Mcdonald’s Corporation

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Mcdonald’s Corporation

McDonald’s Plaza
Oak Brook, Illinois 60521
U.S.A.
(708) 575–3000

Public Company
Incorporated: 1955
Employees: 169,000
Sales: $5.57 billion

Stock Index: New York Midwest Pacific Toronto Frankfurt Munich Paris Tokyo

Since its incorporation in 1955, McDonald’s has not only become the world’s largest quick-service restaurant organization, but has literally changed Americans’ eating habits. On any given day, nearly 7% of the American population will eat a meal at a McDonald’s restaurant; in a year, 96% of Americans will visit a McDonald’s. The company stands head and shoulders above its competition, commanding by far the leading share of the fast-food market. The company’s growth is best described as phenomenal; McDonald’s has recorded increasing sales and earnings every quarter since it went public in 1965.

In 1954, Ray Kroc, a Multimixer milkshake machine salesman, heard about Richard and Maurice (Dick and Mac) McDonald, two brothers who were using eight of his high-tech Multimixers in their San Bernardino, California restaurant. His curiosity was aroused, so he went to San Bernardino to take a look at the McDonalds’ restaurant.

The McDonalds had been in the restaurant business since the 1930s. In 1948, they closed down a successful carhop drive-in to establish the streamlined operation Ray Kroc saw in 1954. The menu was stripped to the bare essentials: hamburgers, cheeseburgers, french fries, shakes, soft drinks, and apple pie. The carhops were eliminated to make McDonald’s self-serve. There were no tables to sit at, no juke-box, no telephone. As a result, McDonald’s attracted families rather than teenagers. Perhaps the most impressive aspect of the restaurant was the efficiency with which the McDonalds’ workers did their jobs. Mac and Dick McDonald had taken great care in setting up their kitchen. Each worker’s steps had been carefully choreographed, like an assembly line, to insure maximum efficiency. The savings in preparation time, and the resulting increase in volume, allowed the McDonalds to lower the price of a hamburger from 30 cents to 15 cents.

Kroc believed that the McDonalds’ formula was a ticket to success, and suggested that they franchise their restaurants throughout the country. When they hesitated to take on this additional burden, Kroc volunteered to do it for them. He returned to his home outside of Chicago with rights to set up McDonald’s restaurants throughout the country, except in a handful of territories in California and Arizona already licensed by the McDonald brothers.

Ray Kroc’s first McDonald’s restaurant opened in Des Plaines, Illinois, near Chicago, on April 15, 1955. As with any new venture, Kroc encountered a number of hurdles. The first was adapting the McDonald’s building design to a northern climate. A basement had to be installed to house a furnace. Adequate ventilation was difficult: exhaust fans sucked out warm air in the winter, and cool air in the summer.

Most frustrating of all, however, was Kroc’s initial failure to reproduce the McDonalds’ french fries. The McDonald brothers produced delicious french fries, but when Kroc and his crew duplicated their method—leaving just a little peel for flavor, cutting the potatoes into shoestrings, and rinsing the strips in cold water—the fries turned into mush. After repeated telephone conversations with the McDonald brothers and several consultations with the Potato and Onion Association, Kroc pinpointed the cause of the soggy spuds. The McDonald brothers stored their potatoes outside in wire bins, and the warm California breeze dried them out and cured them, slowly turning the sugars into starch. In order to reproduce the superior taste of these potatoes, Kroc devised a system using an electric fan to dry the potatoes in a similar way. He also experimented with a blanching process. Within three months he had a french fry which was, in his opinion, slightly superior in taste to the McDonald brothers’.

Once the Des Plaines restaurant was rolling, Kroc began to seek franchisees for his McDonald’s chain. The first snag came quickly. In 1956 he discovered that the McDonald brothers had licensed the franchise rights for Cook County, Illinois (home of Chicago and many of its suburbs) to the Frejlack Ice Cream Company. Kroc was incensed that the McDonalds hadn’t informed him of this arrangement. He purchased the rights back for $25,000—five times what the Frejacks had originally paid—and marched forward.

Kroc decided early on that it was best to set up the restaurants first, and then franchise them out, so that he could control the uniformity of the stores. McDonald’s continues to own most of the real estate for its restaurants. Early McDonald’s restaurants were situated in the suburbs. Corner lots were usually in greater demand because gas stations and shops competed for them, but Kroc preferred lots in the middle of blocks to accommodate his U-shaped parking lots. Since these lots were cheaper, Kroc could give franchisees a price break.

