transcript

Speaker 1:
[00:06] Pushkin. With jerky movements, a golden droid walks up to the counter of a burger restaurant. He turns to his companion, who's lagging behind. R2-D2, hurry up, says C-3PO. At the counter, C-3PO asks for a Star Wars poster. The smiling young server explains that if he buys a large Coca-Cola for 49 cents, the poster's free. The year is 1977, and Star Wars is a sensation in the nation's cinemas. Nowadays we expect any major movie to have a tie-in with a fast food chain. But in 1977, that idea was very new. The burger restaurant? Go on, have a guess. I'm going to guess that your guess was McDonald's. But no, the advert was for Burger Chef. You've never heard of Burger Chef? For a while it was almost as big as McDonald's, and in many ways more innovative. Burger Chef had the Big Chef before McDonald's had the Big Mac. Burger Chef had the Fun Meal before McDonald's had the Happy Meal. When McDonald's introduced the Happy Meal, Burger Chef sued, saying they'd ripped off the idea. Where McDonald's had its clown, Ronald, Burger Chef had a jocular cartoon chef with a chirpy teenage sidekick.

Speaker 2:
[01:58] The Fun Burger, with a surprise prize, only at Burger Chef.

Speaker 3:
[02:03] Incredible!

Speaker 1:
[02:06] If you'd wanted to get into the hamburger business in the United States in the 1960s, you might well have chosen to buy a franchise from Burger Chef, not McDonald's. And when Star Wars fans flocked to your restaurant to buy large Coca Colas, you'd have felt pretty happy about that decision. If someone had told you that Burger Chef was soon to disappear, you might have found that, well, incredible. In the advert, C-3PO and R2D2 excitedly unroll a poster of themselves. Then a chill descends as the sound of heavy mechanical breathing fills the restaurant. C-3PO glances towards the doorway and sees Darth Vader. R2, says C-3PO, I think we'd better leave. In Star Wars, the Rebel Alliance takes on the Empire. It's a story of conflict between two ways of life. One side cares about self-determination. The other side values conformity and control. This is a similar story about burgers. On one side is McDonald's. On the other side, the McDonald's. I'm Tim Harford and you're listening to Cautionary Tales. San Bernardino, California was a fast growing town in the 1940s, 50 miles east of Los Angeles on Route 66 at the edge of the Mojave Desert. On the corner of 14th and E Streets, Dick and Mac McDonald ran a restaurant. It was a small octagonal building with a huge parking lot, enough space for 125 cars. Waitresses, known as Car Hops, shuttled back and forth between the cars and the restaurant, taking orders, bringing food, returning the empty plates. Dick and Mac served a wide ranging menu, but their star attraction was the BBQ Ribs, cooked over hickory chips specially shipped in from Arkansas. The restaurant did well. Dick and Mac bought a house on the hill. Once a year, they each paid a visit to the town's Cadillac dealer to buy a brand new Cadillac. Trading in the Cadillacs, they'd bought the previous year. These year old Cadillacs never had many miles on the clock because the MacDonald brothers never ventured far from San Bernardino. They liked it there. Other people liked it too. The town's population was growing quickly and its demographics were changing. There were more young families with little kids looking for a friendly place to eat. But Dick and Mac saw that those families weren't eating at McDonald's because it had acquired a reputation as a seedy teenage hangout. The car hops flirted with the customers and those teenage customers were annoyingly careless. They kept breaking crockery and losing cutlery. Dick and Mac decided to reinvent themselves. They wanted to come up with a different kind of restaurant, one that would be more attractive for families, one that would need fewer staff to run. They analyzed their sales. In their advertising, they'd always made a big thing about their Arkansas Hickory BBQ. But they had to admit that their BBQ ribs weren't actually that popular. Mostly, they sold hamburgers. So what if they sold only hamburgers? Dick and Mac closed their restaurant for three months and completely revamped it. Out with a BBQ pit, in with specially designed grills, optimised for one job, grilling hamburgers. Out with a crockery and cutlery, in with disposable paper cups and wrappers. Out with the car hops. Now customers would line up at the windows of the restaurant to collect their food themselves. And they wouldn't have to wait long for their food because it could all be efficiently pre-made. Hamburgers with onions, pickles, ketchup and mustard. Boxes of fries and hot apple pies. Wash it down with a soda, a milkshake or a coffee. That was it. That was the menu. Simple, efficient, quick. The brothers put up a sign advertising their speedy service system and re-opened for business. It went disastrously. Sales were just a fifth of what they'd been before. Former customers came by asking when they'd go back to how the restaurant used to be. Fired car hops said, When you do, can I have my job back? But the brothers persisted and word began to spread. The hamburgers were cheap, just 15 cents. But they didn't taste cheap. They tasted good. The fries were fantastic. And this idea of going up to the window to order food, instead of having car hops take your order, it turned out that one particular type of customer loved that idea. Little kids. An employee recalls how the kids would walk up to the window, clutching a handful of coins and place their order, feeling all grown up and independent, with a quick glance back to the car, where mum and dad would smile their encouragement. Before long, the parking lot was full again. The queues at the windows were long and fast moving. Rival restauranteurs started to wonder how the McDonald Brothers were serving so many customers so quickly. It wasn't hard for them to find out.

