Grinding It Out (20 page)

Pretty heady stuff. But there was real substance under all the hoopla. We had our first stock split in April 1966, and I told our first annual stockholders meeting as a public company the following month that we had created a new American institution. I also stressed that it was our strict adherence to moral principles in business that made us so strong.

The steady expansion of our business had another effect, one we hadn't foreseen. We simply outgrew our red-and-white tile buildings. There also appeared to be a movement among our customers away from the idea of eating in their cars. So we decided to experiment with larger buildings and inside seating. As Jim Schindler declared in a presentation he made on the subject, “It's obvious that our present equipment will not support the kind of volume we are going to do.”

Our first store with inside seating opened in Huntsville, Alabama, in July 1966. It was pretty primitive compared to the kind of seating we have now—a narrow counter with stools and a couple or three small tables—but it was a big step forward.

I had put Luigi Salvaneschi in charge of real estate in California when Bob Whitney left us, a choice that was greeted with a lot of headshaking and raised eyebrows back in Chicago. But they didn't know Luigi like I did. He had taken over the first McOpCo store I built when I moved to California in 1961, the Manhattan Beach unit, and he ran it like a veteran. Luigi was always after me to improve the architecture of our buildings.

“Mr. Kroc, California is setting the trend for the rest of the country in community planning,” he'd say. “How can we go into these towns and propose to put up these slant-roof buildings, which are absolute eyesores?”

I'd usually wind up getting mad and throwing him out of my office when he started carrying on about aesthetics and Michelangelo and blah, blah, blah. Yet, down deep, I knew he was right. The time was coming that we were going to have to make a major change in the appearance of our buildings. But I was biding my time, letting the need ripen, because I knew that this was going to mean a big battle between Harry Sonneborn and me. I could smell it coming, and I wanted to be ready for it on every front when it happened.

 

13

There is a cross you must bear if you intend to be head of a big corporation: you lose a lot of your friends on the way up.

It's lonely on top.

I never felt this so keenly as when Harry Sonneborn and I had our final confrontation, and he resigned.

Recalling the various elements of this situation is like thinking about a set of Chinese boxes, each one nesting inside another. When the last one is removed, you are left with an empty box, a sense of loss.

Harry was in poor health. He had a chronic bad back. He also had severe diabetes. Once he was laid up with his back for a whole week in some remote little town in western Canada. He couldn't be flown out; he had to be put on a train. No taxis or rental cars in the town, so he bought a Cadillac, paid cash for it, and had his wife drive him to the railhead. They probably still talk about the incident in that town. Due to his illness, toward the end of 1966, Harry was spending more and more time away from the office. He'd stay for weeks at a time at his wife's home down in Mobile, Alabama.

That was the first box.

Another was the division of loyalties among the executives in our office into the Kroc people and the Sonneborn people. This situation was aggravated by a conflict between Harry and me over the appointment of executive vice-presidents. I had demanded that Fred Turner be made an executive vice-president. Harry's price for it was that Pete Crow be made one, too. Well, it was a dumb situation, but I had to go along with it. Dick Boylan was executive VP in charge of the budget and accounting; Pete Crow was head of new store development, which included real estate, construction, and licensing; and Fred Turner was in charge of the retail end, including operations, advertising and marketing, and equipment. Later on Fred took over licensing from Pete. Staffers referred to this three-headed setup as the “troika,” and I never found anyone who was happy with it. The three executives were supposed to be equal in authority. The problem, however, was that Harry kept hold of the purse strings himself, and what the situation boiled down to, except with Boylan, was responsibility without authority.

Inside that box were several others having to do with Harry's direction of the company on a course that was completely opposite to the tack I wanted it to take. These ranged all the way from compensation for staffers to proposals that the arches be removed from new buildings. I approved taking them off, but as soon as Harry saw the plans, he'd say, “Put the goddam arches back!”

The most important problem I had with Harry, however, was his growing conservatism in real estate development. He was listening to bankers and others who told him the country was heading into a recession in 1967 and that McDonald's ought to conserve cash and hold down its construction of new stores.

Finally Harry put a moratorium on all new store development. No more construction. I was opposed to it, but when Luigi came into my office wringing his hands and complaining, I really couldn't give him any direction.

“Mr. Kroc, what am I going to do?” he asked. “I have thirty-three locations in the works. They are all good ones. We can't afford to lose them. What shall I do?”

“Tell 'em something vague, Luigi. String 'em along,” I said. “I'm going to Chicago and see what I can do.”

I was in our LaSalle Street offices the next morning waiting for Harry. When he came in we went at it hammer and tongs. I forced the issue all the way, with the result that he resigned. It was a hell of a mess, and I stewed about it all the way back to California.

I felt I needed legal advice, but I didn't want to go to Chapman & Cutler. They are a fine law firm, and I'm sure their opinion would have been honest and aboveboard. However, I thought that they were influenced too much by Harry, and I made up my mind that they wouldn't represent McDonald's in the future. So I called Don Lubin of Sonnenschein Carlin Nath & Rosenthal in Chicago and asked him to come out and talk to me. Don had done some personal legal work for me, and his firm had represented McDonald's in some matters early in our development.

Lubin's advice was that I try to patch it up with Harry. He knew that Harry was very close to the financial community, and he felt that a sudden resignation by this key individual seemed almost certain to hurt McDonald's. So I asked him to talk to Harry and try to get him to stay, although I really didn't think it was going to work. I also told Lubin that I wanted his firm to begin representing McDonald's, and I wanted him to go on our board of directors.

