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Speaker 1: Pushkin. Too quick? No, it was perfect. Pushkin. Stop.

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Speaker 2: You got it.

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Speaker 1: Jacob? Robert.

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Speaker 3: The year is 1968, and the subject of today's episode

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Speaker 3: is Herman Petty.

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Speaker 4: This was before he was considered a civil rights pioneer.

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Speaker 4: In 1968, Petty was just a guy living on the

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Speaker 4: south side of Chicago who wanted to make some money.

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Speaker 1: Petty was outgoing.

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Speaker 4: He was charming by all accounts. And his jobs really

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Speaker 4: reflected that. During the day, he ran a barber shop

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Speaker 4: in the neighborhood. Would always say he knew everyone and

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Speaker 4: everyone knew him. At night, he had a different view

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Speaker 4: of the same street. He was a Chicago bus driver.

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Speaker 4: On the graveyard shift.

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Speaker 2: Hard working.

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Speaker 1: He was.

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Speaker 4: He was saving his money to start his own business.

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Speaker 4: And we don't know exactly what his plans were, but

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Speaker 4: he must have thought once or twice about a certain

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Speaker 4: opportunity about five blocks away from his barbershop. The McDonald's

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Speaker 4: franchise at 6560 South Stony Island Avenue. This wasn't one

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Speaker 4: of those gleaming suburban McDonald's. It was pretty run down

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Speaker 4: at the time. The owner was a white businessman who

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Speaker 4: was serving a mostly black neighborhood at this point. And

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Speaker 4: it didn't seem like he wanted to invest much in

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Speaker 4: the restaurant. He let things break. He didn't fix them.

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Speaker 4: But he was still willing to take the neighborhood's money.

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Speaker 4: This all changed on April 4th, 1968. Martin Luther King Jr.

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Speaker 4: was assassinated in Memphis. And when people in Chicago heard

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Speaker 4: the news, they took to the streets. In the days

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Speaker 4: following the murder... There were protests and violence in some

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Speaker 4: of the black neighborhoods in Chicago, not on Herman Petty Street.

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Speaker 4: But tensions around the city were very, very high. It

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Speaker 4: was around this time that the white owner of the

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Speaker 4: Stony Island McDonald's essentially abandoned the restaurant, walked away. He

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Speaker 4: told McDonald's executives that he would like to sell the franchise.

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Speaker 4: And Herman Petty, the barber and the bus driver, saw

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Speaker 4: his chance. He traveled out to McDonald's headquarters in the

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Speaker 4: Chicago suburbs, and he told them, it should be me.

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Speaker 4: I want to be the first Black owner of a

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Speaker 4: McDonald's franchise.

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Speaker 1: I'm Robert Smith.

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Speaker 2: I'm Jacob Goldstein, and this is Business History, a show

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Speaker 2: about the history of business. Let me thank right now

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Speaker 2: listener Sean Kelly, who suggested that we do an episode

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Speaker 2: on Black franchise owners in America. Thank you, Sean. He

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Speaker 2: wrote to us at businesshistoryatpushkin.fm, and you should write to us, too.

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Speaker 2: We read all the emails, and they mean a lot

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Speaker 2: to us, and we get good ideas from them, like

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Speaker 2: this show.

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Speaker 4: And a story on franchising is actually perfect for the show,

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Speaker 4: because fast-food franchises have that whiff of.

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Speaker 1: The American dream to them.

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Speaker 4: Like, All you need is a burger brand and a

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Speaker 4: 700-page instruction manual. And with a little hard work, anyone

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Speaker 4: in the country can become a fast food millionaire.

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Speaker 2: That is the promise. That is the theoretical promise.

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Speaker 4: But before Herman Petty, the anyone part wasn't true. McDonald's

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Speaker 4: had 1,000 restaurants at the time, and every single owner

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Speaker 4: was white. Herman Petty marked the start of an unlikely

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Speaker 4: and sometimes tense partnership between McDonald's and the fight for

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Speaker 4: civil rights. Herman Petty showed up to McDonald's headquarters. at

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Speaker 4: exactly the right time. Because inside the company, executives were

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Speaker 4: just starting to realize that they had a problem on

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Speaker 4: their hands. And it's actually surprising it didn't occur to

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Speaker 4: them before they opened their thousands store. But in a

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Speaker 4: weird way, they had sort of avoided coming to terms

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Speaker 4: with race in America. The neighborhoods that they served, though,

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Speaker 4: were changing out from under them. There's the white flight

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Speaker 4: from urban centers. And that meant that white-owned McDonald's franchises

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Speaker 4: were now serving more black and Latino customers. More and

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Speaker 4: more of those white owners had second thoughts about owning

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Speaker 4: these restaurants.

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Speaker 1: So they start quietly.

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Speaker 4: Hunting, McDonald's does, they start quietly hunting for the first

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Speaker 4: black franchisee. They know it's going to be a big

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Speaker 4: deal and they want to find the right person. By

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Speaker 4: the way, this story and a bunch of the stories

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Speaker 4: in today's show comes from an excellent book called Franchise,

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Speaker 4: The Golden Arches in Black America. It's by Marsha Chatelain,

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Speaker 4: won the Pulitzer Prize, by the way. So McDonald's is

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Speaker 4: looking for its first black franchisee. They had one of

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Speaker 4: their black restaurant managers who worked in the D.C. area

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Speaker 4: take the recruiting assignment. Everyone loved this guy. His name

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Speaker 4: was Roland Jones. He had served in the military and

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Speaker 4: would often say that he was used to serving in

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Speaker 4: the military a with black and white bosses and had

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Speaker 4: people report.

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Speaker 1: To him who were black and white.

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Speaker 2: Military was one of the early institutions to be integrated

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Speaker 2: in the United States. Not that early, not as early

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Speaker 2: as you'd like, but decades before this. Yeah, and Roland Jones.

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Speaker 4: Always said the military was why he had success in

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Speaker 4: the white business world. He had a quote here of

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Speaker 4: who he was looking for.

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Speaker 2: Someone who could communicate with the corporate structure and identify

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Speaker 2: with blacks on the grassroots level.

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Speaker 4: Which pretty much described Herman Petty in Chicago. Petty had

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Speaker 4: a pretty simple message for the corporate executives, why he

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Speaker 4: should take over this particular McDonald franchise in his neighborhood.

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Speaker 2: And that was, it's my home.

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Speaker 1: Like, I know this.

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Speaker 4: I run a business on the street. I know everything

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Speaker 4: there is to know about the South Side of Chicago.

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Speaker 4: And he had a particular philosophy. He would say this

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Speaker 4: later in all sorts of interviews. Why don't you give

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Speaker 4: it to us?

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Speaker 2: There's no such thing as a bad community. You just

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Speaker 2: have to concentrate on bringing the good out.

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Speaker 4: Petty spent the day at McDonald's headquarters where he made

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Speaker 4: his pitch. The headquarters are in Oak Brook, Illinois. And

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Speaker 4: apparently they were impressed because when Petty told the story later,

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Speaker 4: he said, give us another one from him.

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Speaker 2: One minute I was in Oak Brook finding out more

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Speaker 2: about McDonald's. And the next minute I was on the

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Speaker 2: telephone telling my wife I'm not a barber anymore.

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Speaker 3: Nice. Nice.

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Speaker 4: They were sending Petty to the McDonald's Training Center, which

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Speaker 4: is delightfully known as Hamburger Center.

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Speaker 2: Don't they have like a McDonald's, like an actual McDonald's

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Speaker 2: and you go and you train it? Have you been there?

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Speaker 2: I feel like you have been to Hattemberger University.

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Speaker 1: I have not.

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Speaker 4: It was in the basement of a restaurant in the

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Speaker 4: early days, basement of McDonald's. And then they had their

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Speaker 4: own suburban training center. I guess it's in downtown Chicago now.

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Speaker 4: But no, it has a complete replica of an entire

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Speaker 4: restaurant where you can learn all the parts. The idea

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Speaker 4: is that if you're going to be an owner of

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Speaker 4: a McDonald's franchise, you need to know how every single

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Speaker 4: thing fits together and works. And apparently in recent years,

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Speaker 4: more and more of it is about management and not

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Speaker 4: how to operate the fryer. But still, you've got to

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Speaker 4: operate the fryer.

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Speaker 2: It's probably easier to operate the fryer now. My guess

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Speaker 2: is the fryer is sort of a robot now, and

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Speaker 2: it's more about dealing with employees and how do you

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Speaker 2: relate to employees and that sort of thing.

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Speaker 1: Yeah, and hiring and recruiting.

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Speaker 2: Tell us what a franchise is. What is a franchise?

