Sunday, August 6, 2017

thoughts on The Founder





In reduced form as an op-ed in papers across Indiana, with a version of this longer piece to appear in the Indiana Policy Review soon...

Most people would think that The Founder is at least a good movie—well-acted and well-produced, a compelling story and on a topic in which everyone has at least a tangential interest: McDonald’s. Back in the day, I read that one-fourth of all Americans had worked at a McD’s; today, the estimate is one-eighty. Everybody has eaten there. And everybody knows of McD’s historical influence in the fast-food industry and the larger culture. 


The Founder is a terrific movie if you’re into business, economics, and entrepreneurship. I’ll use it to discuss a number of concepts in my MBA Econ course:

a.) general elements of entrepreneurship and what drives it;

b.) the role of information and uncertainty in entrepreneurship (the McDonalds describe “a learning curve” for customers—on the speed of service, disposable wrappers and utensils, walk-up counters, etc.);

c.) the emergence of franchises in the 1950s (since auto transportation was becoming much easier); but

d.) the challenges and opportunities in franchising or even operating multiple locations;

e.) the limits of contracts and their enforcement; and thus,

f.) the immense practical value of morality in market transactions.

In this essay, I want to discuss how the movie depicts Kroc and the McDonalds—and the implications for business, economics, entrepreneurship, and ethics.
When I’ve asked people about the movie, most people said it was good, but it left them feeling ill. (For a notable exception, see this essay by Jeffrey Tucker.) They didn’t like Ray Kroc and they felt sorry for the McDonald brothers, Mac and Dick. Perhaps I lowered my expectations too much, but it wasn’t nearly as bad in these respects as I anticipated. It seems like another example of how easy it is to see sins of commission (by profligates like Kroc) while overlooking sins of omission (by conservatives like the McDonalds).

For one thing, I had the impression that the brothers were rubes. Instead, they were about the same age as Kroc and much more experienced in business. They were shrewd and even brilliant. They had already tried Kroc's idea to franchise (albeit without success). They knew their numbers; they understood the production process; they related to consumers and provided excellent service; they had good lawyers; and so on. As the brothers put it, we were "an overnight sensation 30 years in the making.”

The brothers also had the upper-hand in their first contract with Kroc. And they used their advantage—or at the least, they greatly benefited from it. Their lawyer wrote the contract. They negotiated (and Kroc accepted) a really low margin for him (1.4%) and tons of restrictions. How do we know it was a low margin? Kroc was doing everything right—given his passion, work ethic, standards, etc.—but was still going under, despite mortgaging his house. As a key character notes later on: if Kroc wasn’t making a ton of money from his efforts (and he wasn’t), then something was terribly wrong.

It also follows that it would have been ethical—and probably required from a Christian worldview—for the McDonalds to renegotiate the rate. They were making plenty of money—in their own endeavors and from Kroc’s efforts. Given their success and his struggle, they had been "taking advantage of him"—whether knowingly or not. (Kroc returns the favor at the end, by competing directly with them in San Bernadino. While legal and ethical from a worldly perspective, it's difficult to motivate this move from a Judeo-Christian perspective. It reminded me of the Old Testament injunction against cooking a calf in its mother’s milk: it just ain't right, for reasons we may not be able to pin down.)

In negotiating the first contract, the brothers had expressed some willingness to be flexible in implementing the franchise model. Beyond that, flexibility is part of the contractual process. But it didn't seem like they held up their end of the bargain. They denied the Coke sponsorship; they refused or delayed his plans for basements—and a more reasonable restriction, they refused to let him change the milkshakes. Perhaps it was hyperbole, but in a private conversation, Kroc claims that the brothers "never” approved anything. To the extent that they were less flexible than they had implied or is normal, they violated the spirit of the contract. Ironically, the McDonalds were bullying Kroc in this earlier phase: violating the contract when Kroc was not in a position to take them to court (for what they should have done naturally).

The milkshake debate was the final straw in the battle of competing visions for the business. Purity of vision is always in the eyes of the beholder—and by the end, we know that Kroc and the McDonalds have reached a breaking point. But the movie also takes pains to show us that Kroc cared a lot about the McDonalds’ vision. For example, he was meticulous in keeping things clean (even taking care of trash and sweeping himself), working to promote a family-friendly environment, insisting on two pickles for every burger, etc. The most telling example is when he has trouble with his initial investors (who see it purely as a monetary investment) and then goes to great lengths to recruit better folks (even changing social clubs and friends)—often, getting couples who would passionately work as a team in concert with the McDonalds’ vision.

For the second contract (the arrangement to dissolve the first contract), Kroc was then in a more powerful position, but was still willing to negotiate a buy-out. The brothers know they can't trust Kroc. Of course, his handshake lie-to-be is still unethical. But when the brothers sign, they *know* that they're (probably) only going to get the $2.7 million. In that sense, the handshake is simply part of the bargaining; the brothers could have walked away at this point and chose not to do so. (Imagine the difference if Kroc had been completely honest and cooperative previously—and then broke the handshake deal!) They were even willing to sell the right to name their own restaurant.

