Authors: Ray Kroc
The reason for going public, in addition to raising capital for the company was to give us some funds ourselves. We had put this tremendous money-gathering machine in motion, and it was running at a fantastic rate. But we hadn't been taking anything out, we were plowing it all back, so as not to slow down the company's expansion.
So Harry spent his days closeted in meetings with bankers, brokers, and lawyers. I was busy trying to decentralize our management structure. We had 637 stores now, and it was unwieldy to supervise them all from Chicago. It has always been my belief that authority should be placed at the lowest possible level. I wanted the man closest to the stores to be able to make decisions without seeking directives from headquarters.
Harry didn't quite see things my way in these matters. He wanted tighter corporate controls, a more authoritarian posture. I maintained that authority should go with a job. Some wrong decisions may be made as a result, but that's the only way you can encourage strong people to grow in an organization. Sit on them and they will be stifled. The best ones go elsewhere. I knew that very well from my past experience with John Clark at Lily Tulip Cup. I believe that
less is more
in the case of corporate management; for its size, McDonald's today is the most unstructured corporation I know, and I don't think you could find a happier, more secure, harder working group of executives anywhere.
My solution to our administrative problem was simply to divide the country into regions. There were to be five of them, but we decided to establish the West Coast Region of fourteen states first, because it was growing faster and was the most difficult to administer from Chicago. I chose Steve Barnes to be our first regional manager.
Steve had joined McDonald's in 1961 from Lou Perlman's company, where he'd sold us paper products. He had come to my attention in 1962 for the pioneering work he was doing in developing frozen french fries in collaboration with a fellow named Ken Strong, who now heads our food research lab in California.
The idea of using frozen french fries appealed to me greatly. It could assure us a continuous supply of the best potatoes, Idaho Russet Burbanks, because we could conceivably purchase and process an entire crop without fear of spoilage. Shipping costs would be a lot lower, and the square boxes of frozen potatoes would be much easier to handle and store than 100-pound bags. It also would eliminate two messy and time consuming tasks in our storesâpeeling the potatoes and blanching them.
There were diehards in our organization who thought that the only good french fry was made from a fresh potato. For them there was something mysterious, almost sacred, in the rites of peeling, washing the starch out, and blanching. I was to blame for this attitude, I suppose, because I had put so much emphasis on it, and I insisted that our classes at Hamburger U. make it a ritual.
But for an operator to insist on peeling his own potatoes in the store instead of using a frozen product was on the same order as insisting on slaughtering his own steers and grinding the hamburger. Not quite as messy, of course, but potato peelings gave us plenty of problems nevertheless. At least one store had failed and some others were in serious difficulty because of potato peelings. These were outlying units in areas where septic tank fields functioned less than perfectly due to the character of the local soil. Our potatoes were peeled by carborundum wheels and the fine waste was washed into the septic system. Whew! what an odor! No stable in the world could stink worse than a rich vein of fermenting potato peelings. And customers tend to avoid a restaurant that's going aswamp in its own sludge.
Of course, the quality of our french fries was a large part of McDonald's success, and I certainly didn't want to jeopardize our business with a frozen potato that was not up to our standard. So we made certain that the frozen product was thoroughly tested and that it met every condition of quality before we made it part of the system.
There was another product being tested at this time that would prove to have a tremendous effect on our business. This was the Filet-O-Fish sandwich. It had been born of desperation in the mind of Louis Groen in Cincinnati. He had that city as an exclusive territory as a result of some horse trading he'd done with Harry and me back in the days when we were using everything but butterfly nets to catch franchisees. Lou's major competition was the Big Boy chain. They dominated the market. He managed to hold his own against them, however, on every day but Friday. Cincinnati has a large Catholic population and the Big Boys had a fish sandwich. So if you add those two together on a day the church had ordained should be meatless, you have to subtract most of the business from McDonald's.
My reaction when Lou first broached the fish idea to me was, “Hell no! I don't care if the Pope himself comes to Cincinnati. He can eat hamburgers like everybody else. We are not going to stink up our restaurants with any of your damned old fish!”
