Read The Very, Very Rich and How They Got That Way Online
Authors: Max Gunther
That may have been the case, indeed.
Once in a while Paulucci outpromoted himself. One year he decided to corner the celery market – quietly buy most of the national crop while it was in season and cheap, then sell it when the season ended and the price went up. Nearly 60 carloads were delivered to Duluth. Only then did Paulucci discover that there wasn’t enough refrigeration capacity in the whole city to hold the monumental load. Nearly half of it perished before he could sell it off.
But his business stayed alive despite such setbacks. He dreamed big dreams for it in the post-war boom. In the mid-1940s he borrowed money, bought out his partner and became sole owner of the odd little company. Deciding the name Foo Young lacked something, he picked a new name that had a ring of imperial grandeur: Chun King. He began advertising in newspapers and Sunday supplements. He enhanced his trade promotions with girlie calendars. He expanded the product line to include chow mein and other oriental dishes. He enlisted the help of his mother to experiment with Italian spicing in the often bland oriental foods (“I’d never even
liked
chop suey myself”), and he continued to push sales upward.
He was now selling to such large national market chains as Food Fair. Somehow he managed to convey the impression that Chun King was a huge, solidly capitalized company with a vast expanse of modern plant buildings. The fact was that the company had little cash, partly because of heavy spending on expansion and promotion, partly because of unfortunate events such as the celery speculation. Paulucci’s office was a cramped little cubicle sheathed with rejected wall-board to save a few dollars a sheet. The old pea-canning plant had burned down and Chun King products were now produced in a war-surplus Quonset hut. But the big buyers seemed to envision Paulucci as the master of a great complex of shining new kitchens, a man whose office was furnished in antique leather and probably had enormous picture windows looking out over Lake Superior.
Paulucci was giving them a picture of the company not as it was but as he dreamed it could be – in fact, as he was certain it would one day become. Optimism is certainly a necessary trait in a promoter.
The Chun King image nearly disintegrated one day. Paulucci was in the office of Food Fair’s head buyer, trying to convince the buyer that the great supermarket chain should stock Chun King instead of competing products. The buyer was prepared to taste-test several oriental canned foods to see whether Chun King’s faint Italian spicing really made a difference. Paulucci pulled out a can opener and pried the lid off a can of chop-suey vegetables.
Lying right on top of the vegetables, hidden from the buyer’s view by the raised can lid, was a cooked grasshopper.
It was the kind of accident that can happen to any food-processing company once in a while, even the biggest. Chun King’s kitchens, though housed in a Quonset hut, were in fact as clean as anybody else’s. But Paulucci was strongly aware, as he gazed horrified at the grasshopper, that his company’s grand image was in mortal danger.
He hesitated for half a second. Then he picked up a spoon, smiled broadly and said, “This looks so good that I’m going to eat the first mouthful myself.” He ate the spoonful, including the grasshopper, with apparent relish.
“It didn’t taste bad at all,” he reported later. The taste was adequately washed away by the fact that Food Fair opted for Chun King.
Thus did the little company grow bigger. Sales began to climb by more than 10% per year, then 20%. Paulucci paid ever-closer attention to the company’s advertising – a natural inclination for any man who made the long climb by the routes of salesmanship and promotion. He made his presence felt so often and so strongly among his ad counselors that many of them couldn’t stand him. “He was always right there looking over my shoulder,” said one New York adman. “Hell, I couldn’t even write a sentence without having him turn it inside out. He drove me nuts.” The Chun King Corporation has changed ad agencies at least a dozen times in its career.
The ad industry’s difficulties with Paulucci stemmed not only from his constant and overwhelming presence but also from his fondness for wild and bizarre promotions. It was his idea that, since Chun King wasn’t wealthy enough to buy nationwide saturation advertising, the company would have to get the most possible mileage out of what little promotion it could afford. This meant the ads had to be unusual, highly memorable. Many of Paulucci’s ad agencies shied away from this notion. They wanted to stick with the safe, the proven.