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Speaker 1: So it's a legal partnership.

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Speaker 4: We'll take McDonald's. McDonald's has a brand. They have the

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Speaker 4: golden arches. They have a certain menu. They have a

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Speaker 4: way of making the French fries, and they make a

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Speaker 4: deal with a person who wants to open a McDonald's.

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Speaker 4: The franchisee, the local owner, agrees to build out the restaurant,

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Speaker 4: to stick to the rules, to hire the staff, and

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Speaker 4: to pay a small percentage of their sales back to

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Speaker 4: McDonald's corporate.

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Speaker 2: Build out the restaurant is non-trivial in terms of capital.

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Speaker 2: You have to build a restaurant and you can put

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Speaker 2: the name McDonald's on it, but you got to build

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Speaker 2: it is what you're saying. Is that right?

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Speaker 1: Yes. And you are risking your own money. Yeah.

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Speaker 4: That's part of the point. You're risking your own money.

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Speaker 4: You have to bring in the supplies and you get

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Speaker 4: to keep the profits as someone taking the risk. So

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Speaker 4: why does this relationship work? There are a few reasons

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Speaker 4: why a successful hamburger restaurant would want to franchise its

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Speaker 4: brand Why don't you give us one, Jacob, the principal

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Speaker 4: agent problem?

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Speaker 2: So say you're a restaurant. You got your little Jake's Burgers.

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Speaker 2: I want to open 10 more Jake's Burgers. I could

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Speaker 2: hire managers and open them myself, but the manager is

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Speaker 2: not going to be as invested as I am in

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Speaker 2: a literal sense because I own the business. And what

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Speaker 2: the manager is going to want to do is make

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Speaker 2: as much money For himself or herself as possible, but not—

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Speaker 2: Give away fries to his friends. But not for the business, right.

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Speaker 2: So I am the principal in that case, and the

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Speaker 2: manager is the agent, and our interests are not perfectly aligned.

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Speaker 2: This is a historical concern about big companies. Back to

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Speaker 2: at least Adam Smith.

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Speaker 4: So the great thing about a franchise is because the

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Speaker 4: franchisee is taking the risk, they're going to hustle from

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Speaker 4: morning to— till night to sell hamburgers.

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Speaker 2: In the language of the principal-agent problem, they are a principal.

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Speaker 2: It is their own money. So it is now principal

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Speaker 2: and principal and their incentives are aligned. Sell more burgers,

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Speaker 2: make more profits. Yeah.

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Speaker 4: And the other thing that you get from franchising your

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Speaker 4: concept of a restaurant, Jake's, is you get to rapidly

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Speaker 4: expand because you have capital coming in. You have these

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Speaker 4: owners who are putting their own money and you can

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Speaker 4: immediately go to.

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Speaker 1: 10 restaurants or 100 restaurants or 1,000 restaurants pretty quickly.

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Speaker 2: Because you don't have to pay to build them all out.

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Speaker 2: All the franchisees are bringing the capital to fund the expansion.

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Speaker 3: Yeah.

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Speaker 4: And here's how the cost would have looked in 1968

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Speaker 4: for someone like Herman Petty. Petty would have had to

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Speaker 4: pay a franchise fee of $ 10, 000. That just gets you

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Speaker 4: in the door. About the same for a security deposit.

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Speaker 4: And then they have to develop the store, get equipment,

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Speaker 4: pay rent, all this before they open. And that price

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Speaker 4: can go up to, even in 1968, that can go

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Speaker 4: up to $ 150, 000.

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Speaker 2: Have you run this through the CPI inflation calculator? Because

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Speaker 2: I'm going to do it right now.

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Speaker 1: It's a lot. It might be under a million, but

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Speaker 1: close to it.

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Speaker 2: I'm doing it.

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Speaker 3: $ 150, 000?

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Speaker 2: Yeah. You want to guess how.

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Speaker 1: Much $ 150, 000 in 1968 is worth today?

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Speaker 3: $ 972, 000. $ 1.

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Speaker 1: 468 million.

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Speaker 2: It was a lot of inflation in the.

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Speaker 4: 70s.

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Speaker 2: Yeah, yeah, yeah. So you need a lot of capital.

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Speaker 2: This is not like an ordinary person with a dream.

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Speaker 2: This is not a barber who moonlights as a bus

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Speaker 2: driver is not going to save up $ 1. 5 million.

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Speaker 4: Exactly right. You can borrow some of it. Some of

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Speaker 4: it you can get from a bank. But it was

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Speaker 4: still a lot of money. And this was a big

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Speaker 4: stumbling block in the early days of looking for a

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Speaker 4: black franchisee. There were lots of successful black businessmen in Chicago,

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Speaker 4: but there were very few who could just write a

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Speaker 4: check for this kind of restaurant.

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Speaker 2: This is a much larger problem with wealth inequality. Wealth

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Speaker 2: inequality is much larger than income inequality. And what you

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Speaker 2: need to get more money is money. And you see

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Speaker 2: this catch-22 problem right here in this moment, in this place.

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Speaker 2: If there aren't Black entrepreneurs with the $ 1. 5 million to

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Speaker 2: get on the McDonald's train, they're out of luck.

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Speaker 4: So McDonald's has to figure out a way around this

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Speaker 4: when Herman Petty shows up. And what they decided to

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Speaker 4: do was to waive some of the fees.

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Speaker 1: That's fine.

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Speaker 4: And they allowed Petty to to break a fundamental rule

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Speaker 4: of the corporation, which was he was allowed to have

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Speaker 4: silent partners. Now, McDonald's wanted their owners, investors, in the

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Speaker 4: restaurant every day. They wanted them to feel attached to

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Speaker 4: their one franchise.

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Speaker 2: It's the principal agent thing. They wanted them to have

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Speaker 2: skin in the game. They wanted them to be on

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Speaker 2: the hook.

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Speaker 4: They don't want rich investors from across the country just

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Speaker 4: pouring money into willy-nilly different franchises. But in Petty's case,

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Speaker 4: they said, okay, fine. You don't have the money. If

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Speaker 4: you can find investors, you can have investors. And Herman

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Speaker 4: Petty takes on two white investors, which allowed him to

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Speaker 4: seal the deal. And so December 21st, 1968, Herman Petty

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Speaker 4: takes over the Stony Island McDonald's. He is the first

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Speaker 4: black franchisee. Despite this, it's a pretty historic moment. There

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Speaker 4: wasn't any news coverage at the time, even in the

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Speaker 4: black neighborhood newspapers. But on that cold day in Chicago,

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Speaker 4: it's always cold in December, I don't even look it up.

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Speaker 4: Petty stood behind the counter, surrounded by broken equipment, run

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Speaker 4: down place. And he realizes this is.

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Speaker 1: Going to be more work than he thought. After the break.

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Speaker 2: We'll be back in just a minute. Robert Smith, we've

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Speaker 2: been talking for, I don't know, what, 15 minutes? You

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Speaker 2: have not said Ray Kroc in a McDonald's story.

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Speaker 1: I'm impressed. Nice work.

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Speaker 4: Yeah, for business history, you know, we kept the star

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Speaker 4: self-aggrandizing owner in the background. But, you know, Ray Kroc

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Speaker 4: will not be denied. He's going to push his way

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Speaker 4: through in this story. And one way he pushes his

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Speaker 4: way through is he sort of takes credit in his

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Speaker 4: autobiography for this new diversity awareness at McDonald's. But it

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Speaker 4: was Ray Kroc's style. to take credit for everything. Even

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Speaker 4: the stuff he had no part in. It was really

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Speaker 4: his greatest gift.

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Speaker 2: A classic unappealing characteristic in corporate types.

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Speaker 1: Yes.

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Speaker 2: Taking credit for everything.

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Speaker 1: Yes.

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Speaker 2: You don't want to be in a meeting with that guy.

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Speaker 1: No, not at all.

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Speaker 4: But you could argue that having an iconic person at

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Speaker 4: the top of a corporation who shows you the way,

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Speaker 4: even if they're taking credit for other people's work.

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Speaker 2: You're a Ray Kroc apologist now?

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Speaker 3: Go on.

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Speaker 1: I'm not. I'm not.

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Speaker 4: So, Herman Petty, he did, by signing this franchise contract,

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Speaker 4: he did agree to run his restaurant the Ray Kroc way.

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Speaker 2: Is that in writing? Does it say I agreed to

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Speaker 2: do it the Ray Kroc way?

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Speaker 3: I hope so.

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Speaker 4: It had a name, the Speedy Service System. This was

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Speaker 4: something that Ray Kroc discovered, doing air quotes here, discovered

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Speaker 4: in 1954. This is before there's a McDonald's corporation. Ray

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Speaker 4: Kroc is 52 years old.

