How McDonald's Works

McDonald's, the company that would come to represent what people love or hate about America, has humble roots in the Great Depression. In the 1930s, brothers Dick and Mac McDonald were struggling to make a living running a movie theater in California when they noticed that a nearby hot dog stand always seemed to do a lot of business. With a $5,000 loan, the McDonald brothers started the Airdrome hot dog stand in 1937 [source: Kroc]. By 1940, they moved it from Monrovia to San Bernardino and changed the name to McDonald's Barbeque [source: Young].

Despite success, the brothers wanted to do things better and faster. In a bold move, they temporarily shut down the place in 1948 and reopened with a new, experimental approach. They simplified the menu to focus on burgers, fries and milkshakes and got rid of those characteristic carhops, who were ubiquitous in the industry at the time. Adopting the process that revolutionized the auto industry, the brothers used an assembly line to prepare their food and improve the efficiency of the restaurant. They called it the Speedee System. The restaurant reopened to great success -- their risky move not only paid off but was to soon set the standard for success in the fast food industry.

In the next six years, business was doing so well that the brothers sold 21 franchises and opened nine outlets [source: Gilpin]. The original restaurant was bustling with so much business that the brothers ordered eight Multimixers -- machines that made five milkshakes at one time. The distributor of Multimixers -- a salesman by the name of Ray Kroc -- was so intrigued at this news that he traveled to California to see what the fuss was about.

Amazed and inspired at the success of the McDonald brothers, Kroc wanted in. He had dreams for the potential of McDonald's restaurants and asked Dick and Mac to hire him as their franchise agent. In exchange for licensing the name to him, the brothers would get a percentage of sales.

Kroc opened his first McDonald's restaurant in 1955 in Des Plaines, Ill. After some bumps in the road, Kroc was eventually successful, and in the next five years, he got 200 more restaurants off the ground [source: BBC]. Kroc was dedicated to the Speedee process that made the McDonald brothers so successful, and he used the motto of "quality, service, cleanliness and value." Some people say he was almost obsessed with cleanliness. Kroc often told workers, "If you have time to lean, you have time to clean" [source: Pepin].

Although Kroc's business deal with the McDonald brothers started swimmingly, relations soon soured. At first, Kroc just wanted to sell as many Multimixers as possible. But by 1961, he bought the entire business for $2.7 million. When they gave up rights to the McDonald's name, Dick and Mac reopened their original San Bernardino hamburger joint as The Big M. Kroc, upset over the brothers' refusal to relinquish the original restaurant, opened up a McDonald's restaurant nearby. The Big M was run out of business.­

Soon, using these tactics, Kroc made short work of the rest of the competition. Now in control of McDonald's Corp., he was ready to take on the world. Next, we'll delve into the business side of how Kroc built the McDonald's empire.

You've got to admit -- a lot of people think those fries are darn good. But to understand what made McDonald's Corp. so successful, you have to look at more than the food or Dick and Mac's Speedee System or even to Ray Kroc's dedication and savvy. Kroc himself attributed much of the company's success to a man named Harry Sonneborn [source: Love]. Sonneborn worked for McDonald's for a mere 10 years, but his real estate policies sealed the fate for the immensely successful company.

Let's back up a few years to when Kroc and the McDonald brothers were still working together. For some time after his hire, Kroc was struggling to make the business profitable. He wasn't bringing in enough revenue from his franchised restaurants. Part of his trouble was in getting the funds to pay for the land and the building for the restaurant. In order to maintain control over operations, Kroc needed to franchise one store at a time, rather than a whole slew of stores over a particular geographic zone, which is what other food chains did [source: Love]. Although other chains could attract big investors, the franchisees Kroc attracted didn't have the funds to pay for the land and the building.

That all changed in 1956 when he hired Sonneborn, who convinced him that the real money was in real estate. Sonneborn's idea was to have the McDonald's company lease a plot of land and the building for each restaurant. The company would then sublease to the franchisee who would run the restaurant. Sonneborn further developed the plan to eventually take out mortgages to own both the building and the land. [source: Love]. Kroc soon established the Franchise Realty Corp. to find willing landowners.

­­At first, McDonald's charged franchisees markups of 20 percent of lease costs, but it eventually increased this to 40 percent. Franchisees were responsible for insurance and taxes, ensuring a steady profit for the company as long as the restaurant stayed in business.

­But that's not all: The rent due to McDonald's could be even more if the restaurant was doing well. The franchisee had to pay either the stipulated lease markup or 5 percent of the sales -- whichever was higher. Kroc and Sonneborn also requested up-front security deposits from the franchisees. Unbeknownst to the franchisee, this capital would fund the opening of more restaurants. Overall, this created a symbiotic relationship between the franchisee and the company -- McDonald's Corp. had a vested interest in the ongoing success of its individual restaurants [source: Love].

