconventional ways to help people that would also  improve his own fortune. His customers whom he had   converted made some innovations of their own. (05:47) The traditional methods of making   milkshakes involved pouring the mixture into a  metal cup, then transferring it to a paper cup.   Now, the innovation was to use a metal cup that  acted as a kind of a collar on top of a paper cup,   which could then be sold to customers.  It was an ingenious way to help reduce   the amount of cleaning required to service  a growing number of milkshake consumers.  (06:07) Earl Clark, the same inventor of the metal  collars, came up with yet another innovation.   So the machines used to mix milkshakes had a  short lifespan due to the high volume of work   they were required to perform. So the shake was  a heavier drink to begin with and when the mixers   were run continuously they simply burned out. (06:25) That situation is what inspired Earl   Prince to invent the multimixer. At first  this machine had six spindles arranged   around the central pedestal stand and the top  could be rotated to take the drinks off. But   that resulted in too many drop drinks and other  minor disasters. So the top was made stationary   and the spindles reduced to just five. (06:44) This machine was powered by a 1/3   horsepower industrial type electric motor  with a direct drive. There was no carbon   brushes to wear out. You can mix concrete  with the damn thing if you had to. This   was the invention that really made big volume  milkshake production possible and it changed   the course of my life. So Croc bought the  multimixer to his boss at Lily Tulip and   they instantly fell in love with the product. (07:09) So, Lily Tulip became the exclusive   distributor of the Multimixer. Unfortunately, the  higher-ups showed very little interest in actually   expanding that product. So, Ry had eventually  become disillusioned with Lily Tulip because   they just wouldn't allow Ry to give Walgreens,  which was one of his largest accounts, a discount   on their cups to help keep them as a customer. (07:29) So, he decided to quit Lily Tulip and   sell multimixers. However, since Lily  Tulip owned the distribution rights,   he had to negotiate accordingly. Lily Tulip  would therefore own 60% of his new company called   Prince Castle Sales and seed the business with  $6,000. Croc said he had to do the deal this way,   but that soon it became an anchor around his neck. (07:51) As soon as Ray left Lily Tulip and started   working full-time selling multimixers, he noticed  that the job was going to be an absolute grind.   While he was able to convince some soda  fountain operators and restaurant owners to   buy multimixers, I got the feeling that he didn't  convince quite as many as he thought he would.  (08:08) So, the job really hadn't changed  that much as Croc was just still a traveling   salesman just selling a different product.  The deal that he'd made with Lily Tulip gave   him an ownership of the company, but it  was too small and that was also starting   to bother him. He thought that getting away  from Lily Tulip might actually open things up   for him and allow him to make some more money. (08:28) But since Lily Tulip was the majority   owner of the company, they were still his boss and  they limited his salary to the exact same amount   that he was making when he was selling their  cups. Unknown to Ray, his former boss at Lily   Tulip had actually purchased the shares of Prince  Castle Sales from the owners of Lily Tulip, who   had originally invested in Prince Castle Sales. (08:47) Ray came back to him to tell him that he   wanted to buy him out so he had more control  over his own business. Perfectly reasonable.   But his old boss, John Clark, told Ray  he'd sell it to him, but it had to be for   $68,000. And this was a figure that Ry felt  was just outrageously high. So to pay Clark   his share back of the company, Ray had to actually  mortgage his own house, which pissed his wife off,   who never supported his move away from Lily Tulip. (09:11) When World War II started, Croc had to   exit the multimixer business entirely, as  copper, which was required to manufacture   the multimixers, was all being used in the  war effort. But once World War II ended,   Croc was back at it. He was selling multi mixers  to notable franchises that you probably heard of,   such as Dairy Queen and A&W. (09:31) One interesting fact I'd   like to discuss is how Ray thought about  incentives. He writes, "I didn't bother   setting sales goals for the Multimixer. I  didn't need any artificial incentives to   keep me working at top speed. My estimates  of when I was having a good year was when I   sold 5,000 units, and I had several of those. (09:50) One year, I think it was 1948 or 1949,   I sold 8,000. This is a mindset that only someone  who truly loves what they do will have. Croc   believed in himself when just nobody else would,  including his wife. But he was working incredibly   hard, traveling around the country, dragging  around 50 lb multimixers to potential leads   and selling a substantial number of them. (10:10) As the business started scaling,   Ry realized that he would need some help. So,  he ended up hiring a bookkeeper to lighten his   burden. Her name was June Martino and she  would later become one of the top female   executives in America as part of McDonald's. As  the 1950s rolled around, Ray observed that the   multimixers was just not really a product  that was going to stay in high demand.  (10:31) Many of his large customers were starting  to remove soda machines from their locations,   which would be a significant headwind for his  current business. So, he looked into finding   his next business venture. Here's where  the official McDonald's story starts. So,   at the ripe old age of 52, Ray Croc learned about  a burger and shake restaurant in San Bernardino.  (10:49) The two McDonald's brothers ran it.  Ray knew about them because they had eight   multimixers operating simultaneously just to meet  their customer demand. Once Ray learned about them   and given his bleak prospects in the multimixer  industry, he booked a ticket to see their   operation. Now, before we get into the McDonald's  brothers, I'd like to just go over some of the   traits that I observe in Ray Croc pre McDonald's. (11:12) So the first one here is that Ry had   endless grit and work ethic. Whether he  was working multiple jobs simultaneously   or selling a single product, he was working long  and hard hours. He was willing to lug around a   50-lb melty mixer across the country just to  make his business a success. He was also an   exceptional salesman. Lily Tulip wanted to keep  him around because they clearly respected his   ability as a salesman and as an entrepreneur. (11:36) Now, while Rey felt like he was taken   advantage of by his former employee, it does show  that there were people who did believe in his   abilities as a salesman. Next is that Rey was just  unconventional. He would find interesting people   in non-conventional areas to sell his products  to, and he did it in kind of this win-win way.  (11:53) He always showed a remarkable  ability to adapt to changing times as well.   Look at his transition from selling cups to  multi mixers to taking a break due to World   War II where he started selling multiplent,  a premixed drink in a cup. We also see how   opportunistic and entrepreneurial Croc was. He  leveraged his network selling cups to eventually   sell multiixers and always had people around  him who could help supply him with new ideas   or interesting connections to make. (12:20) Croc also saw innovation as an   opportunity. The multimixer could have been  a device used at just one single location,   but Croc thought it would take off given the right  push. We also see Ry having strong abilities and   strategic thinking. He observed which of  his customers were making large orders of   his cups and why. Then he worked backwards  from there to uncover new opportunities.  (12:41) He was also willing to test out different  pricing strategies to help customers maximize   their returns. Croc also was constantly monitoring  his surroundings for any significant changes that   could affect his business. Now, as with most  entrepreneurs, Ry also showed a tolerance for   risk-taking. He mortgaged his own home against  his own wife's wishes just to make sure that he   could run his multimixer business as he saw fit. (13:05) He also left a stable job at Lily Tulip   to run a more speculative operation selling  these multimixers because he just believed   in himself. Now, let's move to McDonald's.  