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Speaker 2: Prime of his life.

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Speaker 4: And he is hacking it out as a milkshake machine salesman.

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Speaker 4: And the way Ray Kroc tells it is that he

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Speaker 4: notices that one of his customers had bought enough of

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Speaker 4: the multi-mixer milkshake machines to make 40 milkshakes at the

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Speaker 4: same time.

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Speaker 2: Nobody needs to make 40 milkshakes at the same time.

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Speaker 4: Must be a mistake. So Kroc goes out to see

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Speaker 4: for himself. to San Bernardino, California.

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Speaker 2: San Bernardino.

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Speaker 4: To a tiny burger drive-in called McDonald's. And it's run

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Speaker 4: by the McDonald's brothers, actual brothers, Richard and Maurice. They

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Speaker 4: go by Dick and Mac. I love Mac McDonald. And

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Speaker 4: when Ray Kroc gets there, he is pretty stunned. It's

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Speaker 4: a little burger shack, but there are lines of customers

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Speaker 4: waiting outside.

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Speaker 1: Okay.

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Speaker 4: But he sees how fast the lines move. Orders were

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Speaker 4: coming out of the kitchen in under a minute. People

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Speaker 4: are ordering and the line is just moving through. Ray

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Speaker 4: Kroc later wrote, When I saw.

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Speaker 2: It working that day in 1954, I felt like some

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Speaker 2: latter-day Newton who just had an Idaho potato caromed off

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Speaker 2: his skull. Right here in this quote, he's taking credit. Like,

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Speaker 2: Newton figured out the equations of gravity. All this guy

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Speaker 2: did was see something that somebody else had figured out.

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Speaker 1: And said, I should steal that, right?

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Speaker 2: Or buy it, barely.

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Speaker 4: This is the factory model. For hamburgers, it's exactly the

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Speaker 4: same as the Henry Ford model.

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Speaker 2: The McDonald brothers are making the Model T of burgers.

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Speaker 4: Actually, they are doing the Model T of burgers. You

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Speaker 4: had very little choice in what you bought at the restaurant.

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Speaker 4: That was part of the system. So the McDonald brothers

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Speaker 4: came up with this after a string of business failures.

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Speaker 4: They had run a drive-in where they served barbecue and

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Speaker 4: all sorts of other things. But they weren't making any

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Speaker 4: money because... The costs were too high. They had too

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Speaker 4: many workers, too much food wasted.

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Speaker 2: It's tough business. They run a restaurant. It's famously hard business.

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Speaker 4: They did what really very few people had done at

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Speaker 4: the time, which was to think of the burger restaurant

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Speaker 4: like an assembly line. So they pared down the menu, hamburgers,

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Speaker 4: french fries, milkshakes, sodas, and they redesigned the kitchen for

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Speaker 4: maximum efficiency.

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Speaker 1: I love this story.

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Speaker 4: Before they built their McDonald's kitchen, They drew a chalk

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Speaker 4: outline of the place on a tennis court.

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Speaker 1: Oh, yeah.

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Speaker 4: With squares labeled fryer and grill. And they brought in

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Speaker 4: their staff and made them practice making invisible burgers on

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Speaker 4: the tennis court. And they choreographed it like a ballet.

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Speaker 4: They counted the steps. They made sure that every part

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Speaker 4: of the process had a minimum of movement. And if

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Speaker 4: it didn't, they moved the fry station around.

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Speaker 1: This is Taylorism.

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Speaker 2: Remember Frederick Winslow Taylor, this factory guy that early 1900s,

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Speaker 2: he would go into factories with a stopwatch and look

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Speaker 2: at every movement that workers made. I think it's unclear

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Speaker 2: really how much better he made factories. But he was

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Speaker 2: this guru of factory optimization doing what sounds like the

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Speaker 2: same thing these guys were doing out on the tennis court.

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Speaker 4: The theory is if you can save five seconds on

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Speaker 4: a process that's repeated thousands of times a day, that

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Speaker 4: means real money. And the McDonald brothers felt like this

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Speaker 4: would give them the edge in what was a pretty

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Speaker 4: competitive restaurant market along Route 66 at the time. So

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Speaker 4: speedy service system is what they called it. And, you know,

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Speaker 4: you want to put ketchup on your hamburger. The amount

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Speaker 4: of time it takes for someone to get a knife

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Speaker 4: and dip it in the ketchup.

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Speaker 2: Or they're hitting the bottle.

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Speaker 3: Yeah, yeah. No, no, no, no.

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Speaker 4: They had those special metal funnels built that you could

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Speaker 4: fill with a lot of ketchup and has a trigger

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Speaker 4: on it.

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Speaker 1: And you go.

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Speaker 2: The trigger is the exact amount you do on the burger.

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Speaker 4: Every single burger the same every time. And the condiment

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Speaker 4: guy is always in the same place. Can always reach

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Speaker 4: the pumps. Never had to leave the condiment spot.

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Speaker 2: This is also evocative of. factories and industrialization in the

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Speaker 2: early 20th century because it is de-skilling. It is putting

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Speaker 2: the skill into the machine so that the worker doesn't essentially, frankly,

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Speaker 2: have to have the skill. You don't need to be

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Speaker 2: a good cook to work at this restaurant because the

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Speaker 2: machines are doing the cooking. You don't have to know

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Speaker 2: how much ketchup to put on a burger, even. You

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Speaker 2: just have to pull the trigger.

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Speaker 1: The system is the key.

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Speaker 4: And Ray Kroc, you like the name, love the name McDonald's,

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Speaker 4: but He saw that the system could be marketed. So

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Speaker 4: he made a deal with the McDonald brothers to sell

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Speaker 4: the franchises for their restaurant concept. And the deal would

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Speaker 4: be the same for McDonald's number one, all the way

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Speaker 4: to Herman Petty's McDonald's on Stony Island Avenue. Corporate, aka

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Speaker 4: Ray Kroc, would get a cut of the sales, gross sales,

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Speaker 4: two to 3%, right off the top. Franchisee gets all

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Speaker 4: the profits left over after paying for expenses.

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Speaker 1: Okay.

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Speaker 3: Yeah.

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Speaker 1: And it usually works out great for everyone involved.

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Speaker 4: I mean, that's why by 1968, they had a thousand franchises.

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Speaker 4: People were making money. Ray Kroc was making money. But

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Speaker 4: this setup would be a particular challenge for Herman Petty

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Speaker 4: and for the other black owners who are about to

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Speaker 4: come along.

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Speaker 1: First of all, the expenses.

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Speaker 4: Remember, that comes out of the franchisee's pocket. And the

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Speaker 4: expenses to fix up Petty's new store were enormous. And

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Speaker 4: that cost was all on him. Corporate's not paying for this.

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Speaker 4: The restaurant he bought, remember, was a real dump. And

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Speaker 4: someone who worked with Petty later said, why don't you

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Speaker 4: give me a line here?

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Speaker 2: They said not one piece of equipment in his store

403
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Speaker 2: was in proper working order, if it worked at all.

404
00:19:49,070 --> 00:19:51,030
Speaker 2: The store looked like it was ready for the wrecking ball.

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Speaker 4: More than that, Petty figured out that the ongoing costs

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Speaker 4: for a McDonald's in a neighborhood like his turned out

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Speaker 4: to be much higher than the restaurants in the suburbs.

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Speaker 4: There were higher insurance costs, which was a form of redlining.

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Speaker 4: They would sometimes have to hire security guards. Their stores

410
00:20:07,900 --> 00:20:12,459
Speaker 4: were often in rundown or even burned out neighborhoods. So

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Speaker 4: that was the challenge. It was going to cost him more.

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Speaker 4: It's going to cut into his profits. But Herman Petty

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Speaker 4: tackled these problems one by one. For instance, I love

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Speaker 4: this one. When Petty reopened the McDonald's, he discovered that

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Speaker 4: it was this hangout for this notorious gang called the

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Speaker 4: Blackstone Rangers. And they had intimidated the previous owner into

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Speaker 4: hiring some of their members. And then they could just

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Speaker 4: hang out and kind of get paid there. So obviously

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Speaker 4: terrible for the restaurant. Petty didn't call the police. He

420
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Speaker 4: didn't threaten the gang members. He told the gang that

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Speaker 4: he would no longer employ them. or let them loiter,

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Speaker 4: and amazingly it worked. He later told the Chicago Crusader newspaper, Jacob.