Speaker 3:
[09:09] The store was all glass.

Speaker 1:
[09:11] We were in a fishbowl, recalls Dick McDonald. The whole operation was on public view. All that specialized equipment that Dick and Mac had had custom made. The lazy Susan, where 24 buns at a time could be speedily dressed with condiments. The ketchup dispenser, that squeezed out the exact same sized blob of ketchup every time. And the specialized staff. Two men doing nothing but fry fries. Two more doing nothing but make milkshakes on the multi mixer machines.

Speaker 3:
[09:48] We couldn't conceal what we were doing. So we would talk to anyone who had questions. They would come in with paper and pens and copy the layout and my brother and I would laugh.

Speaker 1:
[10:02] The brothers answered every question. But some people weren't satisfied with sketches of the layout and casual conversations with Dick and Mac. They wanted more detail. And they'd pay for it. Dick and Mac half-heartedly put together a package. A 15 page description of their speedy service system, their architect's drawings of their building and a one week loan of an employee who knew how everything worked. They'd offer to sell you this one-off package, but only if you absolutely insisted. When one woman asked about it, Dick advised her to open a nice little dress shop instead. It wouldn't work like that today. Fast food restaurants are often part of big chains and run as franchises. And today's franchising arrangements look very different from anything Dick and Mac had imagined. Their long-term relationships with mutual obligations, support from head office in exchange for a percentage of sales, and strict procedures to protect the brand. Dick and Mac had no interest in spreading their brand beyond the corner of 14th and E Streets. They assumed that anyone who bought their package would want to put their own spin on their ideas. When one man from another state said that he'd call his business McDonald's too, Dick was puzzled.

Speaker 3:
[11:33] What the hell for?

Speaker 1:
[11:38] One day, a wealthy corporation approached the McDonald brothers with a proposal. They wanted to hire Dick and Mac to open a chain of McDonald's restaurants all across California. Dick and Mac discussed it briefly. They hated the idea.

Speaker 2:
[11:58] Mac complained, We'd be on the road all the time, in motels, looking for locations. I can just see one hell of a headache.

Speaker 1:
[12:09] Why bring on the headache when they already had a lifestyle they enjoyed?

Speaker 2:
[12:14] We were having a lot of fun doing what we wanted to do.

Speaker 1:
[12:20] Sure, a chain of restaurants might make them a fortune, but what could they do with a fortune? They already earned more money than they could imagine how to spend. There's only so often you can buy a new Cadillac. They didn't have kids to pass a fortune on to.

Speaker 2:
[12:38] We'd be leaving it to a church or something. And we didn't go to church.

Speaker 1:
[12:46] The brothers turned the corporation down. One day in 1954, a man turned up at the brothers' restaurant and introduced himself, Ray Kroc, a salesman from the multi-mixer company that made their milkshake machines. Kroc was in his early fifties, but brimming with youthful energy.

Speaker 3:
[13:13] Kroc asked them, Why don't you open a series of units like this? It will be a gold mine for you and for me too. Because everyone would boost my multi-mixer sales. What do you say?