This business plan gave Ray Kroc the success and leverage he needed to get the loan to buy out the McDonald brothers in 1961. By 1963, Kroc opened his 500th McDonald's restaurant. Also in that year, he introduced Ronald McDonald, a clown originally played by actor Willard Scott, who was famous for playing Bozo the Clown. This marked the beginning of McDonald's instilling brand loyalty in customers at a young age, a practiced it would later be attacked for.

In 1965, the company went public, and Kroc made $3 million. Two years later, he took McDonald's restaurants outside the U.S. to Canada, and eventually to Europe and Asia. His wealth would amass to $500 million in the following 10 years [source: Basic Books]. Twenty years after it went public, McDonald's was included in the 30-company Dow Jones Industrial Average. The McDonald's Web site boasts that the company has been a wise investment, saying about $2,000 worth of stock in 1965 would translate to more than $3 million worth in 2006 [source: McDonald's Corp.].

As we've seen, McDonald's is drenched in the business of real estate as much as it is in food. And, as we've all heard, the three most important elements of real estate are "location, location, location." Back in Kroc's days with the company, he would fly around in a plane or helicopter looking for the best spots to set up McDonald's restaurants. He specifically looked for land near schools and churches in a community [source: Kroc].

Today, as most of us can see, McDonald's restaurants are everywhere. But there's still a method to the madness. McDonald's typically looks for locations that are the most convenient for people -- in malls, near colleges or in airports [source: McDonald's Corp.]. This strategy continues Kroc's tradition of getting to the heart of a community through its gathering places.

Let's get to the nitty-gritty: McDonald's looks for intersections with traffic signals -- typically corners of two well-trafficked streets -- and ample parking. In terms of physical space, developers look for a site larger than 32,000 square feet (9,753 square meters) and a height of 22 feet (6.7 meters) [source: McDonald's Corp.].

After the franchisee and the site are lined up, the restaurant is built. You may have noticed that the architecture of McDonald's restaurants has begun to evolve away from the classic double-sloped roof. Many new restaurants are popping up with sleeker looks. These include restaurants with a cafe-style interior featuring lounge chairs to go along with the McCafe line of specialty espresso drinks. The immortal arches that don the facades have also been replaced by what's known as the "swish eyebrow," a yellow arch over a restaurant [source: Gogoi].

­Today's McDonald's restaurants -- whether cafe-style or not -- still incorporate classic production line procedures in the kitchen. Each employee is typically in charge of a certain task so that orders are filled quickly, but technology has come a long way since Multimixers. New technology has made the process even faster and more convenient for the customer. In the drive-thru, for instance, McDonald's restaurants now have digital displays where the driver can look at his order. Increasingly automated equipment, such as those that dispense drinks and make french fries, has also helped keep things moving faster. These are part of a long line of increasingly efficient practices since Kroc switched from fresh potatoes to frozen fries in 1966.

McDonald's amazed many when some of the restaurants began outsourcing their drive-thru order-taking to call centers. To make sure the right order got to each car, a camera hidden in the drive-thru menu took a photo of the driver placing the order and sent it to the restaurant employee who doled out the food at the pickup window. This innovation proved to increase production and efficiency [source: Fitzgerald].

But technology aside, the business wouldn't have succeeded so well without its famous menu, which we'll talk about next.

Ray Kroc was a stickler for consistency and maintaining control of his restaurants. But, as his restaurants grew in number, he needed a way to efficiently instill his motto of "quality, service, cleanliness and value" into the franchisees who would be running them. So, in 1961, the same year that Kroc bought out the original McDonald's brothers, he established Hamburger University in the basement of a restaurant.

Today, Hamburger University, located in Elk Grove, Ill., has its own facilities and serves as a place where employees can earn a degree in Hamburgerology. It offers students college credit and is respected as a corporate training program [source: CBS.MW]. At Hamburger U. and 22 other training centers throughout the world, students can follow curricula for several career paths, including crew development, restaurant management, mid-management and executive development [source: McDonald's Corp.]. As we'll see, Kroc's faith in the talent of McDonald's managers paid off in spades when it came to several menu inventions.

In the 1960s, McDonald's sought a menu item that would tackle a particular dilemma: lagging Friday sales. Back then, most American Catholics were still abstaining from meat on Fridays throughout the year as a form of penance to commemorate the crucifixion of Jesus (a practice still common in some Catholic populations of the world). As a result, McDonald's was losing Friday customers to competitors like Big Boy, which had a fish alternative. To cater to Catholics, Ray Kroc wanted to introduce the Hula Burger, consisting of grilled pineapple on a bun. But in a test market run, another red meat alternative outperformed the Hula Burger in sales: the Filet-o-Fish. Invented by franchisee Lou Groen, the Filet-o-Fish was the first item added to the original McDonald's menu [source: Clark].