And so Paulucci flitted from one agency to another, one approach to another until he met Stan Freberg in the late 1950s. Freberg was a promoter much like Paulucci in many respects: a maverick, a believer in trying the unusual. He had made his name as an entertainer specializing in sharp satires of well-known personalities, songs and ideas. Then he had set up a company to produce humorous, satirical radio and television commercials for any company with the guts to try the approach. It was accepted as dogma in the ad industry that humor doesn’t sell products and Freberg was not inundated with clients. But Jeno Paulucci, the Minnesota promoter, was attracted to Freberg and his zany techniques. Against the earnest advice of most of his ad experts, Paulucci hired Freberg to make some Chun King commercials.
The commercials were decidedly noticed. In fact, they became something of a sensation in their day. Many of them satirized other commercials. In one of them, for instance, an announcer stated that nine out of ten doctors recommended Chun King chow mein. The camera panned in on a group of ten doctors, revealing that nine were Chinese.
The makers of commercials thus satirized were not happy. One large company wrote to Paulucci and demanded that he quit using a commercial that poked fun at its own carefully prepared advertising. Paulucci wrote back airily, “We will stop using this commercial immediately after we’re through using it.”
But though some big companies weren’t happy, radio listeners and TV viewers were. They wrote letters by the thousands praising the fresh, self-satirizing approach. They also bought Chun King products. In some test markets sales rose by nearly one-third after a series of Freberg ads appeared.
And Chun King became a big, wealthy corporation at last.
Several times over the years other companies and individual investors had sought to buy into Paulucci’s enterprise. The first offer, back in the 1940s, had been a tender of $25,000 for a half interest. Paulucci needed the cash badly back then, but the company was his baby, and he wanted it to stay his. He turned the deal down. Somewhat later Chef Boy-Ar-Dee offered $4 million for the Chun King Corporation. Paulucci turned that down, too. He knew the price could go higher. Finally, in 1966, he was approached by the R. J. Reynolds Tobacco Company.
Like other cigarette makers, Reynolds was diversifying into new fields of business as fast as it could run. It had set up, among other things, a division called Reynolds Foods, which was busily acquiring smaller companies. Reynolds Foods indicated it would be very happy to acquire Chun King.
Jeno Paulucci was 48 years old and by no means ready to retire. He was in no mood to rush into a deal with Reynolds. He proceeded slowly, quite prepared to turn Reynolds down as he had rejected other suitors in years past. But he felt he wouldn’t mind selling Chun King if a good enough deal could be hammered out. He had other projects to keep him busy – including a small but growing maker of Italian foods and desserts, Jeno’s Inc., which he had set up years before but to which he felt he had never paid enough attention.
He finally sold his baby, Chun King, to Reynolds. The price was $63 million, cash.
Adding that cash to his other business ventures and his personal properties and investments, Paulucci had a net worth comfortably above $100 million. The Minnesota promoter, the kid from the iron mines, had made it into the ranks of the very, very rich.
He had made it by doing what other men said couldn’t or shouldn’t be done. His way had been the maverick’s way, always a little bit off the beaten track.
Once, when Chun King was just beginning to achieve respectable size and status, Paulucci thought it might be a good idea to start acting like a big corporation. In his earlier days he hired employees by hunch, but now he decided to try the more scientific methods preached by business schools. He sent away for a battery of psychological tests. A junior executive was in the process of being hired at Chun King, and Paulucci asked him to take the tests. For fun, Paulucci took the same tests himself, using a false name.
When the results came back from the psychologist, it turned out that the junior executive was a sound man and worthy of being hired. But the other guy who had taken the tests was a washout, unfit for any kind of responsible business position. It was the psychologist’s advice that Chun King would do better without him.
We’ve studied OPM, and now we’ll look at OPW – the technique of getting rich on other people’s work. This technique, in the latter half of the 20th century has reached its fullest and gaudiest flowering in the franchising business.
In a typical franchising operation you begin by developing some product or service that has, or promises to have, a broad popular appeal. You then go out and find men and women to sell it for you. These people become your so-called franchisees, or franchise holders. Each invests money and work to build his own local business based on your product or service. You grant him a license to use your trade name, which you promise will be ballyhooed in a national advertising campaign. You also promise that he will be the exclusive franchisee in his territory. You offer him the benefit of your mass-purchasing power, through which he can get his raw materials or other supplies cheaply. You may also offer him other inducements such as professional help in picking his store or office location.
