The Story Behind the Business
Brothers Richard and Maurice McDonald opened the first McDonald’s in San Bernardino, California in 1940 and called it “McDonald’s Bar-B-Q” where they sold mostly barbeque. They followed the typical pattern of the drive-ins of the day by employing a legion of carhops who served an extensive menu of items from their octagonal stand. By the late 1940s, changing economics spurred them to rethink their business model. They realized that most of their profits came from hamburgers, so they decided to streamline the process of making and selling just hamburgers, cheeseburgers, french fries, shakes, soft drinks, and apple pie.
In October of 1948, the McDonald brothers closed their drive-in, fired their carhops, simplified the menu, reorganized the kitchen, and emphasized speed, lower prices and volume. They re-did the restaurant and shortened its’ name to “McDonald’s,” and reopened on December 12, 1948. In doing so they converted their drive-through barbecue restaurant into a quick burger and milkshake restaurant joint. They prepared and sold its burgers, fries and shakes for half the price and in half the time of competing restaurants.
They did this by changing the way that a hamburger shop operated. Instead of waiters and waitresses, they offered counters where customers could order their food. Instead of cooking each meal to order, they prepared their burgers ahead of time and kept the food warm under high-powered heat lamps.
So in 1948, the McDonald brothers turned their restaurant into a hamburger and milkshake restaurant, implementing the first fast food process. Once patrons caught on, the new concept became a run-away success, attracting the attention of the restaurant industry and entrepreneurs. In later memoirs, the brothers would credit their process to Henry Ford, saying that they modeled their restaurant around his car creation assembly lines in Detroit.
The McDonald brothers radically simplified their drive-in and completely reordered food delivery by focusing on quick and efficient self-service. Thus, they set into motion the notion of fast food.
McDonald’s Begins to Franchise
With labor costs slashed and revenue rocketing by the early 1950s, the McDonald brothers saw their profits double. So in 1952, they started franchising, selling their first franchise to Neil Fox, whose Phoenix, AZ franchise opened in 1953. Their second franchise went to Roger Williams and Bud Landon, who opened a Downy, California location also in 1953.
In September 1952 American Restaurant Magazine published an article about a “carry-out” drive-in in downtown San Bernardino, California. The magazine reported how the McDonald brothers had created a self-service system capable of providing a sandwich, beverage, and french fries in 20 seconds. The brothers, according to the article, were also developing a nationwide franchise system that would “soon be made available to the industry.”
The magazine article led to a pilgrimage of entrepreneurs to San Bernardino hoping to franchise or duplicate the success of the McDonald’s system. One pilgrim was Ray Kroc, a milkshake-machine salesman from Illinois. Kroc was 52 years old in 1954 when he was in Los Angeles making routine calls and decided to drive 60 miles east to San Bernardino to see the McDonald’s drive-in.
Kroc was impressed with the operations and had dinner with the McDonald brothers that evening. He discovered that the brothers had already issued franchises for ten other sites in California and Arizona and were looking for someone to franchise their concept in the remainder of the United States. When Kroc flew back to Chicago after his meeting with the McDonald brothers, he was that person. He came back with a freshly signed contract with the McDonald brothers in his briefcase.
Believing the McDonald’s formula was a ticket to success, Kroc suggested they franchise their restaurants throughout the country. The brothers were skeptical, however, that the self-service approach could succeed in colder, rainier climates; furthermore, their thriving business in San Bernardino, and franchises already operating or planned, made them reluctant to risk a national venture. Kroc offered to take the major responsibility for setting up the new franchises elsewhere. He returned home after the meeting with rights to franchise McDonald’s restaurants throughout the country, except in a handful of territories in California and Arizona already licensed by the McDonald brothers. The brothers in exchange were to receive ½ of 1% of gross sales. In 1955, Kroc founded “McDonald’s Systems, Inc.” as a legal structure for franchises.
Ray Kroc Joins the Company, and the Business Model Shifts to Real Estate Holdings
Business format franchising as we know it today began on April 15, 1955. On that day, Ray Kroc opened his first McDonald’s restaurant in Des Plaines, Illinois. This was in fact the ninth opened McDonald’s restaurant overall. Once the Des Plaines restaurant had become operational, Kroc sought franchisees for his McDonald’s chain.