Speaker 1:
[13:31] Dick and Mac sighed inwardly. Another proposal they would have to turn down. But Ray Kroc wasn't going to take no for an answer. Cautionary Tales will be back in a moment. All work and no play makes Jack a dull boy, so the saying goes. Ray Kroc never understood that saying. Surely, work is play. As a teenager, Kroc recalls in his autobiography, Grinding It Out, he worked in a grocery store, a music store, a drug store, and a lemonade stand.

Speaker 3:
[14:20] I got as much pleasure out of work as I did from playing baseball. To put it another way, Kroc says, Work is the meat in the hamburger of life.

Speaker 1:
[14:33] Kroc got a job as a paper cup salesman.

Speaker 3:
[14:36] I don't know what appealed to me so much about paper cups. Perhaps it was because they were so innovative and upbeat. But I sensed from the outset that paper cups were part of the way America was headed.

Speaker 1:
[14:52] After a long, hard day of pounding the streets selling paper cups, Ray Kroc wanted to do only one thing. More work. He spent his evenings in the studio of his local radio station, working as a piano player until 2am. Kroc's wife never got to see him. She wasn't happy. When he describes this in his book, you can almost hear his begrudging tone as he responds to a prompt from his ghostwriter.

Speaker 3:
[15:26] Looking back on it now, I guess it was kind of unfair.

Speaker 1:
[15:31] But in the next breath, he's justifying himself.

Speaker 3:
[15:34] I was driven by ambition. I hated to be idle for a minute.

Speaker 1:
[15:41] Kroc had chosen a fast growing industry.

Speaker 3:
[15:45] The 10 years between 1927 and 1937 were a decade of destiny for the paper cup industry.

Speaker 1:
[15:55] Still though, there's always a chance that an even better opportunity will come along. In the course of selling paper cups, Kroc encounters the multi-mixer. This is going to be huge. He has to get into the milkshake machine business. He quits his steady job at the paper cup company. His wife isn't happy.

Speaker 4:
[16:20] You're 35 years old. And you're going to start all over again as if you were 20?

Speaker 3:
[16:27] You just have to trust my instincts.

Speaker 1:
[16:30] He neglects to mention that he's mortgaged their house so he can buy into the multi-mixer company. When she finds out, she's furious. She couldn't seem to handle it, Kroc recalls, sounding slightly bemused. He tells her that, obviously, she'll have to come and work for him in the multi-mixer business to give him the best chance of making it a success. Absolutely not, she says.

Speaker 3:
[17:00] I felt betrayed. I just couldn't believe she'd let me down like that.

Speaker 1:
[17:08] Kroc throws himself into the task of selling multi-mixers. People are amazed at his energy. At trade events, he's up until 3am, schmoozing clients, then appears at breakfast, bright-eyed and bushy-tailed, eager for a new day. What's his secret? they ask.

Speaker 3:
[17:29] He tells them, I sleep as hard as I work.

Speaker 1:
[17:36] In the early 1950s, Kroc notices that he's getting more and more calls from people who want to buy multi-mixers because they've seen them being used at a hamburger joint in San Bernardino. Kroc is intrigued. What's so special about this place? He flies out to California to investigate. McDonald's isn't yet open when he arrives and parks up, and his first impression is underwhelming. It's just a small, ordinary octagonal building. He watches from his hired car as the employees file in.

Speaker 3:
[18:16] All men dressed in spiffy white shirts and trousers and white paper hats. I like that.

Speaker 1:
[18:27] He watches as the parking lot fills up and long queues form at the window. More and more intriguing. Kroc gets out of his car and strikes up conversations with the customers. He approaches an attractive young lady, a strawberry blonde, and asks, How often do you come here?

Speaker 4:
[18:49] Anytime I'm in the neighborhood. And that's as often as possible because my boyfriend lives here?

Speaker 1:
[18:57] Kroc gets the hint. She's assumed he's a clumsy middle-aged pickup artist, but he doesn't mind the brush off.

Speaker 3:
[19:06] It was not her sex appeal, but the obvious relish with which she devoured the hamburger that made my pulse begin to hammer with excitement.

Speaker 1:
[19:17] Kroc peers into the fishbowl, watching the men in their spiffy white shirts at work. He's enchanted, so simple, so efficient. That night, Kroc lies in bed in his hotel room.

Speaker 3:
[19:36] Visions of McDonald's restaurants dotting crossroads all over the country paraded through my brain.