If this sounds like an elaborate con game, it can indeed be just that. In the middle 1960s, the hot, bright summer of the franchising business, many unwary citizens got suckered into deals that were pure swindle from front to back. Dozens of scruffy little franchising companies sprang up promising fast and fabulous riches to their lucky franchisees. The only people who got rich were the companies’ organizers. Many such companies stayed in business only a couple of years and perhaps never intended to stay longer. They extracted stiff licensing fees from hopeful franchisees, spent a year or so going through businesslike motions, then folded up – with the fees still in the organizers’ pockets. Others stayed around a little longer – just long enough to go public and get their stock prices bulled up. With the prices at dizzy levels, the organizers sold out and vanished into the night from which they’d come, leaving everybody else holding an empty bag.
As Phineas T. Barnum once noted, you can’t fool all the people all the time. The American public wised up quite rapidly, and by 1970 the franchise fever had cooled. A faint, nasty odor still lingers around the business, but by and large it can be said that most of the companies still surviving are honest. Not all profitable, but at least honest.
A well-run franchising operation does in fact offer a good deal on both sides of the handshake. Franchiser and franchisee alike can make money. The franchisee, as a small-time businessman, can work his way up toward the $100,000-a-year income bracket with luck, sweat and patience. The franchiser, the big-time man with hundreds of thousands of small-timers working on his behalf as well as their own, can, of course, grow a lot richer.
Of all franchising industries now operating in the country, the fast-food business may be the most colorful. It has included some of the shoddiest swindles as well as some of the most egregious successes. Among the latter is McDonald’s, huge and ubiquitous purveyor of hamburgers.
McDonald’s was built by a man named Ray Kroc, whose discouraging early life gave no hint that he would ever make the big time. His own and his company’s stories are told here by
New York Times
reporter J. Anthony Lukas.
by J. Anthony Lukas
As is his custom on Wednesday afternoons, Bob Jennings of Joplin, Missouri, left his McDonald’s restaurant . . . early on May 5 and, with five other Joplin businessmen, drove down to Table Rock Lake, where he owns a mobile home. After fishing awhile for bigmouth bass, Bob and his friends put some steaks on the outdoor grill and settled back with drinks to hear the evening news.
Only then did they learn that a few hours after they’d left Joplin a tornado had roared up from the southwest and ripped a path several blocks wide through the heart of town killing one person, injuring 60 and causing damage later estimated at $2 million.
Three thoughts raced through Bob Jennings’s mind: Were his wife and children all right? Was the restaurant damaged? And was his crew getting free hamburgers and coffee out to the victims and rescue workers (standard operating procedure for a McDonald’s restaurant in a disaster area)? A quick phone call set his mind at rest on the first two counts: The Jennings family was fine and the restaurant unscathed. To Bob’s mild annoyance, though, his crew couldn’t get their food past the police lines.
But the next day brought an unexpected bonanza. Schools were closed and, with little else to do in this slow-paced old mining town, hundreds of schoolchildren streamed down to Joplin’s only McDonald’s. Moreover, farmers and villagers from miles around flocked into town to inspect the tornado damage, and many of them ended up at McDonald’s, too. By the end of the day Bob Jennings counted $500 more than usual in his cash drawers.
In the brisk, upbeat world of McDonald’s, every disaster presents an opportunity. If a high-school football star is stricken by cancer – as one was recently in Trenton, New Jersey – name a day in his honor and donate the proceeds toward his hospital bills. If fire destroys a Goodwill Industries clothing warehouse – as it did in St. Petersburg, Florida – designate McDonald’s as a collection point for donated clothing. If Frump-Frump the Elephant dies – as he did at the zoo in Roanoke, Virginia – offer to buy another elephant.
And if all else goes wrong, trust in Providence, which somehow seems to smile down on the Golden Arches.
