64 Years Ago, Ray Kroc Made a Decision That Completely Transformed McDonald’s. The Rest is History

Think “McDonald’s” and you think fast food. But McDonald’s isn’t in the food business. Not really.

In 1956, Ray Kroc was a couple years into a business agreement with the McDonald brothers. He had opened his first franchise in Illinois. He had added a few more. But he struggled to bring in enough revenue to make a reasonable profit, much less generate funds for further expansion. Nor could he attract franchisees with sufficient capital to purchase their own land and build their own stores. 

He faced the classic entrepreneurial dilemma: Rapid growth was needed to grow revenue per fixed costs and overcome tiny operating margins. But he had no money to fuel that growth.

Here’s how Harry Sonneborn (more on him in a moment) sums up the situation in the movie The Founder:

“So, to summarize,” Sonneborn says, “You have a miniscule revenue stream, no cash reserves, and an albatross of a contract that requires you to go through a slow approval process to make change, if they’re approved at all. Which they never are. Am I missing anything?”

“That about sums it up,” Kroc says.

Sonneborn thinks for a moment. “Tell me about the land,” he says. “The land, the buildings… how that whole aspect of it works.” 

And with that question, everything changes for Kroc — and McDonald’s.

“Pretty simple, really,” Kroc says. “Franchisee finds a piece of land he likes, gets a lease, usually 20 years, takes out a construction loan, throws up a building, and off he goes.”

The operator selects the site. The operator picks the property. Kroc provides training, the system, the operational know-how. The operator is responsible for the rest.

“Is there a problem?” Kroc says.

“You don’t seem to realize what business you’re in,” Sonneborn says. “You’re not in the burger business. You’re in the real estate business.”

According to Sonneborn, Kroc can’t build an empire off a 1.4 percent cut of a 15 cent hamburger. You build it by owning the land upon which that burger is cooked. He tells Kroc to buy plots of land to lease to franchisees who, as a condition of their franchise agreement, can only lease from Kroc.

That way, Kroc gets a steady, up-front resume stream that begins when an agreement is signed — not months later when a restaurant finally opens and sells its first burger. He gets more capital for expansion, which fuels land acquisition, which fuels expansion… in short, a mini-flywheel.

And it provides what Kroc desperately needed: Control over how franchisees operate. Control over menus. Control over service and quality standards. If a franchisee violated standards, Kroc wielded the ultimate hammer: He could cancel their lease. 

As Sonneborg says in The Founder, “Land. That’s where the money is.” 

And within months, McDonald’s was in the real estate business. 

As Sonneborn, who spent the next ten years as the McDonald’s CFO, said, “We are not technically in the food business. 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.”

Keep in mind it’s a mutually-supportive system: “Tenants” can only pay rent if customers are happy with food, service, price, etc. McDonald’s has a vested interest in the health of every franchise since, without sales, franchisees won’t stay in business.

Much less seek to open more franchises and help fuel further growth.

The key is to focus not on what you provide, but on what customers get.

Take Dominos; technically a pizza/food business, it’s actually a delivery and technology business. As CEO Patrick Doyle has often said, “We’re a technology company that sells  pizzas.” Sure, they make pizzas… but what they really do is make ordering and delivery extremely convenient and efficient.

You could also argue that Amazon is a technology and delivery company that sells well, everything.

I know what you’re thinking: “Yeah, but those are massive companies. The ‘what business are you really in?’ premise doesn’t apply to me.”

Sure it does. A pivotal moment for the wedding photography business I used to own occurred when my wife found me struggling to solve a complicated lighting problem that popped up once in a while.

She watched for a few minutes and said, “Let me see what you’re trying to fix.”

I did, and she said, “You realize you’re the only person who sees that. No one notices but you.”

She paused, then said, “I think you’ve forgotten what you really do. You’re not in the ‘perfect photograph” business. You’re in the emotions business.

“Your job is to make couples and their families feel they’re in good hands, that you’ll be the one vendor they can trust to be professional and courteous and kind and understanding… and later deliver photos that will always remind them of their special day.

“That’s what you should be spending your time on. Not trying to wring an extra half-percent of quality out of one or two photographs per shoot.”

She was right. When I put more effort into building rapport, understanding individual needs, learning how to make the day flow and step in to solve problems — problems unrelated to photography — and make people feel beautiful and handsome and cared for and truly special… my business boomed.

People who referred us to friends praised the photography. They loved the photos they received. But what they really loved, what they really raved about, was how we made them feel.

I still worked to become a better photographer.

But I worked much harder to provide what our clients really wanted: People who took care of them.

Photography was the product. Photography was the hamburgers, or the pizzas, or the everything.

Photography was the vehicle and the platform from which the emotions our clients wanted to experience were delivered.

Customers don’t think in terms of products. They think in terms of benefits and solutions.

What problems do you really solve? What benefits do you really deliver?

Focus on what your customers get — not on what you think (or want) to provide.

Make sure you know what business you’re really in. Or want to be in.