Devotion to a new faith

BECOMING A FRANCHISEE IS an odd combination of starting your own business and going to work for someone else. At the heart of a franchise agreement is the desire by two parties to make money while avoiding risk. The franchisor wants to expand an existing company without spending its own funds. The franchisee wants to start his or her own business without going it alone and risking everything on a new idea. One provides a brand name, a business plan, expertise, access to equipment and supplies. The other puts up the money and does the work. The relationship has its built‑in tensions. The franchisor gives up some control by not wholly owning each operation; the franchisee sacrifices a great deal of independence by having to obey the company’s rules. Everyone’s happy when the profits are rolling in, but when things go wrong the arrangement often degenerates into a mismatched battle for power. The franchisor almost always wins.

Franchising schemes have been around in one form or another since the nineteenth century. In 1898 General Motors lacked the capital to hire salesmen for its new automobiles, so it sold franchises to prospective car dealers, giving them exclusive rights to certain territories. Franchising was an ingenious way to grow a new company in a new industry. “Instead of the company paying the salesmen,” Stan Luxenberg, a franchise historian, explained, “the salesmen would pay the company.” The automobile, soft drink, oil, and motel industries later relied upon franchising for much of their initial growth. But it was the fast food industry that turned franchising into a business model soon emulated by retail chains throughout the United States.

Franchising enabled the new fast food chains to expand rapidly by raising the hopes and using the money of small investors. Traditional methods of raising capital were not readily available to the founders of these chains, the high school dropouts and drive‑in owners who lacked “proper” business credentials. Banks were not eager to invest in this new industry; nor was Wall Street. Dunkin’ Donuts and Kentucky Fried Chicken were among the first chains to start selling franchises. But it was McDonald’s that perfected new franchising techniques, increasing the chain’s size while maintaining strict control of its products.

Ray Kroc’s willingness to be patient, among other things, contributed to McDonald’s success. Other chains demanded a large fee up front, sold off the rights to entire territories, and earned money by selling supplies directly to their franchises. Kroc wasn’t driven by greed; the initial McDonald’s franchising fee was only $950. He seemed much more interested in making a sale than in working out financial details, more eager to expand McDonald’s than to make a quick buck. Indeed, during the late 1950s, McDonald’s franchisees often earned more money than the company’s founder.

After selling many of the first franchises to members of his country club, Kroc decided to recruit people who would operate their own restaurants, instead of wealthy businessmen who viewed McDonald’s as just another investment. Like other charismatic leaders of new faiths, Kroc asked people to give up their former lives and devote themselves fully to McDonald’s. To test the commitment of prospective franchisees, he frequently offered them a restaurant far from their homes and forbade them from engaging in other businesses. New franchisees had to start their lives anew with just one McDonald’s restaurant. Those who contradicted or ignored Kroc’s directives would never get the chance to obtain a second McDonald’s. Although Kroc could be dictatorial, he also listened carefully to his franchisees’ ideas and complaints. Ronald McDonald, the Big Mac, the Egg McMuffin, and the Filet‑O‑Fish sandwich were all developed by local franchisees. Kroc was an inspiring, paternalistic figure who looked for people with “common sense,” “guts and staying power,” and “a love of hard work.” Becoming a successful McDonald’s franchisee, he noted, didn’t require “any unusual aptitude or intellect.” Most of all, Kroc wanted loyalty and utter devotion from his franchisees – and in return, he promised to make them rich.

While Kroc traveled the country, spreading the word about McDonald’s, selling new franchises, his business partner, Harry J. Sonneborn, devised an ingenious strategy to ensure the chain’s financial success and provide even more control of its franchisees. Instead of earning money by demanding large royalties or selling supplies, the McDonald’s Corporation became the landlord for nearly all of its American franchisees. It obtained properties and leased them to franchisees with at least a 40 percent markup. Disobeying the McDonald’s Corporation became tantamount to violating the terms of the lease, behavior that could lead to a franchisee’s eviction. Additional rental fees were based on a restaurant’s annual revenues. The new franchising strategy proved enormously profitable for the McDonald’s Corporation. “We are not basically in the food business,” Sonneborn once told a group of Wall Street investors, expressing an unsentimental view of McDonald’s that Kroc never endorsed. “We are in the real estate business. The only reason we sell fifteen cent hamburgers is because they are the greatest producer of revenue from which our tenants can pay us our rent.”