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Speaker 2: He said, because I had a barbershop down the street,

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Speaker 2: I knew everybody in the neighborhood. I knew the kids

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Speaker 2: and I knew their families. And I was able to

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Speaker 2: get them all out of the store. So is he

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Speaker 2: basically saying, you got to stop loitering at my store

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Speaker 2: or I'm going to tell your mom? And they were like, yes,

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Speaker 2: is that what he's saying here?

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Speaker 1: Yes.

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Speaker 4: I assume they were not afraid of rival gangs or

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Speaker 4: the police, but tell your mom.

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Speaker 2: Tell your mom. That is delightful.

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Speaker 4: Petty was also using his knowledge of the neighborhood and

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Speaker 4: his connections to bring people into the store. He'd provide

436
00:21:22,600 --> 00:21:25,899
Speaker 4: free hamburgers to church functions. He would train local kids.

437
00:21:26,380 --> 00:21:29,389
Speaker 4: He was this neighborhood celebrity. And by the way, to

438
00:21:29,410 --> 00:21:32,090
Speaker 4: give Ray Kroc a tiny bit of credit, this was

439
00:21:32,510 --> 00:21:36,010
Speaker 4: part of the design of the franchise system. That if

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Speaker 4: you had people who cared about their neighborhood, it would

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Speaker 4: actually be great for business, too.

442
00:21:40,510 --> 00:21:43,290
Speaker 2: This is what you want the small business to be doing.

443
00:21:43,330 --> 00:21:47,710
Speaker 2: Maybe sponsoring a little league team. That feeling of... this

444
00:21:47,790 --> 00:21:50,389
Speaker 2: person who lives here and runs this business and is

445
00:21:50,450 --> 00:21:52,409
Speaker 2: involved with us and we go to the store, that

446
00:21:52,450 --> 00:21:55,090
Speaker 2: is a nice feeling. And weirdly, there is this giant

447
00:21:55,130 --> 00:21:57,590
Speaker 2: corporation sort of getting some of that money.

448
00:21:57,609 --> 00:22:00,190
Speaker 4: Don't pay attention to Ray Grog. Pay attention to Herman Petty,

449
00:22:00,650 --> 00:22:01,340
Speaker 4: is what they're saying.

450
00:22:02,210 --> 00:22:02,670
Speaker 2: And it worked.

451
00:22:03,140 --> 00:22:05,780
Speaker 4: The next year, sales increased at the Stony Island McDonald's

452
00:22:05,820 --> 00:22:10,040
Speaker 4: by 75%. Petty made enough money to buy a second

453
00:22:10,260 --> 00:22:11,119
Speaker 4: McDonald's franchise.

454
00:22:11,140 --> 00:22:12,100
Speaker 2: Okay, how he's going.

455
00:22:12,200 --> 00:22:15,540
Speaker 4: And then eventually a third. By the time he got

456
00:22:16,020 --> 00:22:18,520
Speaker 4: The third one, people started to know him in the city.

457
00:22:19,080 --> 00:22:20,980
Speaker 4: When he bought that one, he got a city alderman

458
00:22:21,220 --> 00:22:23,680
Speaker 4: to improve the lighting and trash collection.

459
00:22:24,080 --> 00:22:27,320
Speaker 2: You know you're getting somewhere when the alderman improves trash

460
00:22:27,359 --> 00:22:28,320
Speaker 2: collection for you.

461
00:22:28,500 --> 00:22:31,919
Speaker 4: Build new sidewalks, he got that. You're improving Chicago one

462
00:22:31,960 --> 00:22:32,760
Speaker 4: McDonald's at a time.

463
00:22:32,780 --> 00:22:33,980
Speaker 2: Yeah, one alderman at a time.

464
00:22:34,100 --> 00:22:37,460
Speaker 4: By the end of 1969, there were 12 black-owned McDonald's

465
00:22:37,580 --> 00:22:38,300
Speaker 4: across the country.

466
00:22:38,380 --> 00:22:39,960
Speaker 2: Still not very many, I will say.

467
00:22:40,180 --> 00:22:43,689
Speaker 4: There was still the question of financing for black owners.

468
00:22:44,210 --> 00:22:47,340
Speaker 4: McDonald's kept the rules loose, but it was starting to

469
00:22:47,359 --> 00:22:51,639
Speaker 4: become a problem. The two white owners who had backed

470
00:22:51,680 --> 00:22:55,439
Speaker 4: Herman Petty had backed a few other Black franchisees. The

471
00:22:55,460 --> 00:22:59,480
Speaker 4: book McDonald's Behind the Arches by John F. Love talks

472
00:22:59,550 --> 00:23:03,810
Speaker 4: about how it turned into this disaster. The investors had

473
00:23:03,850 --> 00:23:07,050
Speaker 4: originally promised to eventually sell their shares back to the

474
00:23:07,090 --> 00:23:07,730
Speaker 4: Black partners.

475
00:23:08,330 --> 00:23:09,270
Speaker 1: They did not do that.

476
00:23:09,770 --> 00:23:13,170
Speaker 4: What they did instead was to start to cheat other

477
00:23:13,230 --> 00:23:17,650
Speaker 4: people using the restaurant. They didn't pay supplier bills. They

478
00:23:17,710 --> 00:23:21,280
Speaker 4: fell behind in their royalty payments to McDonald's headquarters. They

479
00:23:21,320 --> 00:23:24,680
Speaker 4: would arrive early at the restaurant to skim money from

480
00:23:24,720 --> 00:23:25,159
Speaker 4: the till.

481
00:23:25,300 --> 00:23:26,520
Speaker 2: Or just basic stealing.

482
00:23:26,680 --> 00:23:28,600
Speaker 1: Basic stealing. I mean, they're investors, right?

483
00:23:28,880 --> 00:23:31,740
Speaker 4: But they were taking any profits or sales first.

484
00:23:32,020 --> 00:23:32,780
Speaker 1: In the book, John F.

485
00:23:32,780 --> 00:23:36,500
Speaker 4: Love quotes Burt Cohen, an executive at McDonald's, saying about

486
00:23:36,640 --> 00:23:38,000
Speaker 4: this system and what went wrong.

487
00:23:38,480 --> 00:23:42,060
Speaker 2: He said, we'd stretched or broken every licensing rule we had,

488
00:23:42,260 --> 00:23:45,140
Speaker 2: everything that was proven to be successful. It all came

489
00:23:45,180 --> 00:23:48,210
Speaker 2: back to haunt us. They basically had solved the principal

490
00:23:48,270 --> 00:23:51,890
Speaker 2: agent problem by making the owner put all the money

491
00:23:51,930 --> 00:23:54,050
Speaker 2: into the store, and you've solved it. And then they've

492
00:23:54,670 --> 00:23:56,930
Speaker 2: recreated it by having these outside investors.

493
00:23:57,450 --> 00:24:00,740
Speaker 4: McDonald's eventually paid to unwind the deals. They're like, this

494
00:24:00,780 --> 00:24:01,239
Speaker 4: is on us.

495
00:24:01,340 --> 00:24:01,840
Speaker 1: It's our bad.

496
00:24:02,510 --> 00:24:05,030
Speaker 4: But as they were trying to grow the number of franchisees,

497
00:24:05,090 --> 00:24:07,710
Speaker 4: remember there were 12 at this point, they still needed

498
00:24:07,790 --> 00:24:12,770
Speaker 4: to figure out a way for black entrepreneurs to get financing.

499
00:24:14,060 --> 00:24:18,040
Speaker 4: And luckily for McDonald's, there was someone who offered to help.

500
00:24:19,400 --> 00:24:21,560
Speaker 4: Not exactly a fan of the civil rights movement either.

501
00:24:21,700 --> 00:24:25,500
Speaker 4: That person, President Richard M.

502
00:24:26,100 --> 00:24:26,480
Speaker 2: Nixon.

503
00:24:27,740 --> 00:24:29,600
Speaker 4: This is a strange turn in the story, and it

504
00:24:29,660 --> 00:24:32,629
Speaker 4: is a huge focus of Marcia Chetland's book. But the

505
00:24:32,690 --> 00:24:35,780
Speaker 4: appearance of Nixon makes sense if you go back half

506
00:24:35,800 --> 00:24:38,400
Speaker 4: a decade or so to the final years of Martin

507
00:24:38,420 --> 00:24:41,520
Speaker 4: Luther King Jr. 's life. MLK had started at this

508
00:24:41,580 --> 00:24:45,460
Speaker 4: time to talk more about economic justice. He had this

509
00:24:45,580 --> 00:24:48,330
Speaker 4: famous quote he said to striking sanitation workers.

510
00:24:48,770 --> 00:24:49,709
Speaker 1: Jacob? What does it.