McDonald’s grew slowly for its first three years; by 1958 there were 34 restaurants. In 1959, however, Kroc opened 67 new restaurants, bringing the total to more than 100.

Kroc had decided at the outset that McDonald’s would not be a supplier to its franchisees—his background as a salesman warned him that such an arrangement could lead to lower quality for the sake of higher profits. He also determined that the company should at no time own more than 30% of all McDonald’s restaurants. But he knew that his success depended upon his franchisees’ success, and he was determined to help them any way he could.

In 1960, McDonald’s advertising campaign, “Look for the golden arches,” gave sales a big boost. Kroc took the view that advertising was an investment that would in the end come back many times over, and advertising has always played a key role in the development of the McDonald’s Corporation—indeed, McDonald’s ads have been some of the most identifiable over the years. In 1962, McDonald’s replaced its “Speedee” the hamburger man symbol with its now world-famous golden arches. A year later, the company sold its billionth hamburger.

In the early 1960s, McDonald’s really began to take off. The growth in automobile use that came with the suburbanization of America contributed heavily to McDonald’s success. In 1961, Kroc bought out the McDonald brothers for $2.7 million and dreamed of making McDonald’s the number-one fast-food chain in the country.

In 1965, McDonald’s Corporation went public. Common shares were offered at $22.50 per share; by the end of the first day’s trading the price had shot up to $30. A block of 100 shares purchased for $2,250 in 1965 was worth, after nine stock splits, more than $400,000 in 1989. McDonald’s Corporation is now one of the 30 companies that make up the Dow Jones Industrial Index.

McDonald’s success in the 1960s was largely due to the company’s successful marketing and flexible response to customer demand. In 1965, the Filet-o-Fish sandwich, billed as “the fish that catches people,” was introduced in McDonald’s restaurants. The new item had originally met with disapproval from Kroc, but after its successful test marketing, he eventually agreed to add it. An item that Kroc had backed a year previously had flopped. It was a burger with a slice of pineapple and a slice of cheese known as a “hulaburger.” The market was not quite ready for Kroc’s taste, however; the hulaburger’s tenure on the McDonald’s menuboard was short. In 1968 the now-legendary Big Mac made its debut. Its “two all-beef patties special sauce lettuce cheese pickles onions on a sesame seed bun” slogan was a hit. In 1969, McDonald’s sold its five-billionth hamburger. A year later, as it launched the “You Deserve a Break Today” advertising campaign, McDonald’s restaurants had reached all 50 states.

In 1968 the company opened its one-thousandth restaurant and Fred Turner became president and chief administrative officer of McDonald’s. Kroc became chairman, and remained CEO until 1973. Turner had originally intended to open a McDonald’s franchise, but when he had problems with his backers over a location he went to work for Ray Kroc in 1956. As operations vice president, Turner helped new franchisees get their stores set up and running. He was constantly looking for new ways to perfect the McDonald’s system, experimenting, for example, to determine the maximum number of hamburger patties one could stack in a box without squashing them and pointing out that seconds could be saved if McDonald’s used buns that were pre-sliced all the way through and weren’t stuck together in the package. Such attention to detail was one reason for the company’s extraordinary success.

McDonald’s spectacular growth continued in the 1970s. Americans were more on-the-go than ever, and fast service was a priority. In 1972, the company passed $1 billion in annual sales; by 1976, McDonald’s had served 20 billion hamburgers, and systemwide sales exceeded $3 billion.

McDonald’s pioneered breakfast fast food with the introduction of the Egg McMuffin in 1973 when market research indicated that a quick breakfast would be gobbled up by consumers. In 1977, the company added a full breakfast line to the menu. By 1987 one-fourth of all breakfasts eaten out in the United States came from McDonald’s restaurant.

Chairman Ray Kroc was a firm believer in “putting something back into the community where you do business.” In 1974, McDonald’s acted on that philosophy in an original way by opening the first Ronald McDonald House, in Philadelphia, to provide a “home away from home” for the families of children in nearby hospitals. Twelve years after this first house opened, 100 similar Ronald McDonald Houses were in operation across the United States.