The brothers were paid really well to break the first contract. Today, $2 million post-tax would be tens of millions of dollars. A lot of money, for sure—but is it too much, too little, or just right? This begs the question of what the McDonalds should have received. What credit and how much money did they “deserve”?

Their efforts certainly set the table for Kroc's success. But their work was not a sufficient condition for his success—and arguably, it was not even a necessary condition. What did they accomplish? First, they had an amazing restaurant—one worthy of being franchised if not copied. As Kroc had seen, every town had a drive-in and many of them were lousy. It is fitting and not surprising that the McDonalds’ vision would supplant lousy efforts by others. 

Second, the McDonalds figured out a way to do mass production in a service industry—an innovation along the lines of Henry Ford. As Kroc says, this is the "most remarkable restaurant” he had seen and “I want to hear your story.” But as the bathroom scene indicates, many people had heard and seen the story. The brothers fully (and reasonably) expected someone to steal their production ideas successfully. This part was easy to emulate. But it hadn't happened, so we know that Kroc brought a ton to the table.

Why hadn’t the brothers been successful in franchising? The brothers’ partnership was remarkable and remarkably successful, but their limitations made it difficult to scale. They were conservative, which made it painful to take risks they couldn’t control relatively well—and to accept deviations from their norms. Mac's health woes made risk-taking more difficult. To their credit, they had tried to franchise, but hadn't been able to control quality through the one manager they hired. After failing once and not being able to confidently imagine success, they settled for limited success and gave up on the larger idea.

Interestingly, there are four entrepreneurs who were responsible the success of McD's: the two brothers with their original vision and production process; Kroc with his franchising prowess; and the wizardry of the legal/finance/accounting guru, Harry Sonneborn. Perhaps Sonneborn is the real loser in the credit game—and even the money game. Without him, none of this happens!

All this said, there’s still the role of serendipity. Kroc believed that the name McDonalds had power. In the movie, he notes that people wouldn’t buy burgers from a restaurant called Kroc’s. The name McDonalds sounded…well, American. Kroc saw the name as the most important thing—and saw his investment as buying their name. So, to what extent should the McDonalds deserve and receive financial rewards, merely for being born into a good name?

Kroc’s angle on the name also connected to his vision of McDonalds as part of American Civil Religion (although he doesn’t use the term). He links the Cross, the Flag, and the Golden Arches as one American bundle of breaking bread, healthy community, strong family, moral values—and presumably, apple pie and anti-Communism!

One other question: what motivated the entrepreneurs in the movie? All of them were driven by money to some extent. But there’s far more to it for Kroc and the McDonalds. Both saw value in doing things the right way. Both saw their efforts fitting into a certain vision of America. Both enjoyed entrepreneurship and the act of creation (as is emphasized in the excellent movie The Call of the Entrepreneur). Late in The Founder, we learn that spreading the Golden Arches across America had been Dick's dream—and we don’t have the sense that it’s so they can make a ton of money. 

So, in the end, I don’t feel particularly sorry for the McDonalds. But I did sympathize with some other people in the movie. As the movie depicts it, the employee-owners of the original McDonald’s may have lost out. They did not seem to enjoy the largesse that the brothers received and may have lost out when Kroc soon out-competed them.

And the movie certainly makes you pity Ethel, Kroc’s first and long-time wife. For one thing, the movie portrays her as a part of "his" success—her willingness to switch social circles and to help Ray recruit the new group of franchisees. And who knows what she expected when they got married? Maybe she was mostly happy with the nice house in the suburbs. But even if she signed up for that deal, it certainly rings hollow as the story continues. And it’s pathetic by the end, punctuated by him saying that he wants to divorce her.

Two interesting things about the way the divorce is handled by the movie: First, the Joan/Ray attraction (and in real life at some point, an affair) seems to be driven by beauty, given the physical attractiveness of the actor/actress, much more than in real life. Ironically, while taking pokes at people pursuing power and money, Hollywood depicts the story through one its favorite idolatrous currencies, physical beauty.

Second, Kroc formally breaks his contract with McD's (over the milkshakes), saying “contracts are like hearts: both are made to be broken.” In the next scene, he asks Ethel for a divorce, perhaps breaking her heart, but clearly showing that he sees marriage as a contract "made to be broken,” rather than as a covenant. Ironically, in real life, Joan also saw their marriage as a contract that could be broken too—after he died. Kroc was very conservative politically, but Joan gave much of their wealth to causes he would have adamantly opposed. 

At the end of the movie, it’s years later and Kroc is preparing to give a speech. He’s talking to a mirror and describing “how it all began.” But when he says his version of the beginning (completely ignoring the McDonalds’ role), he has a funny look on his face, showing us that he knows it’s a lie—and ultimately an empty claim. Maybe that’s the punchline of the entire movie: when you live from a materialistic worldview with worldly pursuits, hearts and contracts will get broken, lies will be told and lived. As Solomon tells us in Ecclesiastes, this way of life is ultimately a matter of vanity.

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