Elsewhere along the frenetic superhighway of fast-food franchising, last year’s economic cyclone wreaked havoc. In part this was a natural reaction to the absurd speculation in such enterprises, which dazzled investors in 1968 and 1969. Many of the companies that rode the crest of the bull market had little more than a celebrity’s name (Bart Starr, Mickey Mantle, Johnny Carson, Joe Namath, Minnie Pearl). Some reported huge “earnings” before a single outlet was opened by totalling their stiff initial franchise fees. Others made most of their profit by selling franchisees everything from mustard to paper cups – a practice that, recent court rulings suggest, may violate the antitrust laws.
So, when the recession hit, the fast-food market collapsed like a soggy, overloaded paper cup. Lum’s, a star performer that sold as high as 331⁄2 on the New York Stock Exchange, was down to 6 in [mid-1971]. Dunkin’ Donuts, once at 331⁄4, was down to 13. Minnie Pearl Fried Chicken (now Performance Systems, Inc.) hit 23, then sank to 121⁄2 cents – less than a bag of its chicken costs.
But McDonald’s has proved as invulnerable to recession as it has to tornadoes. Although the cost of its hamburgers has increased only five cents (from 15 cents to 20) in 16 years, its other vital statistics have grown recently by about one-third a year. In 1970 sales reached $587 million, a 33% increase over 1969 (1971 first-quarter sales were up a staggering 40% over the comparable period last year). In 1970 McDonald’s was the nation’s seventh largest server of food, trailing only the army, the Agriculture Department, the navy, Kentucky Fried Chicken, the Marriott Corporation and ARA Services, a vending-machine and institutional food-service company. It opened a record 297 restaurants during 1970 and 50 more during the first quarter of 1971, bringing its total outlets to 1642 (most of them franchised, but 397 owned and operated by the company itself). Already operating in Canada, Costa Rica, Puerto Rico and the Virgin Islands, the company [plans new] outlets in Germany, the Netherlands, Japan and Australia. And on May 5 [1971], with its stock selling at 75 – compared with 40 [half a year earlier] – it declared a three-for-two stock split.
But the McDonald’s statistic that has captured the American imagination is its ever-expanding record for selling hamburgers. Emblazoned across the Golden Arches is the slogan “OVER SEVEN BILLION SOLD.” At the current rate of four million a day, that sign . . . [will need to be changed often].
The McDonald’s people revel in the sensuous feel of figures that large. Cooper and Golin, their inventive public-relations firm, keeps trying to come up with a graphic expression for billions of hamburgers. In July 1969, when the five-billion mark was reached, Cooper and Golin said that if all those hamburgers were shot into orbit, they’d form almost 13 rings around the earth at its broadest point. When sales passed six billion in May 1970, the public-relations men said that many hamburgers would fill more than 2041 747 jets with all seats and equipment removed. And at seven billion [in] January [1971] they came up with a whole slew of comparisons: If a man ate a hamburger every five minutes, he’d have to live 70,000 years to eat them all; if all the flour for the buns were spread out, it would coat everything east of the Mississippi; and if all seven billion were piled into Illinois, everybody in the state would be ankle-deep in hamburgers.
Traveling the nation’s highways these days, one often feels at least hubcap-deep in hamburgers. Some New Yorkers have the strange idea that the hot dog is the all-American food, but franchisers scoff at the weenie. “The hot dog is New York, not American,” says one authority. “They’re Coney Island or Yankee Stadium. How many places west of the Hudson specialize in them? Dog ‘n’ Suds, Lum’s (‘Hot Dogs Steamed in Beer’) and maybe a few more. Hell, there are more pizza joints.”
But hamburgers are everywhere: Burger Chef, Burger King, Bog Boy, Wimpy’s, Gino’s, White Castle, White Tower, not to mention McDonald’s. For the Texas rancher, the Iowa farmer, the Detroit construction worker and the tourist on the road anywhere, it is the all-American snack.
Originally, gastronomes say, hamburger came from the medieval Baltic states, where people liked to eat raw beef shredded with a dull knife. Traders from the Hanseatic League brought it to Hamburg, where it is still a favorite dish under the name “steak tartare.” Then, as “hamburger”, it was brought to America by German immigrants who settled in St. Louis, Milwaukee and Chicago. The broiled and bunned version we now know was probably first served in 1904 at the Louisiana Purchase Exposition in St. Louis.