In 1975, McDonald’s opened its first drive-thru window in Oklahoma City. This service gave Americans a fast, convenient way to get a quick meal. The company’s goal was to provide service within 50 seconds, quicker where possible. Drive-thru sales eventually accounted for more than half of McDonald’s systemwide sales.

In the later 1970s competition from other hamburger chains like Burger King and Wendy’s began to heat up. Experts believed that the fast-food industry had gotten as big as it ever would, so the companies began to battle fiercely for market share. A period of aggressive advertising campaigns and price slashing in the early 1980s became known as the “burger wars.” Burger King suggested that customers “have it their way”; Wendy’s offered itself as the “fresh alternative” and asked “Where’s the beef?” But McDonald’s sales and market share continued to grow. Consumers seemed to like the taste and consistency of McDonald’s best.

During the 1980s McDonald’s further diversified its menu to suit changing consumer tastes. Chicken McNuggets were introduced in 1983; by the end of the year McDonald’s was the second-largest retailer of chicken in the world. In 1987, ready-to-eat salads were introduced to lure more health-conscious consumers. The 1980s were the fastest-paced decade yet. Efficiency, combined with an expanded menu, continued to draw customers. McDonald’s, already entrenched in the suburbs, began to focus on urban centers and introduced new architectural styles. Though McDonald’s restaurants no longer looked identical, the company made sure food quality and service remained constant.

Despite experts’ claims that the fast-food industry was saturated, McDonald’s continued to expand. The first generation raised on restaurant food had grown up. Eating out had become a habit rather than a break in the routine, and McDonald’s relentless marketing continued to improve sales. Innovative promotions, like “When the U.S. wins, you win” giveaways during the Olympic games in 1988, were a huge success.

In 1982, Michael R. Quinlan became president of McDonald’s Corporation and Fred Turner became chairman. Quinlan, who took over as CEO in 1986, had started at McDonald’s in the mailroom in 1963, and gradually worked his way up.

The first McDonald’s CEO to hold an MBA, Quinlan was regarded by his colleagues as a shrewd competitor. In his first year as CEO the company opened 600 new restaurants.

McDonald’s growth in the United States was mirrored by its stunning growth abroad. By the late 1980s, 26% of systemwide sales came from restaurants outside the United States. McDonald’s opened its first foreign restaurant in British Columbia, Canada in 1967; since then the company established itself in more than 50 foreign countries and now operates more than 2,500 restaurants outside the U.S. Its strongest foreign markets are Japan, Canada, West Germany, Great Britain, and Australia.

In the mid-1980s, McDonald’s, like other traditional employers of teenagers, was faced with a shortage of labor in the United States. The company met this challenge by being the first to entice retirees back into the work-force. McDonald’s has always placed great emphasis on effective training. It opened its Hamburger University in 1961 to train franchisees and corporate decision makers. By 1987, more than 30,000 people had received “Bachelor of Hamburgerology” degrees from the 80-acre Oak Brook, Illinois facility. The corporation opened a Hamburger University in Tokyo in 1971, in Munich in 1975, and in London in 1982.

Quinlan continues to experiment with new technology and to research new markets to keep McDonald’s in front of its competition. Clamshell fryers, which cooked both sides of a hamburger simultaneously, were tested. New locations such as hospitals and military bases are being tapped as possible sites for new restaurants. In response to the increase in microwave oven usage, McDonald’s, whose name is the single most advertised brand name in the world, has beefed up advertising and promotional expenditures, stressing that its taste is superior to quick packaged foods.

It took McDonald’s 33 years to open its first 10,000 restaurants. The company plans to open the next 10,000 by 2005, mainly by taking advantage of strong opportunities overseas. McDonald’s ability to adapt to the changing tastes and habits of its customers has made it the virtually unassailable leader in the fast-food industry. New challenges will arise, but if McDonald’s relatively brief past in any indication of its future, the company has plenty to look forward to.

Principal Subsidiaries

McDonald’s Australian Properties Corp.; McDonald’s Deutschland, Inc,; McDonald’s Restaurant Operations, Inc.; McDonald’s Property Co. Ltd.; McDonald’s Restaurants of Canada, Ltd.; McDonald’s Systems of Australia, Ltd,; McDonald’s Properties (Australia) Pty., Ltd.; McDonald’s Immobilien GmbH (West Germany); McDonald’s Hamburgers Ltd. (U.K.); McDonald’s Finance Co., N.V. (Netherlands Antilles).