Letter #17: McDonalds (1963)

1963 Shareholder Letter from Ray Kroc and Harry Sonneborn

Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.

Today’s notes are on Ray Kroc’s and Harry Sonneborn’s 1963 Shareholder Letter, McDonald’s first year as a public company.

If you have any thoughts on what you’d like to see, let me know!

Notes

The year of 1963 marked substantial growth for McDonald’s Corporation in three significant areas—units, sales and profits

*Units. A total of 111 were opened during the year and the total number of McDonald’s restaurants topped the 500 marks.

*Sales. The one billionth hamburger was sold by McDonald’s during 1963 and by the end of the year we were welling hamburgers at the rate of one million per day. Sales volume for the year was $97,978,344, an increase of approximately 28% over 1962.

*Profits. For the first time, the net profits earned by McDonald’s in a single year exceeded $1,000,000.00.

Such solid accomplishments achieved by a company less than ten years old gives positive indication of sound and continuing growth for McDonald’s in the future.

  • Ray lays out the companies KPIs right at the beginning: Units, Sales, Profits

  • Units

  • Sales

    • In 2019, McDonald’s generated revenue of $21 billion

  • Profits

    • In 2019, McDonald’s generated profits of $6 billion

    • Net Margins have increased from 1% to 29% over the past 50 years (Net Income as reported by the Company)

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The direction of these developments is indicated in the following detailed reports of the company activities:

Real Estate

Concluding a total of 156 leases during 1963, McDonald’s real estate department closed the year with its largest inventory of both new units under construction had not yet commenced. A total of 51 units were under construction at year’s end and 69 properties had been acquired where development was scheduled for the immediate future.

  • Growing up, I was always confused when my brother told me that McDonald’s was a real estate company, not a fast food restaurant. Clearly, it’s always been about the real estate.

Construction

A modification of McDonald’s basic design, enclosing the perimeter of the building, was developed by the construction of and architectural department and placed into building blueprints of several new units. By providing a heated enclosure during wintertime, air conditioning during the summer, and seating in the conventional McDonald’s unit, it is anticipated that volume per unit will be materially increased through added customer comfort. Style and image of McDonald’s have been zealously retained in the new building layout.

  • Own the land, design the plans, build the infrastructure

  • Focus on added customer comfort

  • Keep a clear, focused image of the McDonald’s brand

Legal

In two major lawsuits instituted by the Company, involving violations by operators of the McDonald’s franchise contract, favorable verdicts were obtained in the courts by the legal department. The Appellate Court of Illinois ruled against Sandy’s, Inc., after five years of litigation. A lower court in Michigan upheld McDonald’s in a suit against a Detroit franchisee. Both of the defendants started competitive chains in violation of franchise contracts.

  • Lol unsurprised. McDonald’s Corporation itself was the result of legal moves. Unsurprising that they would be focused on protecting themselves legally so they didn’t run into the same problems that let the original brothers lose control of their company.

  • Always interesting when I hear people say “supply chain isn’t a competitive advantage”

Accounting

New data processing equipment to provide more financial and statistical information was delivered to the company during the year. By programming data from various departments, this automated equipment will correlate information more rapidly and assist in the future planning of the company.

  • Focus on the numbers — collect as much data as possible

Training

A graduate management course was instituted during the year at Hamburger University to increase the efficiency and productivity of licensees and their employees. A total of 271 students graduated from Hamburger University in 1963, the largest number in the history of the school.

  • HR isn’t enough to vet employees — if you really want employees to understand the company’s values and operations, train them yourself.

  • Investment Banks have their 3 months of training before full-time work, Deloitte has Deloitte University, etc (not too familiar of any companies outside of financial services that have these — anyone know of any?)

Operations

For the first time in nine years, a new item—a fish sandwich—was added to the McDonald’s menu. The culmination of considerable research not only in product but also equipment to handle it, the fish sandwich met with immediate favorable response from patrons and gives every indication of becoming a major item on our menu.

  • Focus on consistency and quality — first new product in NINE years.

  • McDonald’s didn’t just come up with a new sandwich, they came up with the equipment necessary to properly handle the sandwich — build from the ground up

Engineering

In addition to developing a fish station in our compact, well-equipped building, the Engineering Department continued to improve existing physical layout and equipment in order to better serve our customers. More efficient methods to produce and serve our products are constantly sought by the Engineering Department.