In 1956, Ray Kroc met Harry J. Sonneborn, who offered an idea to accelerate the growth and investment grade of Kroc’s planned McDonald’s operation: Own the real estate that future franchises would be built on. Kroc hired Sonneborn and his plan was executed through forming a separate company called Franchise Realty Corp. which was solely designed to hold McDonald’s real estate. The new company purchased the real estate and leased it to franchisees, passing on all the real estate costs to the franchisees with long-term leases. Then the new company would then own the real estate at no cost to them.
The McDonald’s real estate model of ownership within the franchise persists to this day, likely the most important financial decision in the company’s history. McDonald’s present-day real estate holdings represent $37.7 billion on its balance sheet, about 99% of the company’s assets
McDonald’s grew in 1957 to 37 locations, by 1959 there were 100 locations, and by 1961, there were 228 locations.
In the early 1960s, McDonald’s really began to take off. The growth in U.S. automobile use that came with suburbanization and the interstate highway system contributed heavily to McDonald’s success. In 1961, Kroc’s conflict over the vision of the company with the founding brothers had grown to an unbearable extent, and he asked them how much money they wanted to leave their business to him entirely. The brothers asked for $2.7 million (about $21.6 million in today’s dollars). Kroc was able to raise the money and bought the founding brothers out.
In 1965, McDonald’s Corporation went public and in 1968, McDonald’s opened its 1,000th restaurant, 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.
Today, there are approximately 34,000 McDonald’s restaurants open. 80 percent of them are franchises. 1.8 million people are employed by McDonald’s in 118 different countries.
Ray Kroc Revolutionized Franchising
The McDonald’s system was not the only franchise success story that emerged in the years following World War II. Brands like Kentucky Fried Chicken, International House of Pancakes, Radio Shack, Ramada Inns, Perkins Pancake House, and Midas dotted the streets and highways of America.
In the 1950s and 1960s, the franchising boom achieved almost mystical stature. Franchisors of convenience goods and services grew throughout the United States, including the automotive aftermarket (Midas Muffler and Lee Myles), hotels (Holiday Inn and Sheraton), ice cream and treats (Dairy Queen, Tastee Freeze and Orange Julius), convenience stores (7-Eleven), trades (Roto-Rooter), professional services (Dunhill Personnel, Pearle Vision and H&R Block), and laundry and dry cleaning (Martinizing Dry Cleaning). During the same period, Nate Sherman’s Midas Muffler had grown to 400 locations, Wilson’s Holiday Inn grew to 1000 locations, and Jules Lederer’s Budget Rent A Car opened their 500th franchise.
Although Ray Kroc did not invent the business franchise concept, he did revolutionize it. As John Love explains: “what Kroc was inventing was a unique franchising system, one that set McDonald’s apart from all the other early fast-food franchisors.” Kroc established the format and modeling that guides all successful franchise systems today.
Some Key McDonald’s Corporate History Dates are Listed Below:
1937 – The McDonald brothers start their hot dog stand, getting into the food service business as a team.
1940 – They open their barbecue restaurant in San Bernardino, the world’s first McDonald’s restaurant. There is no current information on whether they sold barbecue rib sandwiches, but we would like to think they did.
1948 – The McDonald brothers turn their restaurant into a hamburger and milkshake restaurant, and in the process are credited with inventing the modern service model of fast food. In later memoirs the brothers would credit their process to Henry Ford, saying that they modeled their restaurant around his assembly lines in Detroit.
1953 – McDonald’s opens its first franchise restaurant in Phoenix.
1954 – Ray Kroc, a traveling appliance salesman, visits the McDonald’s restaurant to discover why a small hamburger shop needs as many milkshake machines as it does. He buys the rights to franchise McDonald’s restaurants across the country.
1955 – Kroc opens his first franchised restaurant, arguably the first restaurant of the modern McDonald’s company, in Des Plaines, Illinois.
1956 – Kroc developed a financial model in which McDonald’s would own the land on which its franchisees build their restaurants. That model continues to this day, and is often considered one of the most significant financial decisions the company has ever made
1960 – Kroc buys out the McDonald brothers for $2.7 million (approximately $22.3 million in 2019 equivalent). The brothers keep their original restaurant, renamed Big M. Kroc later opened a competing McDonald’s nearby that drove them and the first-ever McDonald’s out of business by the end of the decade.
1965 – McDonald’s launches its public stock.