Speaker 1:
[19:47] The next day, he approaches the McDonald brothers with his pitch.

Speaker 3:
[19:51] I've been in the kitchens of a lot of restaurants selling multi-mixtures, and I have never seen anything to equal the potential of this place of yours. Why don't you open a series of units like this? It would be a gold mine for you, and for me too, because everyone would boost my multi-mixture sales. What do you say?

Speaker 1:
[20:19] Silence. Kroc is puzzled. Has he said something wrong? Mac MacDonald points to a house on a nearby hill.

Speaker 2:
[20:32] See that big white house with the wide front porch? That's our house, and we love it. We sit out on the porch in the evenings and watch the sun set, and look down on our place here. It's peaceful. We don't need any more problems. We're in a position to enjoy life now, and that's just what we intend to do.

Speaker 1:
[20:56] CROC IS TOTALLY THROWN Kroc is totally thrown. He can't comprehend what the brothers are saying.

Speaker 3:
[21:06] Their approach was utterly foreign to me. It took me a few minutes to reorganize my thinking.

Speaker 1:
[21:15] Once he's reorganized his thinking, Kroc suggests they get someone else to open restaurants for them. Maybe, they say, but who?

Speaker 3:
[21:28] Well, what about me?

Speaker 1:
[21:35] That year, 1954, 2,000 miles away in Indianapolis, another pair of brothers were cooking up an idea for a restaurant chain. Frank and Don Thomas' family business made fast food equipment. The Easy Way frozen custard machine, the Sani-Serve milkshake machine, and the Insta-Broiler, which flame-grilled hamburgers on a conveyor belt. They decided to demonstrate their machines to potential customers by opening a showcase restaurant. Word got around that the burgers and milkshakes in this showcase restaurant were the best in town. Trade customers came by to check out the equipment but were even more impressed by the cues of eager locals. Just like the MacDonald brothers, the Thomas brothers discovered that many wannabe fast food entrepreneurs were in the market for a complete restaurant concept. They didn't just want equipment. They wanted restaurant plans and working procedures. Even a brand name. The Thomases got to work on a concept they could franchise. They called it Burger Chef. Ray Kroc drives away from San Bernardino with a signed contract with the MacDonald Brothers in his pocket, and joy in his heart.

Speaker 3:
[23:08] I was 52 years old. I had diabetes and incipient arthritis. I had lost my gallbladder and most of my thyroid gland, but I was convinced that the best was ahead of me.

Speaker 1:
[23:23] Kroc tells his wife that he's agreed to set up a hamburger chain. He's starting all over again, again. She's incandescent.

Speaker 3:
[23:38] I had no time to bother with emotional stress, though. I had to find a site for my first McDonald's.

Speaker 1:
[23:47] It wasn't a headache for Ray Kroc to schlep around the country, sleeping in motels, assessing the market potential of various crossroads. He adored it.

Speaker 3:
[23:59] Finding locations for McDonald's is the most creatively fulfilling thing I can imagine.

Speaker 1:
[24:08] Are there schools and churches nearby? He hangs out in local shops. What are the people like? At 2 a.m. he sifts through the garbage of rival hamburger joints, and by counting the empty meat boxes he'll get a sense of how much business they're doing. Kroc obsesses over fast food minutiae. Fries, he decrees, must be precisely nine thirty seconds of an inch thick. Beef patties must not exceed 19% fat.

Speaker 3:
[24:43] Is it any more unusual? To find grace in the texture and softly curved silhouette of a hamburger bun than to reflect lovingly on the colors in a butterfly's wing?

Speaker 1:
[25:01] Well, yes, Ray, it kind of is. Kroc works obsessively to recruit franchisees. He opens hundreds of McDonald's restaurants, but he's only just keeping ahead of Burger Chef. In 1967, the Thomas brothers decide to cash in. They sell Burger Chef to a mega food conglomerate. The new owners have big ambitions to leave McDonald's in the dust. Cautionary Tales will be back in a moment. Burger Chef's new owners promptly commission a snazzy new logo to refresh the brand's identity. They introduced the Fun Meal and a whole cast of kid-friendly cartoon characters to interact with their jocular chef and his teenage sidekick. There's the witch, Cackleburger.