But not until the 1920s, when Walter Anderson and Edgar Waldo (Billy) Ingram founded White Castle, did Americans start eating hamburgers in large numbers. Ingram recalled in a 1964 speech that 50 years ago one could ride all day through New York “without seeing a single hamburger sign.” White Castle had to “break down a deep-seated prejudice” against chopped beef, he recalls, and “sell the romance of the hamburger.” They succeeded beyond their wildest dreams. Modeling their stands after Chicago’s water tower, they chose “white for purity” and “castle for strength.” Their hamburgers were cute little 2½-inch-square patties so thin they would break if you tried to lift them from the bun; yet there are still those who swear by them and follow the chain’s admonition, “Buy ‘em by the sack”.
But White Castle owns and operates each of its 113 outlets. The mass marketing of hamburgers had to await the application of franchising techniques to the food-service field, which began in earnest in the early Fifties. It was back in those days that Harland Sanders, a dropout from the seventh grade who’d tried his hand without great success at streetcar conducting, piloting a ferry boat, stoking fires on the railroad and selling insurance, began attracting wide attention for the unusually tasty chicken he served in his restaurant in Corbin, Kentucky. Putting a couple of pressure cookers and a bag of seasoning in his car, he hit the road offering to cook up a mess of his chicken for any likely-looking restaurant he came to. Today there are 3100 of Colonel Sanders’s Kentucky Fried Chicken outlets in the United States.
Ray Kroc’s early career was strangely like the colonel’s, suggesting that a genius for fast food may grow best in a man who has knocked about on the road himself, snatching opportunity – a sale, a deal, a job, a meal – where he can. After dropping out of high school as a sophomore, Kroc played piano with several traveling bands, served as musical director of a Chicago radio station, sold real estate in Florida and paper cups in the Midwest. He knew failure. “After the Florida boom collapsed, I was stone-broke,” he recalls. “I didn’t have an overcoat, a topcoat or a pair of gloves. I drove into Chicago on icy streets. When I got home, I was frozen stiff, disillusioned and broke.”
In 1937 Kroc went into business for himself as head of a small Chicago company that distributed Multimixers – machines that could mix five malted milks at one time. In 1954 he discovered that a small restaurant in San Bernardino, California, run by Mac and Dick McDonald, had eight of his machines. Nobody else had that many, and Kroc decided he had to see the McDonald operation for himself. He went to San Bernardino and quickly realized what a gold mine the McDonald’s had stumbled on. “They had people standing in line clamouring for those 15-cent hamburgers,” he recalls, still with wonder in his voice. Kroc asked the McDonald’s why they didn’t open more restaurants. “I was thinking about Multimixers, not hamburgers then; if every McDonald’s had eight Multimixers, I’d soon be rich.” But Dick McDonald shook his head and pointed to a nearby hill. “See that house up there?” he said. “That’s home to me, and I like it there. If we opened a chain, I’d never be home.”
Ray Kroc saw his opportunity and grabbed for it. The McDonalds quickly agreed to let him franchise their outlets anywhere in the country in exchange for one-half of 1% of the gross receipts. Kroc began deliberately. His first McDonald’s – which he owned himself – opened in Des Plaines, Illinois, a Chicago suburb, on April 15, 1955. The second, in Fresno, California, opened that September, and the third, in Resada, California, in December. But soon the pace picked up. By 1960 there were 228 McDonald’s restaurants, and about 100 were opened each year until 1968, when the rate increased to more than 200 a year.
In 1961 Kroc bought the contract – along with the name, all trademarks, copyrights and formulas – from the McDonalds for $2,700,000. Since then he has had little contact with the brothers whose name his company bears. When I asked him about them recently, Kroc said, “Well, I talked with Dick on the phone about a year ago. But I don’t see them. They’re younger than I am, but they quit. I can’t have any anchor hanging on to me. When you’re green, you’re growing; when you’re ripe, you rot.”