To understand McDonald's, let's look at the   backstory of their very first location opened  by Maurice and Richard McDonald. So Dick   recalls operating a movie theater for a time. (13:23) And at that time, it was a very lean   period for the McDonald's brothers. That meant  eating was just a luxury that they actually had   to cut back on on a regular basis. There was a hot  dog stand close by, and they would frequently eat   a hot dog for their daily meal. Dick was impressed  that the hot dog stand was really the only one   around and found that very, very interesting. (13:41) This eventually helped give him the   idea to start a restaurant. The original idea was  actually a barbecue restaurant in San Bernardino.   But after a few years, they realized a restaurant  was always busy, but they weren't really moving   much volume. So, they pivoted. They closed  down that restaurant and opened a new concept.  (13:59) Here's what Ray writes about it. It was a  restaurant stripped down to the minimum in service   and menu. The prototype for legions of fast food  units that later would spread across the land.   Hamburgers, fries, and beverages were prepared on  an assembly line basis. And to the amazement of   everyone, Mac and Dick included, the thing worked. (14:18) Of course, the simplicity of the procedure   allowed the McDonald's to concentrate  on quality in every step. And that was   the trick. When I saw it working that day in  1954, I felt like some latter-day Newton who   just had an Idaho potato cored off his skull.  Now, the interesting thing about Croc's fora   into McDonald's was that he didn't yet have  the vision of what McDonald's would become.  (14:41) He mentions multiple times in the  book that one of his primary interests in the   proliferation of McDonald's was simply that each  location would just have eight multimixers. So,   he was still focused on the multimixers and  not necessarily on what McDonald's could be.   One thing that Ry made very clear was  that the McDonald's brothers wanted   complete control, which he initially agreed to. (15:00) So, the new franchises that Ray opened   had to resemble the plan drawn up by their own  architect. New locations would have to display   signs and menus that were authorized by the  brothers. The agreement could not be deviated from   unless changes were specified in writing signed by  both brothers and sent to Ray by registered mail.  (15:20) For Ray's first location in Dplaines,  Illinois, things didn't start very smoothly.   The architectural plans the McDonald's brothers  wrote were meant for a desert climate. So,   they kept their potatoes outside basically year  round, which just wasn't possible in Illinois.   The plan also lacked a basement, which would  have been required for this exact location.  (15:40) So, when Ray called the McDonald's  brothers to ask permission to install a basement,   they told him to just proceed without  obtaining a written approval. Next was   the issue of the McDonald's French fries. So  Croc couldn't actually replicate the taste   that he had at the San Bernardino location.  He said he followed their methods to a tea,   but they just didn't taste the same. (16:01) So Ry actually ended up contacting   the Potato and Onion Association, which I didn't  even know existed, to see if they had any insight   on what he was doing wrong. He was asked to  explain the exact process that the McDonald's   brothers used in San Bernardino. And that's  where it was discovered that since the potatoes   were left outside, they were naturally cured. (16:20) So Croc then created his own curing   process for the potatoes by blasting them  with air. So it's worth noting here that   Croc had very little money at this time as he  essentially risked it all on opening the first   McDonald's site. But since things were starting  to go well, he wanted to continue opening new   locations. But there was yet another problem. (16:38) The McDonald's brothers had licensed   their restaurants to 10 locations in the western  US. But they had failed to notify Rey that there   was actually another location they had licensed  in Illinois to someone else, even though they had   promised the rest of the US to Rey. So, here's  what Ry writes. It cost me $25,000 to buy that   area from the Frey Jacks, and it was blood money. (17:00) I could not afford it. I was already in   debt for all that I was worth. I couldn't blame  the Frey Jacks, of course. They were completely   above board and fair. But I could just never  forgive the McDonald's. Unwittingly or not,   they had made an ass of me in the biblical sense.  I'd been blindfolded by their assurance and led to   grind like some blind Samson in the prison house. (17:20) Now, throughout this book, it's very   evident that Ry respects the McDonald's brothers  and yet he takes several jabs at them. So,   Ry was a more serious businessman and I  think took the job a lot more seriously   than the McDonald's brothers did. There was  definitely a bit of misalignment on that end   and I don't think it was ever corrected. (17:38) However, let's return to an area   of the book that I found particularly interesting,  which is systems. I love systems, and I think Croc   figured out how to create the McDonald's  systems incredibly well and efficiently,   although he indeed ran into numerous  roadblocks while on this journey. So,   Rey also demanded a ton from his franchises. (17:57) For instance, many restaurants sought   to increase their revenue by incorporating  elements into their stores to generate   passive income. So you can think  of things such as hey telephones,   juke boxes, or vending machines. But Ry  did not allow for any of that because   he believed it tarnished the fine  brand of being a family restaurant   that McDonald's had cultivated over the years. (18:14) McDonald's had been a uniform operation.   There were simply just no room for people who  wanted to operate under the McDonald's brand,   but take a different direction. He didn't want it  to be a name used by various people half-hazardly.   Now, Ray needed to create a restaurant  system known for consistently highquality   food and uniform methods of preparation. (18:34) He needed to focus on repeat business   driven by the systems reputation rather than  relying on a single store or operator. They also   had to maintain a continuous program to educate  and support operators as well as to review their   performance on a regular basis. To continue  improving McDonald's, they needed a full-time   research and development program as well. (18:53) Now, while developing this program,   Ray Croc and his colleague Harry Saiborn began  to understand the bigger picture for McDonald's.   Instead of just building out the locations on  behalf of the franchisee, they would decide   to have a slightly different model where they  would find the location, develop it themselves,   then lease the area back to the franchisee. (19:12) It was a brilliant business plan   that had massive success. To get this  all started, Ray and Harry began at the   Franchise Realy Corporation. It was seated  only with $1,000 and its success came from   some pretty savvy financial engineering.  So, you could basically break it down to   four parts. The first part, find a landowner. (19:29) Second part, convince that landowner   to lease the land back to them and agree to take a  second mortgage, meaning they'd only get paid back   after the bank. Third, use that agreement to get a  first mortgage from a bank to build the restaurant   on the land. And fourth, the landowner's rights  to the land would be subordinated. The bank   would have first claim before the land owner. (19:48) Croc didn't think the landlords would   go for this deal at all, but he decided to  let Harry try it anyways. Ray's management   style reminds me a lot of Reed Hastings style at  Netflix. If you hire a superstar, you give them   responsibility and you let them take ownership  of it. If you hire them for their expertise,   you let them cook and see what kind of innovations  they can do to help move your company forward.  (20:09) Harry Sona was Croc's first  superstar inside of McDonald's and   the system worked incredibly well. It allowed  franchise realy to scale up and since there   wasn't as much competition for real estate  as there is today, they could secure their   locations at much better prices than they could  probably get today. Now, speaking of systems,   the next curveball thrown at Ray was related to  having a key person who could visit the newly set   up franchises to help them getting run properly. (20:35) The man he found for this job was Fred   Turner. In 1957, Croc opened 25 franchises  and Fred Turner worked inside every single   one of them. Fred bought other innovations to  McDonald's just like Harry Saiborn. For instance,   as McDonald's scaled up, the scale created  numerous problems regarding uniformity.   The hamburger buns are a good example. (20:56) So any McDonald's you go to is   going to have the exact same buns. However,  the problem was that as McDonald's scaled,   they needed more and more buns and making them  proved to be very, very challenging. As a result,   Fred came up with the idea to have buns made in  significant quantities by several suppliers with   McDonald's being their primary customer and I  think in some cases being their only customer.  (21:17) And as McDonald's expanded, so did its  suppliers. So I mentioned earlier that Ry was   very good at helping his customers when he was  at Lily Tulip. He brought that same attitude to   McDonald's. For instance, at the time McDonald's  was creating just nine products and required only   40 items to make those nine products. (21:35) But Croc wasn't selling these   inputs to his franchises. Each franchisee was  sourcing them directly from the supplier. Where   McDonald's had the advantage was in making  it cheaper for their suppliers to get their   product to the franchises. They did things like,  you know, improving packaging, which could make   the supplier more efficient, allowing them to  charge McDonald's less than other customers.  (21:56) Many of these relationships with suppliers  came about because the suppliers were also inside   of the business as franchises. This alignment of  incentives worked very well between McDonald's,   its franchises, and its suppliers. For  instance, in California, there was actually   a massive discrepancy in sourcing buns and  meat. So, in California in the late 1950s,   buns and meats were going for nearly 100%  premium compared to stores in Illinois.  (22:22) Ray resolved this issue by leveraging  his entrepreneurial skills and connections.   He basically just found a baker who had helped  solve McDonald's buns problems elsewhere who   retired and got him to come out of retirement to  help McDonald's in California. Now, for the patty   problem, he had to take a different approach. (22:39) One supplier of meat for McDonald's   named Bill Moore was actually experiencing  cash flow problems and needed about a million   to avoid bankruptcy. Him and his partner  asked if McDonald's would buy the company,   but Ray said no because he just didn't want to  be part of the supply chain business. But what   Ray did was basically just told him, "No,  hang in there and that he'd be okay because   they were partners with McDonald's. (22:58) And as McDonald's grew,   the supplier would grow with them." And  it all ended up working out for Bill. So,   Bill ended up building multiple McDonald's  franchises with his partner. Bill then ended   up selling his shares in the franchises to fund a  new meat processing plant that Ray said processes   over 300 million patties per year for McDonald's. (23:16) The plant also made things like syrup for   soft drinks and manufactured  milkshake mix. Additionally,   Bill then went on to create even more plants  around the US, including locations in Atlanta,   San Jose, North Carolina, and Hawaii. Now,  like most small businesses, McDonald's had   numerous cash flow problems as it scaled up. (23:34) One such problem occurred when a   McDonald's franchisee named Clem Boore, who was  responsible for scouting and leasing new sites for   McDonald's, failed to secure a clear legal title  to the properties. This oversight resulted in a   mechanic's leans totaling around $400,000 against  the company. This was a significant financial   setback for the very early franchise operation. (23:55) Ray's net worth at the time was only   $90,000. So, he just wasn't able to  come up with that money himself. So,   they basically were forced to borrow money  from a consortium of insurance companies   and an acquaintance. This opened the door to  McDonald's borrowing more money in the future,   which helped further expedite their growth. (24:12) Another way that McDonald's systematized   was through its speedy service system. So  this system required a standardized to store   blueprint. This meant that every McDonald's  location had nearly identical floor pans for   the kitchen and the front counter. Additionally,  equipment such as things like grills, fryers,   shake machines, and prep tables were placed  in the exact same position in every store.  (24:33) This allowed staff to be trained to move  more consistently regardless of their location.   Next came the workflow system which  was based on an assembly line system.   An example of this while cooking a hamburger  might be patty star on the grill. The cooked   pies moved directly to the dressing station. (24:48) Burgers are then wrapped and placed in   warming bins for pickup. Each step was located  just one to two steps away from the next which   reduced any wasted movement. Kitchens  were laid out so that everything a worker   needed was within an arms reach. Additionally,  equipment was placed to minimize traffic jams   or collisions which could slow down production. (25:07) Quality control was also a massive part   of McDonald's brand and success. Food  had to be served while still hot. So,   grills were position near holding bins,  allowing burgers to be served quickly   while still warm. Jim Ran once  said that you're the average of   the five people you spend the most time with. (25:25) And I really could not agree with him   more. And one of my favorite things about being  a host of this show is having the opportunity to   connect with highquality like-minded people  in the value investing community. Each year,   we host live in-person events in Omaha and New  York City for our tip mastermind community,   giving our members that exact opportunity. (25:47) Back in May during the Bergkshire weekend,   we gathered for a couple of dinners and social  hours and also hosted a bus tour to give our   members the full Omaha experience. And  in the second weekend of October 2025,   we'll be getting together in New York City for two  dinners and socials as well as exploring the city   and gathering at the Vanderbilt 1 Observatory. (26:11) Our mastermind community has around 120   members and we're capping the group at 150  and many of these members are entrepreneurs,   private investors, or investment  professionals. And like myself,   they're eager to connect with kindered  spirits. It's an excellent opportunity   to connect with like-minded people on a deeper  level. So, if you'd like to check out what the   community has to offer and meet with around  30 or 40 of us in New York City in October,   be sure to head to the investorspodcast. (26:40) com/mastermind to apply to   join the community. That's the  investorspodcast.com/mastermind   or simply click the link in the description  below. If you enjoy excellent breakdowns on   individual stocks, then you need to check out  the intrinsic value podcast hosted by Shaun   Ali and Daniel Mona. Each week, Shawn and  Daniel do in-depth analysis on a company's   business model and competitive advantages. (27:07) And in real time, they build out the   intrinsic value portfolio for you to follow along  as they search for value in the market. So far,   they've done analysis on great businesses like  John Deere, Ulta Beauty, AutoZone, and Airbnb.   And I recommend starting with the episode on  Nintendo, the global powerhouse in gaming.  (27:26) It's rare to find a show that consistently  publishes highquality, comprehensive deep dives   that cover all the aspects of a business from an  investment perspective. Go follow the Intrinsic   Value Podcast on your favorite podcasting app and  discover the next stock to add to your portfolio   or watch list. Now, when thinking of fries, the  friers were placed close to the salt station and   holding area to ensure crispiness and speed. (27:53) Shake and soda machines were near   the front counter to minimize any delays in  serving drinks. To add further uniformity,   all major kitchen equipment was supplied  or authorized by McDonald's, which ensured,   you know, uniform cooking times, temperatures,  and quality. This level of control made it   easier to train crew members because  every store operated in the same way.  (28:11) Croc was basically just transforming  the restaurant industry into an assembly line   model. The best aspects of an assembly line  are that it builds speed and consistency,   lowers training time, reduces labor costs,  improves the efficiency of space, and is   more easily scalable. Without this assembly line  systems, McDonald's would have never been able   to expand much further outside of California. (28:32) Additionally, the assembly line system   ensured a consistent product wherever it was  eaten. This was vital in building McDonald's   brand. When you visit McDonald's today, you  expect a very, very specific product. And if you   are wildly disappointed with that product in one  location, the brand's reputation is going to be   tarnished in all locations to that one customer. (28:51) Now, another key theme that I really   appreciated from Ray Croc was his ability  to generate wealth for those around him.   Many investors like myself are huge fans of  individuals such as, you know, Mark Leonard,   the CEO of Constellation Software. He has  helped over 100 Constellation Software   employees become millionaires through the  system that he created for Constellation.  (29:10) His ultimate goal is to create 500 CSU  millionaires, which demonstrate how much runway he   still thinks he has left. Now, the similarity that  I see between the two of them is that Ray also   created several millionaires within McDonald's.  However, instead of being purely employees of   McDonald's becoming millionaires, they were  also from the franchises that he partnered with.  (29:30) One person close to the McDonald's  organization told Ry he was certain research   would show that Ray Croc had made millionaires  of more men in history than any other person.   But Ray seemed like a modest person. In the book,  he discusses that he didn't feel like he'd made   millionaires out of his employees and franchises. (29:47) Instead, they made it themselves. But Croc   saw himself as someone who could just  provide the means to the right person   to attain wealth if they were willing to  put in the work. I admire this humbleness,   and I think it's a very powerful trait in leaders  that I'd like to invest in. Now, let's focus here   a little more on just how important it is to be  aligned with the people that you do business with.  (30:06) Croc made a point in his book as  he helped scale McDonald's that he just   wasn't aligned with the McDonald's brothers. He  writes, "The McDonald's brothers were simply not   on my wavelength at all. I was obsessed  with the idea of making McDonald's the   biggest and best. They were content with  what they had and they just didn't want   to be bothered with more risks and more demands. (30:26) But there wasn't much I could do about it.   At one point, Croc sent Fred Turner to the  California area to observe the practices at   the 10 locations that the McDonald's brothers  had franchised before the deal with Croc. Ray   was absolutely appalled by what they were allowing  at these locations. The locations outside of the   original just weren't following the brand closely  enough, and Ray felt they were tarnishing the   brand that he'd fought so hard to build. (30:48) So, they were doing things such   as adding non-core items to the menu,  such as pizza, burritos, and enchiladas.   They were lowering the quality of the burgers by  adding ground hearts to their ground beef mix,   which changed the fat composition of the  burger, making it greasier. The operators   refused to cooperate in volume purchasing,  so they couldn't charge the same amounts.  (31:07) And they just wouldn't pony up additional  revenue dollars to spend on advertising campaigns   that were supposed to help all of McDonald's's  franchises. So Ray was infuriated by this because   he was just running a tight ship and he felt  contempt for the McDonald's brothers for allowing   these franchises to operate differently. (31:25) But since they weren't his stores,   there was nothing he could do. And that  upset him because like I mentioned before,   when you go to McDonald's in one place, you expect  the exact same experience in any location. And he   could see that these other locations just  weren't suitable for the brand as a whole.   There are many parallels between Croc and  other high-erforming founders such as Steve   Jobs, Howard Schultz, and Elon Musk. (31:48) All three of these guys wanted   to concentrate a lot of their decision-m  early on to help solidify their brand and   product. Croc did the same thing, just decades  ahead of these guys. So, in Steve Jobs's case,   he was utterly obsessed with product design and  the user experience. While Jobs was much more   prickly than Croc was, neither was afraid to  clash with partners or internal executives who   disagreed with their uncompromising standards. (32:12) An example was when Jobs insisted on   removing disc drives from the iMac in the late  1990s, which was an initiative that many other   insiders first resisted. But Jobs clarity of  design helped protect Apple's brand identity,   which was based on the principle of simplicity.  Other rigid requirements that Jobs wanted included   things such as having no fans on his computers. (32:33) This made computers much quieter and   less distracting to use. However, it also  required a completely different method to   keep the laptop cool, which necessitated  considerable innovation. While Croc was   nowhere near the innovator that Jobs ever was,  they were both keen on shaping their companies   in their own mold, and they knew they had the  best vision for providing the best product to   customers based on the brands that they built. (32:55) Starbucks's Howard Schultz was another   pioneer who came after Croc and understood the  power of the interplay of experience with the   consumption of beverage or food. In Schultz's  case, Starbucks wasn't just a location to get   coffee. He envisioned it as a third place to go  between home and work. Schultz is an interesting   case study because he stepped down as CEO, saw  his brand and results deteriorate as a result,   and then returned to write the ship. (33:20) The corrections he made helped   save the brand and are significant reasons  that Starbucks remains the behemoth that   it is today. Now, part of the strategy that  Schult used to bring Starbucks back to its   rightful place was to ensure that operators were  aligned. Small changes in a store were not part   of Starbucks's core and were not to be tolerated  as they altered the customer's core experience.  (33:40) When Schultz left, Starbucks initiated  cost cutting measures that led to a departure   from his original vision. For instance,  they started using ground beans instead   of grinding them in-house and sold food that  overpowered the coffee smell for which Starbucks   had been known. When Schulz came back, he was  willing to go the extra mile to ensure that   employees and customers knew that he was  earnest about getting back to its roots.  (34:01) He famously shut down every US Starbucks  location for 3 hours to retrain baristas on how   to make coffee the way that he thought it should  be made. This clearly demonstrated to Starbucks   employees and customers that they were very  serious about improving the product and service.   Then you look at the enigma that is Elon Musk. (34:22) So where Musk and Croc met was in the   concept of risk. Elon pushed for Tesla  to be vertically integrated. He wanted   control of everything from battery production  to the sales process. This was a pretty novel   concept because the legacy automotive industry  operates in a significantly different manner.   They outsource heavily for manufacturing of parts  and they use dealerships to sell their products.  (34:43) However, Musk chose not to take this  route because he knew that the traditional way   of thinking didn't align with the concepts  of first principles thinking. He understood   that the best way to make a good product was  just to do it all in house. But it was a rocky   road to get Tesla to where it is now. (34:58) The Gigafactory, for instance,   was incredibly costly and Tesla operated a loss  for most of its existence. So, while some people   inside Tesla might have wanted to hit the brakes  and maybe slow down growth or take fewer risks,   Elon decided to push forward with his ambitious  projects because he had the vision to see what   could be possible. This vision and the ability  to take risks are two similarities between   these two exceptional value creators. (35:20) The next topic that I would   like to address is competition.  McDonald's is not, never was,   and never will be a monopoly. While its revenues  are second only to those of Starbucks today,   I would be hardressed to admit that they have any  sort of monopoly. Are they positioned well? Yes,   but they must continue to improve. (35:36) Otherwise, they very well   risk losing market share. So, how have they  managed to stay near the top for multiple   decades? Let's examine some of the concepts that  Ry adopted, which are still prevalent today. So,   Ry specifically demanded to express the  strengths of McDonald's through four things:   quality, service, cleanliness, and value. (35:58) This is one of those situations where   I actually don't really think McDonald's had some  sort of inherent competitive advantage that isn't   available to basically any other well-skilled  competitor. Where they differentiate themselves   though is in execution. So Croc points out that  many former franchises and copycats have tried   to replicate what they learned from working inside  of a McDonald's franchise, but none of them really   ever had that special sauce to make it big. (36:22) This reminds me actually a lot of   evolution AB, a business that we've discussed  quite often on TIP and which I used to be an   investor in. Evolution upon analysis doesn't  really seem to have a significant moat versus   competitors. And similar to McDonald's, it  operates in a very very competitive industry.  (36:38) They have separated themselves in their  ability to execute at a higher level than many   of its competitors. Now, what exactly does this  mean for a business? It means you must continue   innovating and executing at an exceptionally high  level. Even a minor mistake can allow competitors   to steal market share and erode your business.  For this reason, it's not the best competitive   advantage to have, but it can still be powerful  when wielded by the bright leaders in business.  (37:01) Now, Croc mentions that many of his  competitors have attempted to clone the McDonald's   system, but have been unsuccessful. Many  competitors will even clone McDonald's real estate   locations. Now, this is an interesting point  because actually in the book, Rey doesn't discuss   the rationale at all behind choosing locations. (37:19) I assume that he probably did this   purposely for competitive reasons to prevent  competitors from gaining any knowledge that could   harm McDonald's. But in reality, competitors can  really just open shops on this exact same street   as McDonald's and rely on McDonald's own research  to find areas that have very, very high volumes   of foot traffic to support a given restaurant. (37:39) You know, it's really just no coincidence   that you'll see a McDonald's next to several  other fast food restaurants. There was a very   good example from the book about a franchise  in Knoxville, Tennessee. So, a competing burger   restaurant a few doors away was offering five  burgers for 30. And this was a price that the   McDonald's franchisee just could not compete with. (37:58) But he was actually still turning a profit   because while customers were going next door  to buy hamburgers, they would actually end up   going back to McDonald's for their fries  and beverages. But then the competitor   turned up the heat. They were offering burgers,  fries, and milkshakes all for 10 cents each.  (38:14) So the franchisee visited Ray to inform  him of his troubles and that he was thinking of   taking legal action against the competitor as he  found it to be anti-competitive behavior. But Ry   let him know that he believed in entrepreneurship  and didn't think that people should rely on the   government to fight their own battles.  He felt that if a competitor could put   a McDonald's franchise out of business using  this strategy, then McDonald's didn't deserve   to be in business and should shut down. (38:38) Instead, he suggested things like   being a better merchandiser, providing a better  service, and a cleaner place. The franchisee   took this to heart and became a much larger  franchisee. So, apparently, this speech lit a   real fire under him. Now, he's spoken a lot here  about how critical alignment is in business. So,   let's now look at Ray's dissolution of his  partnership with the McDonald's brothers,   as it's a key story to Ray Croc. (39:02) He decided that he no   longer wanted to be in business with  Mac and Dick because they were playing   just too many games and just getting  on his nerves. From the sound of it,   the feeling was actually mutual. So Ry gave  an example of one of the suppliers that he   shared with Mac and Dick who they used and  they would visit. And when they would visit,   it was actually near McDonald's headquarters. (39:20) But whenever they visited, they didn't   bother calling Ry or visiting the HQ, which  was a behavior that Croc found very irritating.   Now, the McDonald's brothers were interested  in retiring and their price was set at about   $2.7 million. This was a figure that Ry felt  was unfair. Now, it's pretty challenging   to really evaluate this deal as I couldn't  find any reliable statistics for that time,   but we're going to revisit this shortly. (39:44) So, I'm not sure if Ray felt the agreement   was unfair or was just upset that he'd have to  find the money from someplace. He eventually   found a lender and purchased a McDonald's brother  steak at the agreed upon price. Now, the original   deal was for all locations, including the San  Bernardino location, which was the Cash Cow.  (40:01) However, at the last minute  before the deal was completed,   the McDonald's brothers demanded that they retain  the San Bernardino location for themselves and   allow their employees to run it. This angered  Ry as he felt that they had gone back on their   word and changed the deal. But the McDonald's  brothers were happy. His quote here shows what   he thought of the agreement and how cutthroat  he was as a businessman. So, I was happy, too.  (40:22) Except for one part of the deal that  stuck in my throat like a fishbone. That was   the McDonald's brothers last minute insistence  on retaining their original restaurant in   San Bernardino. They were going to have their  employees run it for them. What a godamn rotten   trick. I needed the income from that store. (40:38) There wasn't a better location in   the entire state. I screamed like hell about it,  but no way. They decided they wanted to keep it,   and they were willing to pull the plug on  the whole arrangement if they didn't get   it. Eventually, I open up a McDonald's  across from that store, which they had   renamed the Big M, and ran it out of business. (40:56) But that episode is why I can't feel   charitable or forgiving towards the McDonald's  brothers. They went back on their promise,   made on a handshake, and forced me into grinding  it out, grunting, and sweating like a slave for   every inch of progress in California. Here's some  figures from the book that may provide insights   to the economics of McDonald's in its early days. (41:16) So in 1958, a news column mentioned that   Croc had built a $25 million business. He  said that a successful store had an average   net profit of about $40,000 on an annual gross  of $200,000. The average customer's payment was   about 66 and not a single franchise had  failed at that time. He also mentioned   that if a franchise were to fail, McDonald's  would just come in and take it over anyways.  (41:37) What Ry didn't disclose was that  McDonald's business was actually showing a   paper profit, but nothing in terms of cash flow.  He noted that out of the 160 stores they had,   they were only receiving income from 60  locations that had been internally developed.   The remaining 100 were owned, developed,  and operated by the operators themselves.  (41:55) At this time, they collected about a 1.9%  service fee, which I assume is just a franchise   fee. The 60 they were receiving income from had  significant development related costs. However,   by 1963, they had resolved the cash flow issue and  were generating sufficient profits to address it.   