Speaker 4:
[26:13] Phew! That traffic over the airport was murder. Well, what brings you in tonight, Cackleburger?

Speaker 2:
[26:18] Jeff!

Speaker 1:
[26:20] The vampire, Count Fang Burger.

Speaker 2:
[26:27] I'm happy! What are you going to get at Burger Chef?

Speaker 1:
[26:31] And the magician, the great Burgerini. Then came the Star Wars posters. Burger Chef seemed to be on top of its game. But other decisions the new owners had made were putting Burger Chef on course to hit disaster in under 12 parsecs. Those posters were covering up the writing on the wall. Why did McDonald's succeed and Burger Chef fail? There isn't one simple answer. But a big part of the story involves the tension at the heart of the franchising relationship and the heart of the Star Wars movies, between the individual's urge for self-determination and the organization's desire for control. In his book, An Introduction to Franchising, Leicester Business School lecturer Robert Webber calls the franchising relationship a kind of halfway house between being an employee and a fully standalone business. Like any entrepreneur, a franchisee puts their own money on the line. In the 1960s, buying a McDonald's or a Burger Chef franchise would have cost you around $10,000. That's about $100,000 in today's terms. A lot of money. And that's before you make all the other investments in setting the restaurant up. A franchisee is going to be highly incentivised to work hard to get that money back. Much more so, perhaps, than a salaried corporate employee. It's easy to see why chains like McDonald's and Burger Chef latched onto franchising as a quick way to grow. Franchisees brought money and motivation. But what's in it for the franchisee? That's no mystery either, says Robert Webber. The greatest benefit to any hopeful franchisee is that the business model and commercial concepts have been tried and tested. We've seen what would-be entrepreneurs wanted from the MacDonald brothers and the Thomas brothers. Information. What equipment should I buy? How should I organise my workers? That kind of guidance is worth paying for. Dick and Mac McDonald assumed that everyone who bought information from them would want to use it in their own way, give their restaurant its own name, experiment with their own menu. Ray Kroc's vision of franchising was completely different. As one early franchisee found out when Kroc visited his store and snapped at an employee to clean his fingernails. Don't you start telling my help what to do, the franchisee told Kroc, or I'll tell you what you can do. Kroc was furious. The way he saw it, his franchisees weren't just buying information, they were buying reputation. And the only way to maintain reputation was to make sure every single franchisee was upholding the same standards. In his book, McDonald's Behind the Arches, John F. Love writes that Kroc demanded much more control over the system than other franchises did. If you bought a McDonald's franchise, you'd be sent to Hamburger University, where you'd be drilled in French fry thickness and beef patty fat content, though possibly not bun silhouette appreciation. After that, you'd get regular visits from Kroc's henchmen, who'd make sure you were following every instruction in the hundreds of pages of the operating manual. For example, pick up McDonald's litter within a two-block radius of the store. One franchisee who'd been neglecting this duty had a Kroc henchman march into his office with an armful of empty cups and burger wrappers. He dumped them on the franchisee's desk and yelled, How can you let this stuff go on your neighbor's lawn? That's the sense in which franchisees are more like employees than other entrepreneurs. If you're running an independent business, nobody's going to nag you about how often you mop your floor. In setting up its operating system, says John Love, McDonald's displayed no particular genius, just tenacity. They developed standards and enforced standards. As logical and basic as that sounds, it was a revolutionary concept in food franchising. McDonald's achieved a consistency of service that no franchised system had ever before attained. At Burger Chef, when the new owners proudly unveiled their snazzy new logo, they expected the franchisees to pay to change the signs on their restaurants. But their franchise agreements didn't say they had to. Some did, some didn't. Then the new owners announced a new interior design concept and asked the franchisees to refit their restaurants. Some did, some didn't. Then they changed the logo again. At one point, Burger Chefs around the country had four different designs of sign and restaurant. Ray Kroc had understood the vital importance of consistency and conformity. Burger Chef had not. In 1982, the new owners of Burger Chef sold off the struggling chain to Hardee's. A few stubborn franchisees persisted with their version of the Burger Chef brand. The last closed their doors in 1996. Burger Chef's demise shows the biggest downside of buying a franchise. As lecturer Robert Weber puts it, The individual franchisee will have virtually no power over the most important policy decisions that will influence his or her business. Those decisions might be brilliant, like the Star Wars tie-in, or they might be stupid, like the multiple rebrands. Buying a franchise, says Weber, is like getting married after a short courtship. But if it is a marriage, it's not an equal one. The individual franchisee has about as much say in decisions as Mrs. Kroc. Ray Kroc's obsession with conformity was driving McDonald's to new heights. But Kroc faced a constant source of frustration. The contract he had signed with Dick and Mac McDonald. He had been so impressed with their San Bernardino restaurant, so eager to get the rights to franchise it, he hadn't thought the contract through. It said he needed the brothers' written approval for major decisions and they could never be bothered to provide it. They were too busy admiring the sunsets.