In the 1960s and 1970s McDonald’s was much like the Microsoft of the 1990s, creating scores of new millionaires. During a rough period for the McDonald’s Corporation, when money was still tight, Kroc paid his secretary with stock. June Martino’s 10 percent stake in McDonald’s later allowed her to retire and live comfortably at an oceanfront Palm Beach estate. The wealth attained by Kroc’s secretary vastly exceeded that of the McDonald brothers, who relinquished their claim to 0.5 percent of the chain’s annual revenues in 1961. After taxes, the sale brought Richard and Mac McDonald about $1 million each. Had the brothers held on to their share of the company’s revenues, instead of selling it to Ray Kroc, the income from it would have reached more than $180 million a year.

Kroc’s relationship with the McDonalds had been stormy from the outset. He deeply resented the pair, claiming that while he was doing the hard work – “grinding it out, grunting and sweating like a galley slave” – they were at home, reaping the rewards. His original agreement with the McDonalds gave them a legal right to block any changes in the chain’s operating system. Until 1961 the brothers retained ultimate authority over the restaurants which bore their name, a fact that galled Kroc. He had to borrow $2.7 million to buy out the McDonalds; Sonneborn secured financing for the deal from a small group of institutional investors headed by Princeton University. As part of the buyout, the McDonald brothers insisted upon keeping their San Bernardino restaurant, birthplace of the chain. “Eventually I opened a McDonald’s across the street from that store, which they had renamed The Big M,” Kroc proudly noted in his memoir, “and it ran them out of business.”

The enormous success of McDonald’s spawned imitators not only in the fast food industry, but throughout America’s retail economy. Franchising proved to be a profitable means of establishing new companies in everything from the auto parts business (Meineke Discount Mufflers) to the weight control business (Jenny Craig International). Some chains grew through franchised outlets; others through company‑owned stores; and McDonald’s eventually expanded through both. In the long run, the type of financing used to grow a company proved less crucial than other aspects of the McDonald’s business model: the emphasis on simplicity and uniformity, the ability to replicate the same retail environment at many locations. In 1969, Donald and Doris Fisher decided to open a store in San Francisco that would sell blue jeans the way McDonald’s, Burger King, and KFC sold food. They aimed at the youth market, choosing a name that would appeal to counterculture teens alienated by the “generation gap.” Thirty years later, there were more than seventeen hundred company‑owned Gap, GapKids, and babyGap stores in the United States. Among other innovations, Gap Inc. changed how children’s clothing is marketed, adapting its adult fashions to fit toddlers and even infants.

As franchises and chain stores opened across the United States, driving along a retail strip became a shopping experience much like strolling down the aisle of a supermarket. Instead of pulling something off the shelf, you pulled into a driveway. The distinctive architecture of each chain became its packaging, as strictly protected by copyright law as the designs on a box of soap. The McDonald’s Corporation led the way in the standardization of America’s retail environments, rigorously controlling the appearance of its restaurants inside and out. During the late 1960s, McDonald’s began to tear down the restaurants originally designed by Richard McDonald, the buildings with golden arches atop their slanted roofs. The new restaurants had brick walls and mansard roofs. Worried about how customers might react to the switch, the McDonald’s Corporation hired Louis Cheskin – a prominent design consultant and psychologist to help ease the transition. He argued against completely eliminating the golden arches, claiming they had great Freudian importance in the subconscious mind of consumers. According to Cheskin, the golden arches resembled a pair of large breasts: “mother McDonald’s breasts.” It made little sense to lose the appeal of that universal, and yet somehow all‑American, symbolism. The company followed Cheskin’s advice and retained the golden arches, using them to form the M in McDonald’s.