511
00:24:49,750 --> 00:24:51,889
Speaker 2: Profit a man to be able to eat at an

512
00:24:51,950 --> 00:24:54,990
Speaker 2: integrated lunch counter if he doesn't earn enough money to

513
00:24:55,050 --> 00:24:57,670
Speaker 2: buy a hamburger and a cup of coffee? Very compelling.

514
00:24:58,310 --> 00:25:00,369
Speaker 2: I recall that toward the end of his life, he

515
00:25:00,410 --> 00:25:04,330
Speaker 2: was moving away from race as a framework primarily and

516
00:25:04,369 --> 00:25:07,500
Speaker 2: moving toward economic justice more generally.

517
00:25:07,720 --> 00:25:09,220
Speaker 1: Absolutely. Absolutely.

518
00:25:09,700 --> 00:25:14,340
Speaker 4: And conservatives at the time, Republicans, who had fought a

519
00:25:14,380 --> 00:25:16,860
Speaker 4: lot of the integration provisions of the Civil Rights Act,

520
00:25:18,760 --> 00:25:21,080
Speaker 4: they looked at this and they're like, well, actually, economic

521
00:25:21,140 --> 00:25:25,870
Speaker 4: justice is maybe something that we can work with. When

522
00:25:25,910 --> 00:25:28,990
Speaker 4: Richard Nixon ran for president in 1968, he started to

523
00:25:29,109 --> 00:25:33,730
Speaker 4: use a new term, Black Capitalism. Sort of a riff

524
00:25:33,840 --> 00:25:38,980
Speaker 4: on black power, but more acceptable for a Republican, black capitalism. Jacob,

525
00:25:39,200 --> 00:25:41,919
Speaker 4: this is a longer passage, but I just think it's

526
00:25:41,980 --> 00:25:45,740
Speaker 4: amazing that this is a radio address by Richard Nixon

527
00:25:46,030 --> 00:25:47,970
Speaker 4: running for president as a Republican.

528
00:25:48,270 --> 00:25:52,250
Speaker 2: It's no longer enough that white-owned enterprises employ greater numbers

529
00:25:52,310 --> 00:25:56,129
Speaker 2: of Negroes, whether as laborers or as middle management personnel.

530
00:25:56,430 --> 00:25:59,280
Speaker 2: This is needed, yes. But it has to be accompanied

531
00:25:59,380 --> 00:26:03,740
Speaker 2: by an expansion of black ownership, of black capitalism. We

532
00:26:03,780 --> 00:26:07,460
Speaker 2: need more black employers, more black businesses. We have to

533
00:26:07,500 --> 00:26:11,050
Speaker 2: get private enterprise into the ghetto. But at the same time,

534
00:26:11,410 --> 00:26:13,470
Speaker 2: we have to get the people of the ghetto into

535
00:26:13,510 --> 00:26:17,629
Speaker 2: private enterprise as workers, as managers, as owners.

536
00:26:18,290 --> 00:26:21,230
Speaker 4: This was a big deal when Richard Nixon was pushing this.

537
00:26:21,930 --> 00:26:24,359
Speaker 4: Once in the White House, he created the Office of

538
00:26:24,480 --> 00:26:28,440
Speaker 4: Minority Business Enterprise. And this new office, along with the

539
00:26:28,500 --> 00:26:32,609
Speaker 4: Small Business Administration, started to provide grants and loans to

540
00:26:32,670 --> 00:26:36,909
Speaker 4: Black-owned businesses. There was even a special program just to

541
00:26:36,950 --> 00:26:40,909
Speaker 4: get loans to Black entrepreneurs buying white businesses, the Herman

542
00:26:41,090 --> 00:26:46,150
Speaker 4: Petty situation. The government ended up heavily subsidizing the growth

543
00:26:46,470 --> 00:26:51,100
Speaker 4: of fast food franchises in urban neighborhoods. By one calculation,

544
00:26:51,359 --> 00:26:55,990
Speaker 4: the SBA approved nearly 40,000 total loans to and bank

545
00:26:56,010 --> 00:27:02,189
Speaker 4: loan guarantees to minority businesses during Nixon's term. McDonald's, yeah, absolutely,

546
00:27:02,290 --> 00:27:06,730
Speaker 4: but dozens of other fast food brands too, Burger King, KFC.

547
00:27:08,050 --> 00:27:12,330
Speaker 4: This push by the government ended up being divisive in

548
00:27:12,369 --> 00:27:16,409
Speaker 4: the civil rights community. On one side, you had the

549
00:27:16,450 --> 00:27:19,930
Speaker 4: Reverend Jesse Jackson, who was totally on board. The phrase

550
00:27:19,970 --> 00:27:24,699
Speaker 4: he used was, not civil rights rights, but silver rights.

551
00:27:25,240 --> 00:27:25,480
Speaker 2: I know.

552
00:27:25,640 --> 00:27:26,980
Speaker 1: It's very subtle. It's good. It's good.

553
00:27:27,720 --> 00:27:34,720
Speaker 4: And silver rights included things like government loans, sure. But also,

554
00:27:35,400 --> 00:27:39,320
Speaker 4: he was demanding that McDonald's and other corporate franchisors donate

555
00:27:39,359 --> 00:27:42,550
Speaker 4: to the neighborhoods, donate to education initiatives and new parks

556
00:27:42,609 --> 00:27:46,210
Speaker 4: and community swimming pools. This was part of his plan

557
00:27:46,230 --> 00:27:51,390
Speaker 4: to have the wealth of corporate America help neighborhoods all

558
00:27:51,410 --> 00:27:54,440
Speaker 4: across the country. other civil rights members started to ask,

559
00:27:55,380 --> 00:27:59,450
Speaker 4: was junk food really the answer to inner city problems?

560
00:27:59,490 --> 00:28:04,350
Speaker 4: This Office of Minority Business Enterprise gave loans and guaranteed

561
00:28:04,390 --> 00:28:07,869
Speaker 4: loans and facilitated loans to lots of different companies, but

562
00:28:07,910 --> 00:28:10,909
Speaker 4: a lot of them were junk food at the time.

563
00:28:11,440 --> 00:28:15,800
Speaker 4: Ralph Abernathy, the head of the Southern Christian Leadership Conference, said, Jacob?

564
00:28:16,320 --> 00:28:20,240
Speaker 2: We don't want rich individuals. We want rich communities. I

565
00:28:20,260 --> 00:28:23,970
Speaker 2: don't believe in black capitalism. I believe in black socialism.

566
00:28:24,270 --> 00:28:26,750
Speaker 4: Maybe I'm a little bit cynical, but I kind of

567
00:28:26,790 --> 00:28:30,149
Speaker 4: feel that one of the purposes of Nixon's black capitalism

568
00:28:30,210 --> 00:28:33,570
Speaker 4: push was to create this divide in the civil rights movement.

569
00:28:33,810 --> 00:28:34,210
Speaker 1: A wedge.

570
00:28:34,310 --> 00:28:35,109
Speaker 2: It's a wedge issue.

571
00:28:35,170 --> 00:28:38,450
Speaker 4: It's a wedge to give some people opportunities, maybe at

572
00:28:38,490 --> 00:28:41,950
Speaker 4: the expense of other people in the community. Regardless, from

573
00:28:42,170 --> 00:28:45,760
Speaker 4: the franchisee perspective, this was a great moment. This was

574
00:28:45,820 --> 00:28:50,230
Speaker 4: government money and guarantees helping them make money and By

575
00:28:50,250 --> 00:28:52,969
Speaker 4: the end of Nixon's term, McDonald's had gone from one

576
00:28:52,990 --> 00:28:59,830
Speaker 4: Herman Petty to 116 minority-owned McDonald's outlets. And those franchisees

577
00:29:00,170 --> 00:29:02,710
Speaker 4: were making a lot of money. The inner city stores

578
00:29:03,530 --> 00:29:06,490
Speaker 4: started to do more sales and make more money than

579
00:29:06,510 --> 00:29:11,690
Speaker 4: the average suburban McDonald's. Market research showed that in white communities,

580
00:29:11,770 --> 00:29:15,489
Speaker 4: McDonald's was an occasional treat. It's a light snack once

581
00:29:15,530 --> 00:29:18,250
Speaker 4: a month, maybe take the kids out there. In black communities,

582
00:29:18,290 --> 00:29:23,200
Speaker 4: McDonald's was replacing regular meals. Black consumers were more likely

583
00:29:23,240 --> 00:29:25,850
Speaker 4: to eat at McDonald's at least once a week.

584
00:29:25,990 --> 00:29:28,530
Speaker 2: I mean, people eating there all the time were presumably

585
00:29:28,590 --> 00:29:30,070
Speaker 2: part of the reason there were health concerns.