But Lou went to work on Fred Turner and Nick Karos. He convinced them that he was either going to have to sell fish or sell the store. So they went through a lot of research, and finally made a presentation that convinced me.
Al Bernardin, who was our food technologist at the time, worked with Lou on the type of fish to be used, halibut or cod, and they finally decided to go with the cod. I didn't care for that; it brought back too many childhood memories of cod liver oil, so we investigated and found out it was perfectly legal to merchandise it as North Atlantic whitefish, which I like better. There were all kinds of fishhooks in developing this sandwich: how long to cook it, what type of breading to use, how thick it should be, what kind of tartar sauce to use, and so forth. One day I was down in our test kitchen and Al told me about a young crew member in Lou Groen's store who had eaten a fish sandwich with a slice of cheese on it.
“Of course!” I exclaimed. “That's exactly what this sandwich needs, a slice of cheese. No, make it half a slice.” So we tried it, and it was delicious. And that is how the slice of cheese got into the McDonald's Filet-O-Fish.
We started selling it only on Fridays in limited areas, but we got so many requests for it that in 1965 we made it available in all our stores every day, advertising it as the “fish that catches people.” I told Fred Turner and Dick Boylan, both of whom happen to be Catholic, “You fellows just watch. Now that we've invested in all this equipment to handle fish, the Pope will change the rules.” A few years later, damned if he didn't. But it only made those big fish sales figures that much sweeter to read.
I have a pretty well developed set of taste buds, and I can usually predict, as with the cheese on fish, the kind of food combinations the public will like. But once in a while I miss the strike zone. That's what happened with the Hulaburger, which I was taking bets would do better than Filet-O-Fish. The Hulaburger was two slices of cheese with a slice of grilled pineapple on a toasted bun. Delicious! I still have one for lunch at home from time to time. But it was a giant flop when we tried it in our stores. One customer said, “I like the hula, but where's the burger?” Well, you can't win 'em all.
McDonald's had a very good year in 1964, but a pall was cast on it for me by Art Trygg's death from cancer. He had been a wonderful friend, always ready to share a joke or help with a problem. When I went to the office one Sunday and accidentally caught my hand in my car door, lopping off the end of one finger, Art was the one I called to take me to the hospital.
Mental Snapshot:
Art Trygg and I are sitting alone at my favorite table in the dining room at Rolling Green Country Club. I have just asked him to come to work for me, and he gets this peculiar, stricken look on his face. “There's something you don't know about me, Mr. Kroc,” he says, and he proceeds to explain that he is an ex-convict. It seems he drove a beer truck for the old Touhy gang in Chicago during Prohibition and was busted twice. The second time got him a stretch in Stateville Penitentiary. I slap my knee and exclaim, “What the hell, that doesn't matter! You paid for your mistake, so forget about it.” He beams happily and says, “Okay, when do I start?”
I appreciated Art's honesty. I like people who level with me and speak their minds. I always say exactly what I think; it's a trait that's gotten me in trouble plenty of times, but I never have problems getting to sleep at night with a guilty conscience. That's why I could never be a politician. People have told me from time to time that I should run for president. They think I could run the country with the same integrity and sound business sense that I gave to McDonald's. I know it wouldn't work. Not that I think a politician has to be dishonestâbut he has to compromise some things he believes in strongly for the sake of political expediency. I could not do that.
Art's death troubled me in another way, too. I could not help but recall those many bachelor dinners when I would tell him about Joni like some lovesick schoolboy. I was content with Jane. She was a fine lady, but it was Joni I loved and knew I always would.
Fortunately, there was little time to dwell on death and things that might have been. Business was bursting out the tops of our charts. We were entering the year of our tenth anniversary, and it looked like we were just getting started.