Speaker 3:
[34:44] The McDonald brothers were simply not on my wavelength at all. I was obsessed with making McDonald's the biggest and the best. They were content with what they had.

Speaker 1:
[34:59] Kroc decides he has no choice but to buy the McDonald brothers out of their contract. He asks them to name their price. Dick and Mac discuss what their contract is worth. It gives them the right to half a percent of all McDonald's revenue. And at the rate McDonald's is growing, the sums involved are soon going to be vast. In a few years they might have, who knows, five million? Mac says to Dick, What the hell can we do with five million that we can't do now? The brothers decide to ask Ray Kroc for around million dollars each after tax. That's about ten million in today's money, and far less than they could have got if they'd stuck with their contract. Later, Dick MacDonald is asked if he regrets selling up. Not at all, he shrugs.

Speaker 3:
[35:59] I would have wound up in some skyscrapers somewhere with about four ulcers.

Speaker 1:
[36:07] Dick and Mac McDonald cared about money, but they only cared up to a point. Dick remembers struggling through the Great Depression and thinking to himself, how marvelous it would be never to have to worry about making rent. Having achieved that, the brothers cared more about sunsets and Cadillacs and the freedom to do what they wanted with their restaurant. They looked at their community changing and decided to take a risk on reinventing themselves. They dreamed up new ideas that were so successful, they changed the world. The McDonald brothers succeeded on their own terms. But in the world they helped create, it's become much harder to do what they did. Open a restaurant with an experimental concept today and you have to compete with the finely honed operations of multiple franchising juggernauts who've all learned lessons from McDonald's. According to figures quoted by Robert Weber, independent businesses are ten times more likely to fail than franchises. It might be romantic to open your own dream restaurant. The pragmatic choice is marrying Ray Kroc. Just as Ray Kroc is about to sign the deal, buying Dick and Mac out of their contract, he notices something missing. The deal doesn't mention the brothers' original restaurant in San Bernardino. Surely that must be included. Oh no, say Dick and Mac, we've already promised to give that to two of our loyal employees.

Speaker 3:
[38:08] What a goddamn rotten trick. I screamed like hell about it.

Speaker 1:
[38:17] Once the deal is signed, the old employees of course can't call their restaurant McDonald's anymore. They give it a new unique name, the Big M. Ray Kroc opens a McDonald's right across the street and drives them out of business. This script relied on John Love's book about McDonald's, Behind the Arches, and John McDonald's book about burger chef, Flame Out. For a full list of sources, visit timharford.com. Cautionary Tales is written by me, Tim Harford, with Andrew Wright, Alice Fiennes, and Ryan Dilley. It's produced by Georgia Mills and Marilyn Rust. The sound design and original music are the work of Pascal Wise. Additional sound design is by Carlos Sanjuan at Brain Audio. Ben Nadaph Haferi edited the scripts. The show features the voice talents of Genevieve Gaunt, Melanie Gutridge, Stella Harford, Oliver Hembra, Sarah Jopp, Marcea Monroe, Jamal Westman, and Rufus Wright. The show also wouldn't have been possible without the work of Jacob Weisberg, Greta Cohn, Sarah Nix, Eric Sandler, Carrie Brody, Christina Sullivan, Keira Posey, and Owen Miller. Cautionary Tales is a production of Pushkin Industries. It's recorded at Wardour Studios in London by Noria Barr and Lucy Rowe. If you like the show, please remember to share, rate and review. It really makes a difference to us. And if you want to hear the show ad free, sign up to Pushkin Plus on the show page on Apple Podcasts or at pushkin.fm slash plus.