This was done through scale efficiencies. (42:13) Now, another way that McDonald's   developed itself was in the culture that it  created for its franchises. Much of this culture   was created at Hamburger U. Now, I mentioned  earlier that Ry placed a massive emphasis   on standardization. Hamburger U was created  specifically to help people get trained to adopt   Ray's mindset when it came to consistency. (42:33) But, credit goes to Fred Turner,   who actually founded Hamburger U. Now, instead  of focusing purely on how to cook hamburgers   and fries, Hamburger U looked more broadly at a  multitude of different things such as operations,   service, and leadership. It was at  Hamburger U that managers were taught   about the speedy service system,  quality, control, and cleanliness,   customer service, and employee management. (42:56) The course was a 6e intensive. Now,   let's fast forward here to 1959. Ray had made  Harry Soniborn president and CEO of McDonald's,   but the rift was beginning to form between the  two. These rifts can mean a lot of bad news   as they generally indicate that the chairman,  who I would assume would be Ray at this time,   is misaligned with the CEO. (43:15) As we've discussed,   alignment within a corporation is key to  its success. Part of the rift was due to   perception. So Ry had actually moved to California  to help develop stores in that specific state. But   this was far away from McDonald's HQ and Harry  felt Ry was just wasting his time in California.  (43:35) The rift began to widen and McDonald's  executives were informally categorized as either   Croc people or saunaorn people. However, the  rift seemed to be put on the back burner as   Ray's efforts in California ultimately proved  to be successful and McDonald's was now flirting   with the notion of going public. The reason  that McDonald's went public is this pretty   much the exact same reason that most businesses  go public, which was to reward the hard work of   a lot of the insiders inside of the corporation. (44:00) We'll get back to going public shortly,   but I want to tackle another key concept of  McDonald's. Innovation. While it might not be   the same innovation as a tech business such as an  Apple or Tesla, McDonald's had its own version of   innovation that it utilized to help grow its  business. The first significant innovation   in terms of product was the FileTo Fish. (44:20) Now, the idea for the fileo fish   was quite novel. One of the McDonald's franchises  named Lou Growan was noticing that business was   very slow on Fridays, and that was because the  franchise was in Cincinnati, which had a large   Catholic population where meat wasn't supposed  to be consumed on Friday. Another chain called   Big Boys had a sandwich called the Big Boy  sandwich that became a big seller on Fridays.  (44:42) Lou was losing significant amount of  business to Big Boy and wanted to innovate to find   a way to keep up or even beat them. and the fileo  fish was his innovation. The reason that he was   allowed to have the fileo fish was that he owned  the territorial licensing rights to that area.   At first, Ray was hellbent against the idea. But  Lou convinced a few other key executives that he'd   either have to sell fish bers or sell the store. (45:05) They decided to proceed with the idea   and began rolling it out on a very limited  basis initially on just Fridays. However,   the burgers were so successful that it became  a mainstay product where it still is today.   But in any successful business, it's evident  that you won't be rolling in wins all the   time. You're going to have to get through a  number of roadblocks on the way to success.  (45:24) And that was no different in innovation.  So Ray talks about a burger that was around a long   time ago called the Hula Burger. It was a slice  of grilled pineapple surrounded by two slices   of cheese. Ray actually thought that it would  contend with the file fish, but it was just a   major flop and was removed nearly immediately. (45:41) Now, back to going public here.   So going public for a business is often kind  of a circus because many companies that go   public have little to no experience in capital  markets. So navigating that potential minefield   can be an absolute headache. Luckily  McDonald's had really good connections   and found suitable partners to work with. (46:01) Now the first issue they had with   going public came from their auditors.  They had been using what they called the   development accounting which was not certifiable  by their accountant. Now the book doesn't mention   what exactly development accounting is but  from my research I would actually completely   agree with the accountants. So development  accounting enabled McDonald's to recognize   revenue basically before it was even earned. (46:22) For instance, if they knew they were   adding 50 new franchises, they would include  the revenue from those franchises in their   numbers to give an idea of where revenues  would be in the near future. They also   recorded income from franchise fees and  property leases as assets prior to that   restaurant's commencement of operations. (46:39) So they did this not for nefarious   reasons but just because it made the business  look better rather than relying on trailing   numbers. I see the rationale for doing this  as it would have helped potential investors   understand the business's growth potential.  But you know this is not a system that I   have ever really be that comfortable with. (46:55) So I can see how the accountants   require them to do away with it. Now the issue  was that McDonald's only had 2 weeks to rewrite   their financials to meet their deadline  which they achieved by working nearly 24/7.   The next annoyance with going public related  to the question of what the shares would be   priced at. The underwriter suggested 17 times  earnings, but Ry thought that anything less   than 20 times earnings was just ridiculous. (47:17) But, you know, when you go public, it   doesn't really matter what you think. It matters  what the market thinks. And the market actually   agreed with Ray here. So, shares opened at about  $2250 and closed the same day at $30. And in the   first month, shares actually climbed to $50. (47:34) McDonald's chose a very very good time   to go public as it was right at the beginning  of the go- go years. Euphoric markets are the   best possible time to IPO as investor sentiment  is at its absolute highest and you can increase   your chances of having a successful IPO, which  McDonald's did. Now, after McDonald's IPOed, there   were few forces at play that would help it grow. (47:52) For instance, McDonald's had no indoor   seating until 1966 when it was introduced to a  few locations. The stores were also in need of   a facelift, which meant some pretty significant  capex was going to be needed. With indoor seating,   increased square footage, and new buildings,  McDonald's would increase its revenue it   generated per restaurant, and the market  would welcome any news on that front.  (48:13) Now, as I've learned from  researching the franchise business model,   restaurants key into one specific sales  figure, which is called system sales. So,   why not just sales? Because system sales  represents the total revenue generated by the   franchise and its franchises as opposed to just  the franchiser. As I mentioned earlier, franchise   fees for McDonald's at inception were just 1.9%. (48:34) So that means if there were $100 million   in system sales, McDonald's revenue was just  1.9 million. Now, if you're looking to attract   investors, would you be more likely to use 100  million in systems revenue or 1.9 million in   franchise revenue? Probably the former. All  franchises will show both. Let's get back to   the rift here between Harry Sonorn and Ray Croc. (48:55) So, there are a few forces at play and   the first was a personal issue for Harry. So,  his health unfortunately just wasn't very good   in 1966, which forced him to spend more and  more time away from the business. More related   to the corporation was the fact that Harry  and Ray would butttheads over things such   as who to appoint as the next vice president. (49:13) Then, they had other issues with more   minor things such as compensation and a proposal  for the removal of McDonald's golden marches.   