Why Franchisees are “Lovin” McDonald’s
1. Fantastic Training Program
McDonald’s operates Hamburger University (HU), the international training center for the McDonald’s system. With up-to-date courses and manuals, HU ensures that all franchisees will leave the program with full knowledge of the McDonald’s operational system. All franchisees must complete the minimum core training in order to run their franchise location; this is only completed once the franchisee completes the Restaurant Department Management (RDM) curriculum.
The RDM curriculum is deployed through the company’s Learning Management System (LMS), which allows franchisees to track their progress through the course online. Franchisees are also assigned a coach that assists them in any matters related to the completion of the training.
2. A Great Support System
McDonald’s believes in being involved in a business for yourself, but not by yourself. They provide franchisees with the necessary tools to start and succeed in your business. This includes local and national support for all areas of operation, training, advertising, marketing, human resources, real estate, construction, purchasing, and equipment. Help is never far away and corporate responsiveness is key, which is why McDonald’s maintains regional offices throughout the U.S. Kroc emphasized the philosophy that McDonald’s foundation is a “three-legged stool”: one leg is the franchisees, the second is the suppliers, and the third, the employees.
3. Growing Success Stories
Ray Kroc’s overnight success story is inspiring, however, he describes as 30 years in the business being one “long, long night.” Franchises flourish because of the hard work and dedication of their franchisees. When owners and operators devote their full time and passion into their restaurant, they see prosperity over time. Since McDonald’s founding, franchisees have created some of the fast-food chain’s most famous menu items, like the Filet-O-Fish, Big Mac, and Egg McMuffin. Franchisees continue to be an innovative and crucial part of the McDonald’s team, proving that the franchise’s core principles – quality, service, cleanliness, and value – are effective.
4. Major Brand Recognition
McDonald’s has become a household name. It is known all over the world and Kroc’s legacy lives on through how the franchisees promote the brand. Customers know McDonald’s is the choice fast food restaurant for great tasting, affordable meals, as well as fantastic customer service.
5. Serving Smiles and Your Community
Kroc and McDonald’s serves smiles every day with their food and humanitarian actions. Since 1974, the Ronald McDonald House provides comfortable housing for families traveling far for medical care. The Ronald McDonald Care Mobile travels to communities where families and kids need medical, dental, and health care resources the most. Black & Positively Golden is their newest movement that promotes Black Excellence through education, empowerment, and entrepreneurship programs. As a franchisee, you will be making a tremendous difference in other people’s lives.
Initial Franchise Fee: $22,500 – $45,000
According to Item 5 of the McDonald’s FDD, all franchisees must pay a $45,000 initial franchise fee when opening a restaurant. The fee can potentially be refunded if the construction of the location is not complete within one year of the Franchise Agreement signing. However, under other circumstances, the initial franchise fee is nonrefundable.
Monthly Royalty Fees: 4.0%
The royalty fee, or service fee, is to be paid on the 10th day of every month. This is a percentage out of the gross sales, which means all revenues from your sales based upon all business conducted at or from the restaurant, minus sales or use tax.
Estimated Initial Investment Costs: $448,000 – $2,235,000
|Name of Fee||Low||High|
|Initial Franchise Fee||$22,500||$45,000|
|Real Estate and Building (3 months rent)||$60,000||$210,000|
|Signs, Seating, Equipment, and Decor||$310,000||$1,500,000|
|Miscellaneous Opening Expenses||$45,000||$55,000|
|Travel and Living Expenses while training||$3,000||$35,000|
|Additional Funds (3 months)||$80,000||$355,000|
Revenue Range: $557,000 – $12,457,000
This range is based on the achieved sales, profits, or earnings of some McDonald’s restaurant. However, this is only an estimate of how much an individual franchisee may make, but results may differ. There is no guarantee you will sell or earn this much.
McDonald’s offers entrepreneurs the opportunity to make significant capital in an industry that is in a constant state of growth. The startup costs may be high, but the potential revenue gain makes it completely worth it. Plus, McDonald’s will work with you to help you obtain your desired results. You as a franchisee will play a crucial role in the overall success of the McDonald’s brand.
Disclaimer: The above information was derived from the year 2019 FDD of McDonald’s. This data may not reflect the most current information. AskMrFranchise and affiliates are not responsible for any act or failure to act in reliance upon this report, article, data, and/or information. None of the information mentioned above should be used to substitute or replace consultation with legal or other professionals.
By Steve Longo, Tyler Dikun and Jim Notaris