Perhaps the most important item, however, came from Jim Delligatti, the inventor of the Big Mac. This sandwich consists, as the immortal jingle puts it, of "two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun" (with a third bun in the middle to contain the mess). In 1967, McDonald's Corp. granted Delligatti permission to introduce the Big Mac to his McDonald's restaurants in Pennsylvania. By the next year, after his Pittsburgh-area McDonald's restaurants started driving profits from the sandwich, McDonald's Corp. included it on the national menu [source: Reeger]. Needless to say, it was a huge hit for the company.

­The company got another breakthrough in 1973. This time, it was with a radically new item: a breakfast sandwich. The Egg McMuffin was made of a circular, broken-yolk egg with cheese and Canadian bacon on an English muffin. Herb Peterson, the owner-operator of six McDonald's restaurants, had already coined the company's first national ad slogan -- "Where Quality Starts Fresh Every Day" -- when he convinced Ray Kroc to try the sandwich [source: AP]. By perfecting other breakfast selections to accompany the McMuffin and retrofitting restaurants to serve breakfast, McDonald's prepared to venture into the fast food breakfast arena [source: Kroc].

Although the Filet-o-Fish, Big Mac and Egg McMuffin were inspirational concoctions of restaurant operators, the next big-ticket menu item came in a reverse process. Ray Kroc's sidekick, Fred Turner, who was chairman of the company, put in a request for his food supplier in 1979. Turner commissioned a "chicken finger-food without bones, about the size of your thumb" [source: Schlosser]. Food technicians got to work and gave him the Chicken McNugget, made of mostly reconstituted white meat chicken. It was immediately successful after its release in 1983.

But despite the popularity of its food, McDonald's has stirred up controversy.

In the past few decades, McDonald's has come under attack for a variety of perceived offenses. One of the high-profile cases surrounds the temperature of its hot coffee. In the 1992 McDonald's Coffee Case, a customer sued McDonald's after she spilled coffee on her lap and suffered third-degree burns that hospitalized her for eight days. After hearing that McDonald's had received hundreds of other complaints and was previously aware of the problem -- and that its coffee is significantly hotter than homemade -- the jury made McDonald's pay compensatory and punitive damages [source: AAJ].

Another significant scandal had to do with McDonald's french fries. In 1990, when McDonald's announced it would no longer cook fries in beef fat, but rather in vegetable oil, this led many people to believe the fries were vegetarian. Later, vegetarians and Hindus were shocked to learn that the fries contain beef flavoring and sued. Although quick to point out that it never claimed the fries were vegetarian, in 2002 McDonald's agreed to dish out $10 million and apologized for confusion [source: AP].

In 2001, investigative journalist Eric Schlosser made waves with his book "Fast Food Nation." It is often compared to "The Jungle," the 1906 novel that blew the lid off the practices of the meatpacking industry. In his book, Schlosser attacked the fast food industry and targeted McDonald's in particular. He addresses many issues, from obesity to globalization. McDonald's unhealthy food, he claims, has been a major contributor to making America the fattest nation on earth. He also discusses its role in globalization -- what's considered the imperial spread of homogenized, industrialized culture to the entire world. He points to the conditions under which unskilled immigrants work in the meatpacking field and the anti-union tactics of McDonald's. He also attacks the company for instilling brand loyalty in kids from a young age.

Although Schlosser's book was a bestseller and hard-hitting expose´, many of its criticisms were nothing new. For decades, people have been blaming -- and occasionally suing -- McDonald's for what they say is its role in the obesity dilemma and for a slew of other issues. Perhaps most famous is the so-called McLibel Case. As far back as 1986, London Greenpeace started distributing pamphlets entitled "What's wrong with McDonald's."

The pamphlets accuse McDonald's Corp. of several perceived atrocities, including cruelty to animals, selling unhealthy food, targeting children in ads and contributing to the destruction of rainforests. One accusation concerned the company's negative impact on local communities throughout the world. It claims that the practice of buying land in developing countries for use in raising crops or cattle to export to industrialized societies takes away from people in those countries who are in need [source: McLibel Support Campaign].

In what would become the longest trial in England's history, McDonald's sued the two environmentalists for libel in the 1990s. Because the defendants were unable to prove every accusation, McDonald's ultimately won. But the trial was a public relations disaster for McDonald's, and its reputation suffered.

Since the McLibel case, public outcry and pressure on McDonald's has grown slowly but surely. A few years after Schlosser's "Fast Food Nation," McDonald's suffered another blow with "Super Size Me," a documentary by Morgan Spurlock meant to highlight the dangerous health effects of eating an excess of McDonald's food. In it, Spurlock uses himself as a guinea pig as he sets out on a 30-day experiment in which he eats nothing but McDonald's food and avoids exercise. The audience watches as he gains weight and doctors observe his health decline. Although he admits that it's a dramatization of realistic diets, Spurlock includes interviews and commentary that address the problem of obesity in America and the central role that fast food plays.