586
00:29:30,790 --> 00:29:31,330
Speaker 1: Exactly.

587
00:29:31,830 --> 00:29:35,800
Speaker 4: And there was already a growing obesity and diabetes problem

588
00:29:36,190 --> 00:29:39,200
Speaker 4: in Black communities. And people eating there all the time

589
00:29:39,400 --> 00:29:41,600
Speaker 4: in cities was one of the reasons why McDonald's was like,

590
00:29:42,390 --> 00:29:45,160
Speaker 4: we need a lot more McDonald's in the inner city

591
00:29:45,380 --> 00:29:48,250
Speaker 4: and if we're moving into black neighborhoods at a rapid expansion,

592
00:29:48,350 --> 00:29:54,150
Speaker 4: we need more black franchisees. So McDonald's was reshaping really

593
00:29:54,310 --> 00:29:57,710
Speaker 4: street life in cities at this point. And soon black

594
00:29:57,760 --> 00:30:01,360
Speaker 4: franchisees would fight to reshape McDonald's itself.

595
00:30:02,620 --> 00:30:03,040
Speaker 1: After the break.

596
00:30:16,410 --> 00:30:20,290
Speaker 3: The break is over. What is it? The 1970s and

597
00:30:20,390 --> 00:30:21,070
Speaker 3: we're back.

598
00:30:28,560 --> 00:30:32,590
Speaker 4: The early 1970s, Herman Petty helps create the National Black

599
00:30:32,610 --> 00:30:34,970
Speaker 4: McDonald's Operators Association.

600
00:30:35,250 --> 00:30:36,730
Speaker 2: N-D-M-O-A.

601
00:30:37,070 --> 00:30:37,630
Speaker 1: Exactly right.

602
00:30:38,770 --> 00:30:43,730
Speaker 4: McDonald's corporate executives were not really happy with franchisees organizing. Remember,

603
00:30:43,750 --> 00:30:47,060
Speaker 4: there was this balance of power they were trying to keep.

604
00:30:47,800 --> 00:30:50,400
Speaker 4: And I think they worried not just about black franchisees,

605
00:30:50,420 --> 00:30:53,630
Speaker 4: but any of the franchisees getting together for regular meetings.

606
00:30:53,650 --> 00:30:54,990
Speaker 2: Yeah, you guys don't want to talk to each other.

607
00:30:55,010 --> 00:30:57,080
Speaker 2: Let's talk to us. If you have any concerns, just

608
00:30:57,120 --> 00:30:58,750
Speaker 2: call the head office and we'll take care of you.

609
00:30:58,800 --> 00:30:59,560
Speaker 2: Don't talk to each other.

610
00:31:00,180 --> 00:31:03,560
Speaker 4: Herman Petty, charmer that he was, assured McDonald's that this

611
00:31:03,700 --> 00:31:07,600
Speaker 4: isn't some radical organization. This is a bunch of people

612
00:31:07,680 --> 00:31:12,820
Speaker 4: who they know and love running their own franchises. In fact,

613
00:31:13,140 --> 00:31:17,160
Speaker 4: at first, the biggest complaint from the Black franchisees was

614
00:31:17,200 --> 00:31:19,710
Speaker 4: they wanted to own More outlets.

615
00:31:20,310 --> 00:31:21,530
Speaker 1: They wanted more.

616
00:31:21,270 --> 00:31:23,690
Speaker 4: McDonald's because they were making money and they wanted to

617
00:31:23,760 --> 00:31:28,680
Speaker 4: invest in more. They just maybe wanted a few restaurants outside,

618
00:31:29,140 --> 00:31:32,340
Speaker 4: outside of the inner city. So they didn't have so

619
00:31:32,380 --> 00:31:34,820
Speaker 4: many headaches, so many expenses. And they pointed out that,

620
00:31:34,840 --> 00:31:37,720
Speaker 4: you know, black operators might be able to bring some

621
00:31:37,780 --> 00:31:39,680
Speaker 4: valuable experience to the suburbs.

622
00:31:40,370 --> 00:31:40,790
Speaker 1: Fair enough.

623
00:31:41,440 --> 00:31:46,010
Speaker 4: This conflict we'd see more and more of over the

624
00:31:46,050 --> 00:31:50,790
Speaker 4: next few decades between the brand, and the franchisees. Let's

625
00:31:50,850 --> 00:31:52,830
Speaker 4: talk about that relationship a little bit, but let's do

626
00:31:52,850 --> 00:31:53,850
Speaker 4: the good side first.

627
00:31:53,870 --> 00:31:54,810
Speaker 2: You love franchises.

628
00:31:54,910 --> 00:31:57,719
Speaker 4: I kind of do love franchises because one place the

629
00:31:57,760 --> 00:32:02,520
Speaker 4: partnership works really well is in product innovation. Who doesn't

630
00:32:02,560 --> 00:32:06,880
Speaker 4: love innovation? McDonald's, corporate, they have a lot of rules,

631
00:32:07,660 --> 00:32:11,020
Speaker 4: but I think they realized early on that The same

632
00:32:11,040 --> 00:32:13,600
Speaker 4: thing we were talking about, about knowing the neighborhood, also

633
00:32:13,640 --> 00:32:16,360
Speaker 4: meant that you were at the grill as an owner.

634
00:32:16,440 --> 00:32:18,620
Speaker 1: You knew the product. You knew what you were selling.

635
00:32:18,960 --> 00:32:22,210
Speaker 4: So they allowed some of these restaurants to become almost

636
00:32:22,330 --> 00:32:25,730
Speaker 4: laboratories for coming up with new things. So, for instance,

637
00:32:26,570 --> 00:32:30,490
Speaker 4: the Egg McMuffin. That came from a franchisee in Santa Barbara.

638
00:32:31,190 --> 00:32:33,830
Speaker 4: who was noticing that his workers were just standing around

639
00:32:33,870 --> 00:32:35,190
Speaker 4: and doing nothing before lunch.

640
00:32:35,410 --> 00:32:36,610
Speaker 2: Because all there was was burgers.

641
00:32:36,830 --> 00:32:39,950
Speaker 1: All there was was burgers. And he played around.

642
00:32:39,970 --> 00:32:41,709
Speaker 4: He came up with that little metal ring, you know,

643
00:32:41,730 --> 00:32:44,690
Speaker 4: that makes the egg the.

644
00:32:44,670 --> 00:32:46,990
Speaker 1: Exact size of the English muffin. Genius.

645
00:32:47,730 --> 00:32:50,150
Speaker 4: This ends up getting rolled out to the whole nation.

646
00:32:50,630 --> 00:32:55,970
Speaker 4: Filet-O-Fish came from a Cincinnati franchisee who needed a fish

647
00:32:56,130 --> 00:32:57,410
Speaker 4: item for Catholics.

648
00:32:58,270 --> 00:32:59,450
Speaker 2: Don't even eat on Fridays.

649
00:32:59,490 --> 00:32:59,790
Speaker 3: Yeah.

650
00:32:59,970 --> 00:33:00,630
Speaker 2: So smart.

651
00:33:01,170 --> 00:33:01,710
Speaker 1: Filet-O-Fish.

652
00:33:02,050 --> 00:33:02,710
Speaker 2: I never knew.

653
00:33:02,730 --> 00:33:03,310
Speaker 3: Yeah.

654
00:33:03,670 --> 00:33:07,030
Speaker 1: The Big Mac. The iconic... The.

655
00:33:07,350 --> 00:33:08,430
Speaker 2: Iconic McDonald's burger.

656
00:33:08,450 --> 00:33:13,430
Speaker 4: The iconic burger was invented by Jim Delegati, a franchisee

657
00:33:13,470 --> 00:33:17,020
Speaker 4: in Western Pennsylvania. He had a lot of blue-collar workers

658
00:33:17,180 --> 00:33:21,120
Speaker 4: coming into his store, Western Pennsylvania, and he saw that

659
00:33:21,140 --> 00:33:24,380
Speaker 4: they wanted something bigger than a McDonald's hamburger, which, you know,

660
00:33:24,440 --> 00:33:26,980
Speaker 4: is about the size of your fist. And so he

661
00:33:27,000 --> 00:33:30,920
Speaker 4: started to play around with two-all beef patties, special sauce, lettuce, cheese, pickles...

662
00:33:31,050 --> 00:33:35,229
Speaker 4: onions on a sesame seed bun. And of course, the

663
00:33:35,310 --> 00:33:38,670
Speaker 4: crucial middle layer of bread. I don't know how long

664
00:33:38,710 --> 00:33:40,100
Speaker 4: it's been since you've had a Big Mac. It's like

665
00:33:40,140 --> 00:33:42,340
Speaker 4: a club sandwich. There's a layer of bread in the middle,

666
00:33:43,360 --> 00:33:46,540
Speaker 4: which apparently he said they needed because otherwise the two

667
00:33:46,940 --> 00:33:49,860
Speaker 4: meat patties would slide around and it would fall apart.