However, the most significant sticking  point between Ry and Harry had to do   with real estate. So Ry felt that Harry  had been overly conservative because   Harry was listening too closely  to bankers who were telling him   that the US was headed into a recession in 1967. (49:34) So Harry concluded that if that were true,   McDonald's should slow down their growth and hoard  cash. It culminated in Harry putting a moratorium   on any new store openings. But their man in charge  of locations complained to Ray because he already   had 33 really good locations lined up to go. (49:51) So Ray promised him that he'd go and   try to talk to Harry and see what he could  do. And they ended up arguing about it,   resulting in Harry actually stepping down. Ray  eventually got Harry to come back for a short   time, but Harry just didn't have it in him anymore  and he left for good. Ry noted that Harry thought   McDonald's shares would plummet after he left  because the aggressive growth plan that Ray backed   would backfire and that was a massive error. (50:13) Harry who was very well taken care of.   He just didn't have as much money as he would have  if he'd kept his shares. There was an interesting   quote from the book that really highlighted how  skilled an operator Ry was. This was after Harry   stepped down and Ray took over as president.  I really had my work cut out for me now.  (50:28) I took the title of president and  chairman of the board and I removed the 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 that we   were waiting for the local economy to improve  in those areas, I hit the ceiling. Hell's bells.  (50:47) When times are bad is when you want to  build, I screamed. Why wait for things to pick   up so everything will cost you more? If a location  is good enough to buy, we want to build it right   away and be there before the competition. Pump  some money and activity into a town and they'll   remember you for it. This is just good stuff. (51:05) And I think it shows that Rey was   thinking independently rather than succumbing  to the institutional imperative that just so   many executives fall for. So if Harry  Sonor had followed the banker's advice,   which may have been standard practice for the  industry, he would have ended up just waiting   for the recession risk to subside and then  resumed investing in new stores afterwards.  (51:23) But this just shows short-term thinking. I  completely side with Ry on this. I prefer to have   operators who act counterylically. When times are  bad, they are the best possible times to invest.   This applies both to individual businesses and  to just investing in general. Poor sentiment   offers the best upside and the highest margin  of safety, but most investors and executives   are just too afraid to take advantage of that. (51:46) Ry then told Fred Turner that once he   had finished a few things inside of McDonald's,  he would turn over the presidency role to Fred,   which he gladly accepted. Now, what  were the changes that Ry wanted to make?   So the first one here was that he wanted to  recapture some of the territory that he knew   would help with the expansion of the business. (52:02) So there were two partners that owned a   company that had licensing rights for the entire  District of Columbia as well as a few counties   in Maryland and Virginia. So since they had these  exclusive rights, McDonald's couldn't expand into   these territories. So Ry wanted to just buy them  out. McDonald's ended up buying them out for $16.  (52:20) 5 million in cash, but ended up  doubling their stores from 43 to 90 over   a very short period of time. as well as adding  significant talent to McDonald's from the people   that were already involved in those stores. So  Ray felt like that purchase was very very well   justified. The next one was price increases. (52:36) So Ry wanted to increase the price of   some of the items that McDonald's sold and  he wasn't sure unfortunately how customers   would react. So the example that he gives is a 15%  hamburger that he wanted to increase to just 18.   But it actually sounds like this price increase  was more of a result of compressing margins.  (52:52) Though Ray writes, "We were in the  midst of Lynden Johnson's muddled guns and   butter economy with the war in Vietnam, and  even our increasingly sophisticated purchasing   operations could not cope with inflation." So Ray  had conducted some internal modeling to see what   he could expect from these price increases. (53:09) So the theory was that volume would   initially surge as regular customers came in and  paid the increased pricing. But once they were   accustomed to the increased pricing, they would  look elsewhere. Then competitors would follow   suit, increasing their own pricing and customers  would eventually return. And this is exactly what   happened when they did the price increase. (53:27) It took about a year for things to   stabilize. And this was part of the reason  that Ry didn't want to hand the company over   to Fred Turner during that weak point. Now,  the last part here was to roll out a national   advertising and marketing plan. So McDonald's  was developing a program to support all of its   franchises. The spending would be supported  by the franchises who would contribute 1%   of their revenue to support the program. (53:47) Ray liked this, but I've spoken to   some franchises and they don't always like it  because it obviously eats into their margins.   Some locations also just don't believe  that an advertising plan will necessarily   benefit them at their exact location and  at that price. So by 1968, the business   was thriving under Fred Turner's leadership  as president and CEO, who did a superb job.  (54:09) I find this story interesting because  generally when a CEO steps down from a business,   it's a red flag at worst and typically  a yellow flag at best. But in this case,   it was a blessing. Now, it's hard to have an  intimate understanding of what is going on   inside of a business when you're just an investor. (54:24) You know, the problems that Ry and Harry   had would have probably been surprising to  investors during this time. But to McDonald's   insiders, it was probably very evident to everyone  that there was a growing rift and that there was   some sort of event that was likely to happen that  would cause an explosive change to either towards   the direction of Ray Croc or to Harry Sonor. (54:42) This is why Scuttlebutt is so essential.   When you can talk with competitors or former  employees, you can learn these types of hidden   dynamics that are going on that just aren't shared  with the general public. You unfortunately need   a network and connections to talk with the  right people to get this kind of information.  (54:57) Now, Ray shared a quote at the end of  the book that I thought was powerful. Press   on. Nothing in the world can take place  of persistence. Talent will not. Nothing   is more common than unsuccessful men with  talent. Genius will not. Unrewarded genius   is almost a proverb. Education will not. (55:15) The world is full of educated   derelcts. Persistence and determination alone are  omnipotent. Now, I'd like to conclude this episode   by discussing my seven primary takeaways from Ray  Croc and his business experience. The first one   is just vision over product. So, while Ry cared  a lot about the end product, without his vision   where he felt McDonald's could eventually go,  the story would have never unfolded as it did.  (55:38) Croc could have gone into the  business of just selling hamburgers and fries,   but he knew the big picture was the real estate.  He created the franchise model, systematized it,   and made it highly scalable. This allowed him to  focus more on expanding McDonald's while leaving   many of the product innovations to those within  the company who were highly customerf facing and   understood customer needs at a deep level. (55:59) Second, having relentless standards   can create a wide mode. If McDonald's were a  disconnected franchise with various franchises   selling different products, it's unlikely the  brand would have ever achieved a critical mass.   Ray's ability to get all franchises to follow  the system that he supported was tremendous   for the success of the McDonald's brand. (56:17) Croc was obsessed with uniformity   and consistency. And while there is a place for  innovation, it had to be rolled out conservatively   before being released to all franchise  locations. Third is the power of real estate.   