  • Better serve our customers vs/and more efficient methods to produce and serve our customers

  • You see this spirit has continued with McDonald’s being one of the first restaurants worldwide to implement order kiosks

Advertising

The first national advertisement placed by McDonald’s appeared in the October issue of Reader’s Digest, supplementing the $3 million in advertising placed on a local level by licensees including company-operated units. Greater emphasis on our advertising program to spotlight the image of McDonald’s is contemplated in the future.

  • Advertising shifted from local -> national level. National trickled down to local and instantly increases reputation (National > Local)

  • Contemplated… I wonder what exactly this means. The national advertisement did well but didn’t blow it out of the park — otherwise they’d definitely be running a campaign (if good) or returning to local ads (if bad)

Public Relations

Citations both within and without the industry for its public relations efforts were given to McDonald’s during the year. Its billionth hamburger became a milestone saluted in news stories by wire services and newspapers throughout the nation, as well as on the nighttime Art Linkletter Show on the full NBC-TV network. For a second time Time Magazine ran a story on McDonald’s, writing about Hamburger University. Special roto magazine stores on McDonald’s appeared in such top newspapers as the Chicago Tribune, Denver Post and the St. Louis Post-Dispatch in addition to a constant flow of news and feature stories published in hundreds of newspapers reaching millions of readers. McDonald’s civic and charitable activities were cited in special awards to the company from such community organizations as the Salvation Army and Volunteers of America.

  • Very interesting to see “Charitable Activies” under the PR section — very different from eBay where it’s more a core value

Company Units

A total of 26 company-operated units were opened in 1963, bringing to a total of 61 the number of these units in operation. Consistent with company policy, a total of 18 units were sold or subleased during the year on a favorable basis. As a group, the company operated units have steadily increased in sales volume and the profit potential for 1964 is most gratifying.

  • Not sure exactly what the company policy is… will go look into it

Franchising

A total of 85 franchised units were opened in 1963. Of these 28 are operated by new franchisees and the other 57 by existing operators who continue to reflect their excellent profits and enthusiasm for McDonald’s by expansion into new units. While providing every opportunity to present operators to add units, more emphasis on developing new franchisees is projected for the future.

  • In 2018, revenue from franchised restaurants surpassed revenue from company-operated restaurants

  • Franchises have always been a core aspect of McDonald’s business model — own the property — lease it to the franchisee. Generate solid returns on real estate, and generate stable cash flows from franchisee

Research and Development

Several new equipment items were produced during 1963 by our Research and Development Laboratory to materially improve efficiency. Included were a new condiment dispenser, a carbon dioxide warning device, a new type of plastic waste receptacle, a unique cooking computer to determine proper blanching time for potatoes regardless of starch or moisture content, and a fish timer to assure proper cooking for fish. Additional research projects are in progress at the laboratory and others will follow so as to assure the finest product quality and the most efficient operating methods for the benefit of McDonald’s operators.

  • Engineering != R&D

  • The precursor the McDonald’s labs?

Future Outlook

The potential of McDonald’s as a nationally franchised chain will be further demonstrated in 1964 by its growth in number of units, sales volume, and profits. While our rate of expansion will be more measured, growth is projected at a steady pace commensurate with consolidating our financial position to promote stability, to provide the best possible profit picture, and to guarantee maximum future progress.

  • Close by referencing and circling back to McDonald’s core KPIs: units, sales, and profits.

Some Other Thoughts

Pay close attention to the order of the business units… they clearly aren’t in alphabetical order, which means… they are most likely ordered by importance. What do you notice?

For me, they focus on the hard assets (Real Estate, Construction) before moving on to operations (Legal, Accounting, Training, Operations, Engineering) to external relations (Advertising, Public Relations, Franchising) to the future (R&D, Future Outlook).

Full Stack: Focus inwards, move outwards.

McDonald’s was a focused, full-stack company from the very beginning. They laid out every aspect of the company, shared how they were doing, and what they were planning.

Can you think of another company this transparent or thoughtful?

Also interesting — I didn’t see any notice of a food department, a food safety department, or a chef’s kitchen — I suppose new recipes are come up with in the lab, but to me this reinforces that McDonald’s isn’t, and never was, a food company.

Wrap-up

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All compilations here.