In one critical way that was true. We were about to go public, and that boiled down to what had to be the most traumatic ten days our company had ever experienced. Harry and Dick had settled on Paine, Webber, Jackson & Curtis to be the underwriters of the issue, and there had been a lot of bickering back and forth over details of the deal for months. For one thing, the underwriters insisted that we must have one of the “big eight” accounting firms do our books. We had dealt with Al Doty's company in Chicago for ten years. Both Harry and I wanted to continue with him, but they were adamant. Finally, Harry gave in and elected to go with the firm of Arthur Young & Company. Al Doty continued to do my personal accounting and still does, and June Martino's and Harry Sonneborn's, too. Our attorneys on the public offering were Dey Watts and Pete Coladarci from Chapman & Cutler. They worked very closely with Harry, of course, and that relationship was to make me uncomfortable in later dealings with them.
Our big problem was that our “Development Accounting” method was not certifiable, in the opinion of our accountant. So our books had to be completely redone to show what our earnings would have been without that accounting. We had less than two weeks to go back through the transactions of all previous years and bring the financial statements up to date. Gerry Newman and his staff worked virtually around the clock for ten days straight. The report was completed four hours before the deadline and was flown to Washington, D.C. in our company plane. It just made it under the wire.
Our biggest argument with the underwriters was on what the initial selling price should be. We had split the stock a thousand to one by that time, and the underwriters thought we should go out at seventeen times earnings. I wouldn't stand for that. I knew we were worth more, and I stood to lose more than anyone else if we went out too low. Harry agreed. He fought for twenty times earnings, and he made several trips between New York and Chicago trying to get them to see it our way. It was a stalemate. We had come down to the final deadline when I walked into Harry's office and told everyone involved that there was no way we would go for less than twenty. That was a pretty heavy moment. But I meant it; even if we had to flush away all the hours and weeks of effort that had got us to this point, I was determined not to sell McDonald's short. No way!
*Â Â Â *Â Â Â *
So we went on the market at $22.50 a share, and it shot up to $30 before trading ended that first day. The issue was oversubscribedâa tremendous success. Before the first month ended, it had climbed to $50 a share, and Harry, June, and I were wealthier than we'd ever dreamed possible.
Harry was as happy with the outcome as I was, but he wasn't satisfied with having our stock listed over-the-counter. He wanted to see McDonald's up there with the bluest chips on the big board. The New York Stock Exchange had some pretty tough requirements. You had to have so many shareholders in a certain geographic distribution, and you had to have a certain number of round-lot (100 shares or more) shareholders. I really didn't care that much about it. I went along with Harry on the basis that the New York was the class listing, where McDonald's ought to be. But it struck me that some of these folks he was dealing with about it were codfish aristocrats who weren't too sure they wanted to deal with a company that sold fifteen-cent hamburgers. If so, to hell with them! At any rate, we were accepted, and to celebrate, Harry and his new wife, Aloyis, and June Martino and Al Golin all ate hamburgers on the floor of the New York Stock Exchange. Boy! That got terrific coverage in the newspapers. Not only because of the hamburgers, but Aloyis and June were among the first women ever allowed on the floor of the exchange.
This was in July 1966, a year in which we broke through the top of our charts again with $200 million in sales, and the scoreboards on the golden arches in front of all our stores flipped to “OVER 2 BILLION SOLD.” Cooper and Golin sent out a blitz of press releases interpreting the magnitude of this event for a space-conscious public. “If laid end-to-end,” they enthused, “two billion hamburgers would circle the earth 5.4 times!” Great fun. Even Harry Sonneborn got caught up in the spirit of promoting McDonald's, and he pulled off a stunt that made me proud of him. He wanted to have us represented in the big Macy's Thanksgiving Day parade in New York, and he approved the concept of a McDonald's All-American High School Band, made up of the two best musicians from each state and the District of Columbia. Then he hired the world's biggest drum and had it shipped by flatcar from a university in Texas. While it was enroute, and the subject of a lot of publicity generated by the parade's promoters, Harry and Al Golin were having a new drumskin made with
McDonald's All-American Band
printed on it. It was a huge success. So was the introduction of our clown, Ronald McDonald, who made his national television debut in the parade. Harry followed the coup with anotherâsponsoring the first Superbowl telecast.