Harry agreed to stay, but it was an unhappy situation for both of us. He continued to spend more time in Alabama than he did in Chicago, and I felt he was just going through the motions of running the company. But it's true that his health was getting worse all the time. Finally we agreed he would resign. Based on his employment agreement, he would be paid $100,000 a year. Harry had a substantial chunk of McDonald's stock, but he was so certain the company would go down the chute when he left that he sold it all. He wanted the money, I'm told, to go into the banking business in Mobile. But it's a shame, because although the sale gave him a few million dollars at the time, the stock subsequently had a series of splits that made each share worth ten times as much. Had he kept it, his stock would be worth over $100 million. So his lack of faith in us was very costly for him.

I really had my work cut out for me now. I took the title of president and chairman of the board, and I removed that 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, 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 on it right away and be in there before the competition. Pump some money and activity into a town, and they'll remember you for it.”

I also had to deal with the morale problem in our office. Much of the rift was healed as soon as Harry left. In fact, I heard one of our top execs quoted as saying, “Hooray, we're back in the hamburger business!” But we had been losing some good people as a result of the strained situation, and I didn't want to lose any more.

The guy I was chiefly concerned about was Fred Turner. He was extremely unhappy with his role in the “troika,” and he had been sending out signals to indicate it. I knew that he had been getting a lot of telephone calls from other franchise operations. He'd had several very good offers for top positions. So before Harry's resignation was formally announced, I took Fred to dinner at the Whitehall.

“Fred, I know you have been unhappy lately,” I told him. “I realize you have felt frustrated in your work. But I want to tell you something in complete confidence. Harry has resigned. I am going to take his title and do some fence mending and some ass kicking. This will take about a year. At the end of that year, I am going to make you president of McDonald's.”

You could have toasted a McMuffin in the light of that smile of Fred's.

Then his face clouded, and his eyes bulged with anger. He hit the table with his fist so hard the silverware danced, and nearby diners flinched in alarm. “Dammit, if you knew about this frigged-up situation in the office, why didn't you do something about it?” he rasped.

For once in my life, I didn't answer fire with fire. I felt like a father who has failed to stick up for his son, and there was no way I could explain to Fred the kind of tightrope I'd been on with Harry. So I told him to calm down, and one day he would figure it out for himself. Now I'm not so sure that's true, because Fred has no patience with office politics, and Harry's methods would be as foreign to him as they were to me. Anyhow, he couldn't stay mad for long. He was too happy. He said he was as glad about the resolution of the situation in the office as he was over being promised the presidency. I was relieved, because the rest of our conversation that evening showed that I had been a lot closer to losing Fred than I'd suspected.

A few of our executives left when Harry resigned, notably Pete Crow, who went back to his native Alabama to join a fast-fish chain called Catfish Hattie. But the thing we feared most—that a shattering loss of faith in McDonald's might run through the financial community when Harry departed—simply didn't happen. Dick Boylan moved right in behind Harry and kept the ball rolling for us with the bankers and the financial analysts. Dick had worked with these people all along, of course. Harry would initiate deals, but he left the detail work to Dick. So we had no problems. Office politicians and gossips had Dick figured as a Sonneborn man who would either quit when Harry left or when he himself didn't get the presidency. I knew Dick was above that though, and I think he understood that I would never appoint another president of McDonald's who didn't have a strong background in operations. So I pitched him the ball of chief financial officer, and he hit it over the grandstand.

Dick knew that I consider most of the language of high finance to be mumbo-jumbo. That bothered him, and he wanted to educate me a little bit. Also, he wanted to give the analysts the benefit of some of my sales message about McDonald's. Aloyis Sonneborn used to say I was the only guy she knew who could make a hamburger sound as appealing as filet mignon. I considered that a high compliment, because she is a woman of flawless good taste. Anyhow, Boylan started taking me to meetings with the analysts, and I enjoyed it. I came to appreciate their views a little more although I still think a lot of their approach is mumbo-jumbo. I also found that they really enjoyed straight talk about the nuts and bolts of our business.

My biggest task after Harry left the company was to recapture the territory we had granted back in our early and more innocent days to a pair of very smart business heads named John Gibson and Oscar Goldstein. They had an exclusive license like the one Lou Groen had for Cincinnati, but on a much grander scale. Their partnership, Gee-Gee Distributing Company, had the entire District of Columbia and a number of surrounding counties in Maryland and Virginia as an exclusive territory. We couldn't put up a single store in their area. Man-oh-man, that hurt!

Harry had done some dickering with Gibson and Goldstein in an effort to get the area back, but he wasn't willing to pay their price. This rubbed me the wrong way, because I knew we could develop that territory with substantially more than the forty-three stores Gee-Gee had there, and the real estate wasn't ever going to come down in price—no way!

I got my opportunity to corral the two big G's about five months after Harry left, when we met at our national operator's convention at the Doral Hotel in Miami Beach, Florida. They were hard bargainers. Goldstein had been a delicatessen owner in Washington, and Gibson had been an assistant secretary of labor in Truman's administration; so they knew which way the salami was sliced and who had the strongest hand in our negotiations: They did. But I managed to hammer out a deal for a few million dollars more than Harry Sonneborn had been willing to pay.

Gibson and Goldstein wound up getting about $16.5 million in cash. That was a very good dollar, but I didn't begrudge it. I don't stew about what the other guy is making in a deal like this; I'm concerned about whether it is going to be a good thing for McDonald's. Usually there's no reason both sides can't come out winners and be happy.

What we got in return was worth far more to McDonald's than the $16.5 million. We have increased the number of stores in the area from forty-three to ninety. But we also acquired a lot of fine executive talent in the move.