Even though things didn't work out with Harry  Sonorn, Harry was massively important for   providing Croc with this insight. (56:35) Gaining funding to open a   new restaurant wasn't easy, but using  financial engineering to own a property   a franchise sat on was much easier. This  system allowed McDonald's to focus on   collecting royalty fees rather than being  the sole operator of the franchise. So,   even though McDonald's is seen as a  fast food chain, it's really a real   estate business disguised as a fast food chain. (56:54) I'd like to add that I've studied many   quicks service restaurants. And one thing  I find interesting is that franchises with   a high number of corporate owned stores often,  not not always, but often struggle to achieve   profitability. A couple really notable examples  would be something like Cava or Sweet Greens,   which have just nosebleleed evaluations. (57:12) However, when you look at their margins,   they're incredibly subpar despite the fact  that they have hundreds of locations. Now, I've   concluded that the franchise model is just better  than operating with all locations centrally owned.   The margins on franchise revenue are fat and you  don't have to deal with a number of headaches and   expenses involved with operating the restaurant. (57:30) The fourth here is that people and   culture often trump strategy. Croc knew  that surrounding himself with the right   people would be the key to long-term success  of McDonald's. This is how he found hungry   young franchises and corporate people  like Harry Sonorn and Fred Turner. Ray   also understood that he could help motivate  his franchises to success by following many   of the systems that he had implemented. (57:52) While Croc was very demanding of   his people, he also inspired them to  continue performing at a high level,   which often resulted in a win-win situation. And  fifth is that expansion requires ruthless amounts   of focus. It would have been easy for Ry to adopt  too many innovations that were thrown at him,   which would have taken him off the course of his  grand vision for McDonald's, which was to continue   growing its store account in his system sales. (58:14) When McDonald's first began expanding,   its menu was incredibly simple. Burgers, fries,  and beverages. He could have diversified the menu   more, but that would have taken focus away from  his vision. This speaks to Buffett's exceptional   ability to just say no to everything. This helps  Buffett keep his schedule clear so he can read and   learn things that he needs to educate himself on  to be the best possible investor that he can be.  (58:35) Croc also said no to several things. He  didn't want to diversify. Six is the power of   systems. I already mentioned how much focus Ry  put on things like uniformity and consistency.   If you scale a brand up significantly, you  have to have systems in place. Otherwise,   you risk drifting away from what truly works. (58:52) McDonald's's initiatives such as Hamburger   U and how they set up and design stores were a  tool to accentuate consistency. If you're building   a brand, you should closely examine what your  people are doing to move you towards or away from   your vision. Buffett has said, "I try to invest  in businesses that are so wonderful that an idiot   can run them because sooner or later, one will. (59:12) " Now, I'm not saying McDonald's has any   idiots who have run the show in the present or  the past, but they've gone through 11 CEOs and   remained still a great business today. I think  this is a testament to the power of systems   in building a resilient business. While Croc  understood that the business required different   leaders at different times, he established many  guard rails to ensure that regardless of whoever   was in control, the company would succeed. (59:33) And lastly is that just contrarian   thinking pays off. I love contrarians because  no matter where you look, most outperformers   in businesses and investing are just natural  contrarians. And Croc was just a different person.   While he spent much of his career trying to find  that edge that would allow him to truly take off,   he didn't see it until he was 52 years old. (59:52) While many business people flock to   young guns who have built these enormous  tech empires today, many lessons can be   learned from contrarians like Croc, who took  a few more decades than Zuckerberg or Musk to   find his footing. Now, before Croc, nobody  thought a quicks service restaurant would   reach nearly every corner of Earth. (1:00:10) Heck, I don't think anyone   thought a fast food restaurant would even be  in every US state. But Croc thought this was   a possibility and did everything in his power  to make this vision a reality. And even though   he didn't have the support from those closest  to him, his wife, for instance, thought he was   crazy for getting into McDonald's at his age,  he had the inner fire to help motivate himself.  (1:00:28) The original McDonald's brothers  initiated the idea for McDonald's. But   without Rey's understanding and frankly  backbreaking work, the business would have   never probably left the state of California.  The example I gave earlier in this episode   about Croc's ability to think counterylically  is a potent example of that contrarian mindset.  (1:00:44) I love seeing businesses and founders  participate in initiatives like this. One great   example in my portfolio was Dino Pulska, which  invested heavily in its distribution centers.   Despite Poland being in a state of deflation with  a war next door in Ukraine, the GDP growth having   stalled, the company just continued to expand. (1:01:03) They could have sat on their hands   and waited, but they invested heavily in  the company's future development. So far,   it's proven to be a very successful investment,  which should allow the business to continue   expanding its new store development for many  years to come. Now, when I take a step back   and look at Ray Croc's story, it's clear that  McDonald's was never just about burgers and fries.  (1:01:21) It was about vision, discipline, and  building systems that could outlast one person.   Croc didn't invent fast food. He just saw the  potential to scale it in a way that no one else   was willing to do. And that's a big lesson for us  as investors and business builders. Execution and   scale often matter more than the original idea. (1:01:39) For entrepreneurs, the lesson is   straightforward. Systems often outperform  individual genius. For investors, it serves as   a reminder to look beneath the surface. Sometimes  the real money isn't made where you expect like   the real estate model at McDonald's. And for  anyone chasing success, Ray's story is proof that   there's no such thing as an overnight success. (1:01:58) His overnight took more than 30 years of   grinding it out, risking everything, and betting  on himself. So when you see the golden arches,   don't just think about a fast food joint.  Think about what happens when someone   refuses to compromise on standards,  builds alignment across stakeholders,   and focuses on execution day in and day out. (1:02:15) That's the real engine behind   McDonald's and it's a blueprint I think we  can all take on our own investing and business   journeys. That's all I have for you today on  Ray Croc and the building of McDonald's. Want   to keep the conversation going? Follow me on  Twitter at irrationalmrts or connect with me   on LinkedIn. Just search for Kyle Grief. (1:02:31) I'm always open to feedback,   so feel free to share how I can make the podcast  even better for you. Thanks for listening and   see you next time. I think this is why hidden  monopolies resonates with me so much because   similar to that aspect of Scuttlebutt, it focuses  heavily on the customers of a business rather than   its competitive positioning against competitors. (1:02:49) And at the end of the day, it's the   company's customers who are signing those  checks which determine how attractive that   investment can be. So why is customer loyalty so  important? Because if you have loyal customers,   your benefits are significantly higher compared to  businesses that just don't have loyal customers.  (1:03:04) This means that a company with loyal  customers will have more repeat customers.