McDonald's Food Chain

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Background Note

McDonald's was started as a drive-in restaurant by two brothers, Richard and Maurice McDonald in California, US in the year 1937. The business, which was generating $200,000 per annum in the 1940s, got a further boost with the emergence of a revolutionary concept called 'self-service.' The brothers used assembly line procedures in their kitchen for mass production. Prices were kept low. Speed, service and cleanliness became the critical success factors of the business. By mid-1950s, the restaurant's revenues had reached $350,000. As word of their success spread, franchisees started showing interest. However, the franchising system failed because the McDonald brothers observed very transparent business practices. As a consequence, imitators copied their business practices and emerged as competitors. The franchisees also did not maintain the same standards of cleanliness, customer service and product uniformity. At this point, Ray Kroc (Kroc), distributor for milkshake machines expressed interest in the business, and he finalized a deal with the McDonald brothers in 1954.

He established a franchising company, the McDonald System Inc. and appointed franchisees. In 1961, he bought out the McDonald brothers' share for $2.7 million and changed the name of the company to McDonald's Corporation. In 1965, McDonald's went public. By the end of the 1960s, Kroc had established over 400 franchising outlets. McDonald's began leasing/buying potential store sites and then subleased them to franchisees initially at a 20% markup and later at a 40% markup. Kroc set up the Franchise Realty Corporation for this. The real estate operations improved McDonald's profitability. By the end of the 1970s, McDonald's had over 5000 restaurants with sales exceeding $3 billion.

However, in the early 1990s, McDonald's was in trouble due to changing customer preferences and increasing competition. Customers were becoming increasingly health-conscious and wanted to avoid red meat and fried food. They also preferred to eat at other fast food joints that offered discounts. There was also intense competition from supermarkets, convenience stores, mom and dad delicacies, gas stations and other outlets selling reheatable packaged food. In 1993, McDonald's finalized an arrangement for setting up restaurants inside Wal-Mart retail stores. The company also opened restaurants in gas stations owned by Amoco and Chevron. In 1996, McDonald's entered into a $1 billion 10-year agreement with Disney.

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