Despite these enormous setbacks, McDonald's has maintained its popularity. This is due in no small part to its attempts to salvage its damaged public image.

Scandal sells. But, in the midst of the heavily publicized criticism that McDonald's has received in the past few decades, it's important to take note of the positive things that McDonald's has been praised for as well.

First, McDonald's is known for donating heavily to Ronald McDonald House Charities (RMHC). This charity offers lodging to parents so that they can be close to a child who is receiving medical treatment far from home. McDonald's restaurants often include donation boxes where customers can donate to the charity to fund the house, the Care Mobile Program and the Family Room Program -- rooms in hospitals that can include TVs, computers, and kitchens where pediatric patients and their families can relax. Because McDonald's Corp. provides much of the costs to run the global office of RMHC, most of the donations benefit the local chapter or programs [source: RMHC].

McDonald's can counter accusations of perpetuating globalization with the menu adaptations it has made for its restaurants in various countries. In India, for instance, it offers culture-specific selections and got rid of beef to accommodate Hindus who don't eat it. In a process dubbed glocalization, McDonald's attempts to promote its brand while keeping local cultures intact.

­Some people contend that McDonalds does affect the cultures it touches, but rather than hurting them, the restaurants actually benefit these cultures with lifestyle improvements. In "Golden Arches East," author James L. Watson credits McDonald's with raising the standards of bathroom cleanliness in Hong Kong. Before McDonald's started setting up restaurants there in the 1970s, the majority of public restrooms were filthy by some standards. But the popularity of McDonald's restaurants' clean bathrooms caused other restaurants to permanently maintain higher sanitation practices.

In the same book, Watson argues that the introduction of a new kind of food and food service in China encouraged customers to take on better table manners. The exotic experience and atmosphere of McDonald's encouraged patrons to be more polite [source: Kristof]. Standing in line at a restaurant was something new to Hong Kong when McDonald's restaurants came on the scene. Some people say this practice encourages equality over social hierarchy. Watson explains a theory that argues that a sense of equality is developed when both customer and server are standing in this kind of setup [source: Watson].

In response to critics who claim the company has a negative effect on local communities, McDonald's and its supporters argue quite the opposite. The company's Web site touts the work that McDonald's does for communities, providing benefits like jobs and revenue [source: McDonald's Corp.]. Some people contend that globalization -- the very phenomenon that McDonald's is attacked for spearheading -- helps people in developing economies climb out of poverty [source: Meredith].

To help the company climb out of a bad reputation, the McDonald's cleanup crew has been working to improve the public image, which we'll discuss next.

Although people argue about how much McDonald's and other fast food chains are to blame for obesity problems and other issues, it's clear that the accusations have scarred its reputation. As a result, the company has worked to improve its image.

For instance, after "Super Size Me" was screened at the Sundance Film Festival, McDonald's swiftly responded. Before the film had even reached a general audience, the company pulled the "Super-size" option from its stores in an effort to make the menu more health-conscious. In addition, by 2004, it introduced an adult Happy Meal called the Go Active! Happy Meal, consisting of a premium salad, bottled water and a pedometer. This wasn't the first time the company sought the health-conscious demographic. In 1991, it introduced the McLean Deluxe. This sandwich graced the menu only briefly, however, as it failed miserably in sales.

­McDonald's also faced the challenge of improving the perception of the career opportunities it offered. By the 1980s, the term "McJob" was coined to represent a dead-end, low-paying job. Although the term represents any job of this sort, it's based on McDonalds' occupations. After it made its way into common parlance and even the Merriam-Webster and Oxford English dictionaries, McDonald's made efforts to undo this negative reputation.­

­In the 2000s, it launched an advertising campaign to tout the advantages and upward mobility of working at McDonald's. It bragged, "McProspects - over half of our executive team started in our restaurants. Not bad for a McJob" [source: BBC]. McDonald's asked Merriam-Webster and the Oxford English Dictionary to change their definitions of the term "McJob" so it wouldn't offend McDonald's employees. The request cited that more than a thousand crew workers have risen through the ranks to own and operate McDonald's restaurants [source: AP].

Lately, McDonald's has earned respect for its improved animal welfare and environmental policies. The company enforces standards on its meat suppliers, ensuring humane methods for handling livestock -- such as phasing out the debeaking of chickens. It also forbids suppliers from using growth hormones on livestock [source: Capell]. In 2007, McDonald's announced that it would buy coffee only from growers who are certified by the Rainforest Alliance. On top of that, some people argue that fast food is inherently greener than other options due to its efficiency [source: Forbes].

As McDonald's deals with its share of criticism, some people would argue that the business serves up Happy Meals and more to millions of kids and kids-at-heart throughout the world.

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