668
00:33:49,900 --> 00:33:52,820
Speaker 2: So it's like a friction. It's an adhesive agent.

669
00:33:53,040 --> 00:33:55,440
Speaker 4: He starts to serve it for a year, takes it

670
00:33:55,480 --> 00:33:56,490
Speaker 4: to McDonald's headquarters.

671
00:33:56,510 --> 00:33:58,350
Speaker 1: They love it. They're the ones who name it the

672
00:33:58,370 --> 00:34:00,690
Speaker 1: Big Mac. It was adopted by the whole system.

673
00:34:01,250 --> 00:34:04,940
Speaker 4: These are the ways in which franchisees and brands can

674
00:34:04,980 --> 00:34:09,759
Speaker 4: work together. But there were also conflicts. And this came

675
00:34:09,800 --> 00:34:13,200
Speaker 4: from the crucial difference between how McDonald's and how the

676
00:34:13,300 --> 00:34:16,620
Speaker 4: owner-operators made their money. We've gone over this before, but

677
00:34:16,640 --> 00:34:19,060
Speaker 4: I want you to think about this. McDonald's corporate gets

678
00:34:19,100 --> 00:34:22,719
Speaker 4: a cut of sales. So anything that brings in more

679
00:34:22,820 --> 00:34:26,510
Speaker 4: customers is good for McDonald's corporate.

680
00:34:26,780 --> 00:34:31,160
Speaker 2: More revenue, more gross revenue. But the problem is... What

681
00:34:31,200 --> 00:34:35,150
Speaker 2: an owner cares about is not gross revenue, but profit.

682
00:34:35,610 --> 00:34:36,270
Speaker 1: Exactly right.

683
00:34:36,290 --> 00:34:38,569
Speaker 2: What I think of here is when those ads on

684
00:34:38,610 --> 00:34:41,730
Speaker 2: McDonald's are like, come on down and get the dollar

685
00:34:41,790 --> 00:34:44,700
Speaker 2: menu or whatever it is now, the value menu. So

686
00:34:44,719 --> 00:34:47,800
Speaker 2: that's going to drive up revenues. But if they're selling

687
00:34:47,860 --> 00:34:51,160
Speaker 2: it below cost, it's going to drive down profits or

688
00:34:51,200 --> 00:34:54,200
Speaker 2: even at cost. That's going to be good for McDonald's

689
00:34:54,239 --> 00:34:56,410
Speaker 2: corporate because they get the cut of the gross, but

690
00:34:56,830 --> 00:34:59,890
Speaker 2: bad for the owner because they're living off the net,

691
00:34:59,910 --> 00:35:02,890
Speaker 2: the profit. And suddenly, you know, we talked about the

692
00:35:02,930 --> 00:35:07,250
Speaker 2: franchise model solving the principal agent problem, but at that margin,

693
00:35:07,290 --> 00:35:10,490
Speaker 2: they're not aligned. They're not aligned in that instance.

694
00:35:10,810 --> 00:35:12,969
Speaker 4: And it creates a lot of conflicts, not just with McDonald's,

695
00:35:13,270 --> 00:35:16,550
Speaker 4: but with all fast food restaurants. You'll hear this occasionally

696
00:35:16,880 --> 00:35:19,400
Speaker 4: where the brand will say, we have this great idea.

697
00:35:19,420 --> 00:35:21,430
Speaker 4: And the franchises are like, how are we going to

698
00:35:21,469 --> 00:35:23,009
Speaker 4: make that? How are we going to serve this? How

699
00:35:23,030 --> 00:35:25,740
Speaker 4: are we going to survive on that price, that national price?

700
00:35:25,880 --> 00:35:28,660
Speaker 2: Well, and more generally, I will just say in the

701
00:35:29,219 --> 00:35:34,260
Speaker 2: critiques of franchises section, not specific to McDonald's, but more generally,

702
00:35:34,760 --> 00:35:38,320
Speaker 2: there is a critique of franchises that basically comes down

703
00:35:38,400 --> 00:35:41,960
Speaker 2: to the power dynamic, where you have these people who

704
00:35:42,160 --> 00:35:44,540
Speaker 2: want to be entrepreneurs, but don't have that much knowledge,

705
00:35:44,640 --> 00:35:46,739
Speaker 2: often don't have that much capital. And then you have

706
00:35:46,780 --> 00:35:50,060
Speaker 2: this giant company that And often the terms of the

707
00:35:50,120 --> 00:35:54,580
Speaker 2: franchise agreement favor the big company in various ways at

708
00:35:54,620 --> 00:35:57,640
Speaker 2: the expense of the franchise owners. And again, not necessarily

709
00:35:57,660 --> 00:36:00,130
Speaker 2: McDonald's in particular, but that is a standard and it

710
00:36:00,180 --> 00:36:03,049
Speaker 2: seems in some cases valid critique of some franchises.

711
00:36:03,270 --> 00:36:03,950
Speaker 4: I think that's right.

712
00:36:04,130 --> 00:36:04,870
Speaker 1: I think that's right.

713
00:36:05,070 --> 00:36:06,930
Speaker 4: And I think a lot of these things the franchisees

714
00:36:06,969 --> 00:36:09,830
Speaker 4: don't realize until they've been operating a year or two.

715
00:36:09,969 --> 00:36:12,510
Speaker 1: And they think, oh, this is hard.

716
00:36:13,250 --> 00:36:16,700
Speaker 2: And, oh, the parent corporation is selling me supplies at

717
00:36:16,780 --> 00:36:18,940
Speaker 2: some marked-up price, and I have to buy it from

718
00:36:18,980 --> 00:36:21,719
Speaker 2: them under the corporate agreement, under the franchise agreement, or

719
00:36:21,760 --> 00:36:22,420
Speaker 2: something like that.

720
00:36:22,560 --> 00:36:25,880
Speaker 4: To be clear, McDonald's never sells anything to its franchisees.

721
00:36:26,219 --> 00:36:29,020
Speaker 4: It makes deals that everyone benefits from. This was one

722
00:36:29,040 --> 00:36:30,020
Speaker 4: of Ray Kroc's principles.

723
00:36:30,100 --> 00:36:32,219
Speaker 2: So that seems like an instance where you're keeping the

724
00:36:32,260 --> 00:36:33,100
Speaker 2: incentives aligned.

725
00:36:33,280 --> 00:36:35,140
Speaker 4: But I'll tell you one of these points at which

726
00:36:35,510 --> 00:36:38,470
Speaker 4: the conflict happens, and that's in the advertising budget.

727
00:36:38,570 --> 00:36:38,790
Speaker 3: Huh.

728
00:36:39,210 --> 00:36:41,270
Speaker 1: Franchisees contribute money.

729
00:36:41,739 --> 00:36:45,219
Speaker 4: To a national advertising fund, and that costs them money,

730
00:36:45,660 --> 00:36:49,890
Speaker 4: cuts into their profits. But McDonald's headquarters figures out how

731
00:36:49,930 --> 00:36:54,090
Speaker 4: to spend it. Now, going back now to Herman Petty

732
00:36:54,350 --> 00:36:58,830
Speaker 4: and the newly organized black franchisees, they were putting money

733
00:36:58,870 --> 00:37:02,049
Speaker 4: into this national advertising fund in the early 70s, but

734
00:37:02,090 --> 00:37:04,980
Speaker 4: they hated the ads that McDonald's was coming up with.

735
00:37:05,780 --> 00:37:09,660
Speaker 4: In the 1970s, McDonald's would buy TV or magazine ads

736
00:37:09,719 --> 00:37:13,310
Speaker 4: that featured, don't be surprised, white customers and white servers

737
00:37:13,510 --> 00:37:16,770
Speaker 4: at a white McDonald's. And for the black franchisees, they're like,

738
00:37:17,290 --> 00:37:21,250
Speaker 4: this does not speak to my customers on Stony Island Avenue.

739
00:37:21,690 --> 00:37:24,629
Speaker 4: This is a huge waste. You're not even running these

740
00:37:24,810 --> 00:37:27,509
Speaker 4: ads setting aside the white actors. You're not even running

741
00:37:27,550 --> 00:37:31,190
Speaker 4: them on black TV shows, black radio stations. You're not

742
00:37:31,469 --> 00:37:34,629
Speaker 4: putting print ads in Ebony or Jet magazines. We are

743
00:37:34,930 --> 00:37:38,790
Speaker 4: throwing this money down the toilet. McDonald's, to their credit,

744
00:37:39,010 --> 00:37:43,410
Speaker 4: they hear this. And they hired a black advertising executive

745
00:37:43,489 --> 00:37:47,170
Speaker 4: in Chicago. In fact, the very first black advertising executive

746
00:37:47,190 --> 00:37:49,310
Speaker 4: in Chicago, Tom Burrell.

