McDonald’s Corporation

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McDonald’s Corporation

McDonald’s Plaza
Oak Brook, Illinois 60521
U.S.A.
(708) 575-3000
Fax: (708) 575-5814

Public Company
Incorporated: 1955
Employees: 169,000
Sales: $19.93 billion
Stock Exchanges: New York Midwest Pacific Toronto Frankfurt Munich Paris Tokyo Zurich Geneva Basel
SICs: 5812 Eating Places

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 seven percent of the American population will eat a meal at a McDonald’s restaurant; in a year, 96 percent 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 seller of Multimixer milkshake machines, learned that brothers Richard and Maurice (Dick and Mac) McDonald were using eight of his high-tech Multimixers in their San Bernardino, California, restaurant. His curiosity was piqued, and 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 simple: hamburgers, cheeseburgers, french fries, shakes, soft drinks, and apple pie. The carhops were eliminated to make McDonald’s a self-serve operation, and there were no tables to sit at, no jukebox, and 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 ensure 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.

Believing that the McDonald formula was a ticket to success, Kroc 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.

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, and adequate ventilation was difficult, as 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’ delicious french fries. When Kroc and his crew duplicated the brothers’ 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’ fries.

Once the Des Plaines restaurant was operational, Kroc sought 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 Frejlacks had originally paid—and pressed on.

Kroc decided early on that it was best to first establish the restaurants and then to franchise them out, so that he could control the uniformity of the stores. 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 in sales warned him that such an arrangement could lead to lower quality for the sake of higher profits. He had also determined that the company should at no time own more than 30 percent of all McDonald’s restaurants. He knew, however, that his success depended upon his franchisees’ success, and he was determined to help them in any way that he could.

In 1960 McDonald’s advertising campaign, “Look for the golden arches,” gave sales a big boost. Kroc believed 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 logo. 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, aiming at 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. Another item that Kroc had backed a year previously, a burger with a slice of pineapple and a slice of cheese known as a “hulaburger,” had flopped. The market was not quite ready for Kroc’s taste; the hulaburger’s tenure on the McDonald’s menu board was short. In 1968 the now-legendary Big Mac made its debut, and 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 McDonald’s opened its 1,000th restaurant, and Fred Turner became the company’s president and chief administrative officer. Kroc became chairperson 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 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 presliced 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 system wide 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 welcomed by consumers. Five years later the company added a full breakfast line to the menu, and by 1987 one-fourth of all breakfasts eaten out in the United States came from McDonald’s restaurant.

Kroc was a firm believer in “putting something back into the community where you do business.” In 1974 McDonald’s acted upon 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 in 50 seconds or less. Drive-thru sales eventually accounted for more than half of McDonald’s system wide sales.

In the late 1970s competition from other hamburger chains such as Burger King and Wendy’s began to intensify. 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 of other restaurants, “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, and 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, such as the “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 chairperson. 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 degree, 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 1991, 37 percent of system wide sales came from restaurants outside of the United States. McDonald’s opened its first foreign restaurant in British Columbia, Canada, in 1967. Since then the company established itself in 58 foreign countries and now operates more than 3,600 restaurants outside of the U.S., through wholly owned subsidiaries, joint ventures, and franchise agreements. Its strongest foreign markets are Japan, Canada, Germany, Great Britain, Australia, and France.

While western Europe’s population far exceeded that of the United States in 1992, it had only 1,300 restaurants. Latin America, with twice the population of the United States, sufficed with 200 restaurants. China’s first McDonald’s restaurant, located in Shenhen, made a profit in its first year of operation. Beijing and Shanghai restaurants soon followed, giving China’s 1.1 billion people three places to find the golden arches. In March of 1992, two native Czechoslovakians opened a McDonald’s in Prague, and it took three years of bureaucratic red tape to open the Jakarta, Indonesia, restaurant.

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 workforce. 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.

The McDonald’s Corporation operates only 20 percent of its restaurants. It receives 20,000 franchise inquiries a year. In 1991, 350 new licensees joined the corporation’s extensive training program, and of these more than 60 percent were women and minorities. By the end of 1991, there were more than 12,000 system wide restaurants.

Braille menus were first introduced in 1979, and picture menus in 1988. In March of 1992, Braille and picture menus were reintroduced to acknowledge the 37 million Americans with vision, speech, or hearing impairments.

Quinlan continued 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 stepped up advertising and promotional expenditures stressing that its taste is superior to quick packaged foods.

McRecycle USA began in 1990 and included a commitment to purchase at least $100 million worth of recycled products annually for use in construction, remodeling, and equipping restaurants. Chairs, table bases, table tops, eating counters, table columns, waste receptacles, corrugated cartons, packaging, and washroom tissue are all made from recycled products. McDonald’s worked with the U.S. Environmental Defense Fund to develop a comprehensive solid waste reduction program. Wrapping burgers in paper rather than plastic led to a 90 percent reduction in the wrapping material waste stream.

Although 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. The company’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. McDonald’s commands $13 billion of America’s $93 billion quick-service food industry, but considers its area of national sales growth to be the $200 billion “eat out” market. Providing more “loose” seating, rather than the conventional bolted down tables and chairs, has been considered as one way to relax the atmosphere and attract more families as dinner patrons. Pizza, chicken, and pasta menu additions also have been tested.

By the spring of 1992, the company was testing Menu Vision television network in 12 eastern U.S. restaurants. Computer-generated images of menu items and promotional deals were displayed on monitors. McNews, a closed network of live entertainment provided by Turner Broadcasting, also was tested.

In July 1992, the corporation announced a new program for investors who own less than 50 shares, which would allow them to purchase additional McDonald’s shares or donate the new issues to selected charities without incurring brokerage commissions. During the 30-day offer, McDonald’s made matching donations equal to the value of all shares donated, up to a combined maximum of $100,000 worth of stock—all to attract and retain small individual investors. New challenges will undoubtedly arise, but the company seems to have plenty to look forward to.

Principal Subsidiaries

McDonald’s Deutschland GmbH; McDonald’s Development GmbH; McDonald’s Hamburgers Limited; McDonald’s Italia Sri.; McDonald’s Restaurants of Canada Ltd.; McDonald’s Restaurants (Hong Kong) Ltd.; McDonald’s Sistemas de España; McDonald’s System of Australia Ltd.; McDonald’s System of France SARL; McDonald’s System of New Zealand Ltd.