Economics Review: The Founder (2017)

How's a milkshake salesman build a fast food empire with an annual revenue of $700 million? Persistence -Ray Kroc

I recently had the pleasure of watching The Founder, a film that portrays the story of how McDonald’s expanded from a few burger stands to the largest restaurant business in the world. While there are more than 100 critical reviews for this film found on Rotten Tomatoes, in this post I’m going to review a selection of the economic lessons that this film taught me.

--Spoiler Alert--

Process innovation

  • Dick and Mac McDonald had countless ideas that are best described as a process innovations.
  • Developed the Speedy System, a process that gets the patron her food within 30 seconds of ordering or less.  Compared to the previous wait time at burger joints of 30 minutes, this was a 50x to 100x shorter wait time than their competitors.
  • Placement of kitchen stations. Burgers move from the grill clockwise to each station, bun, garnish, bun, wrapping, down a chute to the register.  Check out the video below for a far more beautiful description.
  • Optimize each individual cooking station’s location in the kitchen and techniques used at each station using the scientific method.  The two brothers would take a stopwatch to each station and attempt to shave 5 to 10 seconds off each station's "time to completion" though additional process improvement tests.  All improvements were recorded and the brothers would discuss results after closing.  Their discussions would be framed in the following language, “doing X instead of doing Q saves Y seconds, at only a Z% reduction/improvement in quality.”
  • Limit menu, focus on on the few items that are perennial best sellers (burgers, fries, shakes) only and get those few items to customers quickly and reliably delicious. They understood the “80/20” rule many years before their competitors.
  • Patrons wait in queue rather than in their cars to order their food. This reduces staff costs (no girls on roller skates) and increases the probability that your order is correct.

Technical innovation

  • Serve food in a paper bag and not on plates. Wrap food in a wax paper wrapper for faster consumption (no need to clean plates and cutlery).  Reduce costs by not having dishes to brake.  At the time Kroc first sees a McDonald's burger served in paper bags, he’s unsure of how to eat it.  The film implies this is the first time he’s seen food not served on a plate at a restaurant. A book could be written about this innovation alone.
  • Invented a device that dispenses ketchup and mustard in the correct quantities reliably and quickly.

The challenges of expansion

  • The brothers attempt to franchise McDonald’s, but they were willing to expand at a rate in which they could guarantee quality.  Their expansion was therefore slow.
  • Kroc realized that the brothers focus on maximizing quality per unit of time would result in lower margins. For example, Kroc and his associates realized that if McDonald’s served milkshakes made from powdered milk rather than real milk, they would be able to save on refrigeration costs, improving gross margins.
  • The film helped me better appreciate the inverse relationship between quality and scale.  

The importance of real estate

  • McDonald’s corporation launched a real estate company.  The firm, would purchase land, and lease it back to the franchise, giving them both control and an additional source of revenue aside from franchise fees.
  • Being a large land owner likely gave them access to future loans more easily given bankers' historic love of land as collateral.

Financing risk

  • At first, Kroc had a lot of trouble seeking financing for his firm.  He had a reputation as a sleazy salesman and many bankers were unwilling to provide him with a loan.  As such, Kroc was forced to mortgage his own home to sustain McDonald’s growth.
  • It seemed odd that Kroc wouldn’t have thought to seek private equity backers, but having recently read Shoe Dog (story of Nike’s founding) which took place around the same time as The Founder, Kroc’s decision is less odd.  At the time, there was no private equity industry making growth equity investments and businessmen were forced to finance new businesses with debt.  

Equity valuation

  • There were several moments in the story where Kroc refused to give equity to others.  In his divorce, Kroc gave his wife all assets: home, cash and car, but refused to give her even one share of McDonald's.
  • During a dispute with the brothers, Kroc promises them 1% of all future royalties, but only on the condition that the deal is a "hand shake" agreement and not in the form of written contract.  The brothers agreed and Ray refuses to pay them.  I found this plot twist to be incredible, how the brothers lawyers failed them! 

Authenticity

  • I’ll let Ray Kroc explain: