🍟 1/30/2023 – Ray Kroc: The Father of Franchising

DEEP DIVE 

Ray Kroc: The Father of Franchising

If you’re reading this, you’re likely either a franchisee, a franchise industry professional, or someone considering buying a franchise. Regardless of which persona fits you, you ought to know more about Ray Kroc.

After all, we owe him quite a bit for what he did with McDonald’s. It’s thanks to his work ethic (and risk tolerance) that the world was able to see the power of the franchise model. A model that many have replicated (with varying levels of success) in every industry imaginable. 

Before diving deeper, it’s important to note that he didn’t invent the model. 

A woman by the name of Martha Matilda Harper is the inventor of the modern retail franchise model, which she used to grow a network of hair salons back in the 1890’s (a fascinating story that I’ll likely dive into in the future).

So while Ray Kroc didn’t invent franchising, he sure as hell popularized it, to the point that his name is used synonymously with “franchising” by franchise industry professionals. 

Quick story: To “Kroc It”

I remember my first week on the job in franchising as a young wolf. 

I had just spoken to the owner of ~40 OrangeTheory franchises who was interested in a brand my company was running franchise development for. It was the first time I ever heard of multi-unit franchise ownership, never mind spoken to a multi-unit owner. 

I ran to my then CEO:

ME: “Hey – this guy owns FORTY OrangeTheory franchises! How the heck does someone even do that?!”

CEO: “Uhh..he probably bought 1, and ‘Kroc’d’ it, and now he owns 40. There’s tons of multi-unit owners out there…

I’ve since learned there’s a bigger world of people who have “Kroc’d it” i.e. grown from 1 to many locations, whether as a franchisee, or a franchisor (as Ray Kroc did with McDonald’s).

These folks don’t get the notoriety that other entrepreneurs do, but my podcast Franchise Empires is basically a running list of people currently kroc-ing it or who have already kroc’d it.

Okay, storytime over, back to how Ray put the Kroc in Kroc-it

From Milkshake Machines To McDonald’s

In the early 1950’s, Kroc was a moderately successful working professional as a salesman. He had previously worked for a big supply company of paper cups, in which he sold to paper cups and related products to restaurants. 

But he had recently begun selling “multi-mixers”, a 5 spindle milkshake machine that allowed restaurants to make 5 milkshakes at once, versus the typical single spindle machine. 

Kroc thought it was the next big thing, and would soon be disappointed that he left the stability of selling paper cups for the multi-mixer, which, as it turned out, most restaurants simply didn’t need to make that many milkshakes at the same time.

That all changed though in 1954, at the spry age of 52 years old, when he received word from his secretary June Martino, that a store in San Bernardino had ordered 8 multi-mixers. 

Kroc couldn’t believe it – here he was having a hard time selling single multi-mixer machines, yet a single restaurant wanted 8 machines, implying they’d be making up to forty milkshakes at once!

Rather than just ship the machines to the restaurant, he decided he had to see this for himself, so he drove out to San Bernardino as soon as he could.

Meeting The McDonald’s Brothers

When Kroc pulled up to the restaurant, it was love at first sight.

He introduced himself to the McDonald’s brothers as “the milkshake machine salesman”, and got a tour of the restaurant.

Via the tour, he learned all about the “speedy system”, aka the system the McDonald’s brothers created that combined a specific kitchen setup and nuanced operational structure, so when customers ordered a burger and fries, they’d walk away with a fresh meal in ~15 seconds.

Kroc couldn’t get enough of this concept, and knew what he had to do.

I’ve been in the kitchens of a lot of restaurants and drive-ins selling multimixers around the country, and I have never seen anything equal to the potential of this place of yours. Why don’t you open a series of units like this?

Turns out, they already had 6 franchised locations, but the McDonald’s brothers had no clue how to do quality control. Needless to say, they stopped franchising endeavors to focus on their sole restaurant, and making that 1 location the best it could possibly be.

Kroc’s Impact

While there’s some controversy around this, let’s set the record straight. Kroc is not the founder of McDonald’s.

He didn’t come up with the brand, the original restaurant , or the speedy system. He wasn’t even the first to franchise it, as the McDonald’s brothers already had a few franchisees by the time Kroc met them.

To quote the former McDonald’s chairman, Fred Turner, “The McDonald’s brothers founded the concept, while Ray Kroc founded the company that developed the concept into the largest food service organization in the world”.

Said differently, Kroc is largely responsible for expanding the concept, hence why “to kroc it” has become franchise industry slang for when someone expands a franchise’s number of locations – whether as a franchisee or a franchisor.

Kroc struck a deal with the McDonald’s brothers that saw him in charge of franchising, while the brothers stayed in San Bernardino to run their restaurant.

With the help of Harry Sonneobrn, Kroc formed “Franchising Realty Corporation”. Rather than just collecting a % of the revenue from franchisees, Kroc began reaching out to property owners and buying land, which he then leased to franchisees. 

Rent combined with royalties was (and still is) a killer profit stream for McDonald’s. Like I’ve said before, franchisors run similarly to subscription services, where franchisees pay the franchisor – in this case McDonald’s – a monthly fee to be able to operate the business model & brand.

While this model allowed Kroc to gain serious momentum with McDonald’s, his true genius in expanding McDonald’s successfully lies in the training program he built from scratch.

Hamburger University

In my podcast episode with Scott Marr, founder & CEO of Koala Insulation, a brand that went from 0-350 territories in just a few years – he said the single most important thing as a franchisor is how quickly and effectively you can transfer knowledge to your franchisees, so that they can successfully run the business in their local market. 

Well, Kroc mastered just that by establishing Hamburger University, the training program that taught all franchisees how to operate a McDonald’s, and have uniform methods of preparation that can be repeated every single day.

While there’s limited information on the specifics of the program (naturally, McDonald’s doesn’t want to share it), it’s considered one of the preeminent systems of standardization ever created.

Say what you want about the customer service at McDonald’s today, but you can’t deny that whether you’re in Alaska or Arkansas, a McDonald’s burger is going to taste the exact same. 

Thus, the biggest breakthrough from McDonald’s was never a better burger, or even the speedy system, the biggest unlock was figuring out how to scale flavor.

The co-writer of Ray Kroc’s autobiography Grinding It Out said it best: 

““His greatest skill was as an instinctive leader who brought entrepreneurs into a structure that both forced them to conform to high standards of quality, and service, and freed them to operate as independent business people

Thanks to Kroc’s work, McDonald’s has grown into the world’s most popular fast-food franchise, with over ~40,000 locations worldwide and close to a  ~$200 billion market cap. 

Now that, is Kroc-ing it 👊


FRANCHISE HEADLINES

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Chick-Fil-A has basically created 3 new brands through this venture (Outfox Wings, Because Burger, and Little Blue Menu – where you order from the previous two). I’m not sure I agree with the brand strategy, but hey what do I know compared to Chick-Fil-A’s team?!

The Planet Fitness Business Model

A typical Planet Fitness has 7,500 members, of which only ~10% show up on a given day. In fact, the large majority of their 17,000,000 members worldwide rarely go to the gym. Their business uses a combination of savvy marketing, and an expert use of the franchise model to maximize success. 
Read my case study that I tweeted out yesterday.

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