747
00:37:49,610 --> 00:37:52,390
Speaker 2: Robert, you did a story about this with Sonari, with

748
00:37:52,430 --> 00:37:54,490
Speaker 2: Sonari Glinton at Planet Money, a great story.

749
00:37:54,910 --> 00:37:55,750
Speaker 1: It was a great story.

750
00:37:55,610 --> 00:38:00,020
Speaker 4: Because it was the whole story of Tom Burrell. And

751
00:38:00,480 --> 00:38:03,620
Speaker 4: doing this story was a revelation to me because at

752
00:38:03,660 --> 00:38:07,649
Speaker 4: the time, In order to sell products, the idea was

753
00:38:07,730 --> 00:38:10,050
Speaker 4: you have to have an ad that appeals to everyone.

754
00:38:10,130 --> 00:38:11,110
Speaker 1: It should be generic.

755
00:38:11,130 --> 00:38:13,870
Speaker 4: That was just the principle in advertising. And generic at

756
00:38:13,890 --> 00:38:17,470
Speaker 4: the time usually meant white. And when you would see

757
00:38:17,840 --> 00:38:20,719
Speaker 4: black people in ads, it was oftentimes the same ads

758
00:38:21,040 --> 00:38:23,379
Speaker 4: with the same words and the same set. They just

759
00:38:23,400 --> 00:38:27,239
Speaker 4: swapped out black actors to say the same lines. And

760
00:38:27,280 --> 00:38:31,310
Speaker 4: when Tom Burrell started his advertising agency, he had a motto.

761
00:38:31,790 --> 00:38:33,410
Speaker 4: And he said it so often that other people just

762
00:38:33,530 --> 00:38:36,320
Speaker 4: quoted it back to us constantly when we did this episode.

763
00:38:36,680 --> 00:38:40,860
Speaker 4: And that motto was, black people are not dark-skinned white people.

764
00:38:41,760 --> 00:38:45,160
Speaker 4: And what he meant was you have to write the

765
00:38:45,260 --> 00:38:49,540
Speaker 4: ads from scratch from a black perspective and talk about

766
00:38:49,620 --> 00:38:53,379
Speaker 4: things that those customers actually care about. This was Tom

767
00:38:53,400 --> 00:38:55,239
Speaker 4: Burrell's big idea, and he was brought in to do

768
00:38:55,280 --> 00:38:58,080
Speaker 4: this for McDonald's. And one of the first things he

769
00:38:58,120 --> 00:39:02,299
Speaker 4: told the company is that you are alienating people Black customers.

770
00:39:02,320 --> 00:39:04,820
Speaker 4: You're not just not attracting. You are alienating Black customers

771
00:39:04,860 --> 00:39:06,030
Speaker 4: without realizing it.

772
00:39:06,090 --> 00:39:10,110
Speaker 2: It's like a negative ad. The ad is driving away customers.

773
00:39:10,350 --> 00:39:13,390
Speaker 4: So, for instance, a McDonald's ad would show the whole family,

774
00:39:13,610 --> 00:39:15,830
Speaker 4: white family, piling into a car to go to McDonald's

775
00:39:15,910 --> 00:39:19,220
Speaker 4: for a treat. And Burrell pointed out that Black consumers

776
00:39:19,260 --> 00:39:23,819
Speaker 4: in the inner cities, they used McDonald's differently. Jacob, give

777
00:39:23,840 --> 00:39:26,399
Speaker 4: me this Burrell quote from Planet Money about how Black

778
00:39:26,460 --> 00:39:27,620
Speaker 4: consumers use McDonald's.

779
00:39:28,280 --> 00:39:31,180
Speaker 2: He said McDonald's was not used as a place where

780
00:39:31,200 --> 00:39:34,100
Speaker 2: the family would go. McDonald's was used as a place

781
00:39:34,160 --> 00:39:36,950
Speaker 2: where working people would go and take a break whenever

782
00:39:36,969 --> 00:39:39,250
Speaker 2: they had a chance. It was a place where children

783
00:39:39,290 --> 00:39:41,190
Speaker 2: would go very often by themselves.

784
00:39:41,250 --> 00:39:41,969
Speaker 1: And that wasn't being reformed.

785
00:39:42,420 --> 00:39:45,020
Speaker 4: In the ads. And so Burrell starts to come up

786
00:39:45,040 --> 00:39:50,050
Speaker 4: with ads that better reflect black culture. And at first,

787
00:39:50,250 --> 00:39:54,030
Speaker 4: they're pretty basic ads. But then he starts to introduce...

788
00:39:54,590 --> 00:39:56,790
Speaker 4: these things from the black community that maybe a lot

789
00:39:57,130 --> 00:39:59,830
Speaker 4: of America had not seen at the time. I will admit,

790
00:40:00,670 --> 00:40:03,969
Speaker 4: in the early 1980s, when I was a kid, the

791
00:40:04,030 --> 00:40:06,189
Speaker 4: first time I saw Double Dutch, you know, the jump

792
00:40:06,239 --> 00:40:06,720
Speaker 4: roping thing?

793
00:40:06,739 --> 00:40:07,450
Speaker 2: Yeah, with two ropes.

794
00:40:07,820 --> 00:40:10,660
Speaker 1: Was in a McDonald's commercial. They had a McDonald's commercial

795
00:40:10,940 --> 00:40:12,120
Speaker 1: with Double Dutch jump ropes.

796
00:40:12,180 --> 00:40:13,680
Speaker 2: In your defense, you were living in Utah.

797
00:40:13,800 --> 00:40:16,000
Speaker 1: I was living in Utah at the time. But they

798
00:40:16,020 --> 00:40:18,440
Speaker 1: would list off the menu and do Double Dutch.

799
00:40:18,480 --> 00:40:23,660
Speaker 2: You know, I think my kids learned the learned the

800
00:40:23,719 --> 00:40:25,560
Speaker 2: thing that the kids said in that ad when they

801
00:40:25,580 --> 00:40:28,200
Speaker 2: were kids, like not even from a commercial, just, I

802
00:40:28,219 --> 00:40:31,000
Speaker 2: don't know, jumping rope or something. Let me see. Big

803
00:40:31,040 --> 00:40:34,440
Speaker 2: Mac filet of fish, quarter pounder French fries, icy Coke milkshake,

804
00:40:34,620 --> 00:40:37,500
Speaker 2: sundaes and apple pies. I think that was, was that

805
00:40:37,540 --> 00:40:38,589
Speaker 2: that ad? I think so. Yes.

806
00:40:39,320 --> 00:40:41,600
Speaker 4: Tom Burrell came up with an ad that is being

807
00:40:41,660 --> 00:40:43,000
Speaker 4: passed down to this day.

808
00:40:43,380 --> 00:40:46,200
Speaker 2: By word of mouth to my children, who probably never

809
00:40:46,260 --> 00:40:47,279
Speaker 2: saw a McDonald's ad.

810
00:40:47,540 --> 00:40:51,029
Speaker 4: Burrell also had this big realization, which was that McDonald's

811
00:40:51,150 --> 00:40:54,750
Speaker 4: wasn't just a place for Black people to eat. McDonald's

812
00:40:54,770 --> 00:40:58,330
Speaker 4: was also a place where Black people worked. And in

813
00:40:58,370 --> 00:41:01,359
Speaker 4: some of these neighborhoods, it was a major employer. And

814
00:41:01,910 --> 00:41:05,080
Speaker 4: as we know, in many neighborhoods, it's the first job

815
00:41:05,900 --> 00:41:09,860
Speaker 4: that many teenagers get, McDonald's. He launched a series of

816
00:41:10,040 --> 00:41:12,340
Speaker 4: ads known in the industry just by one name, Calvin,

817
00:41:12,780 --> 00:41:15,280
Speaker 4: because it was about this black teenager named Calvin.

818
00:41:15,300 --> 00:41:16,020
Speaker 1: Should we just watch?

819
00:41:16,550 --> 00:41:16,700
Speaker 3: Yeah.

820
00:41:17,090 --> 00:41:22,430
Speaker 1: Yeah, let's watch this ad. We'll narrate. Don't worry. You

821
00:41:22,489 --> 00:41:23,589
Speaker 1: see a young.

822
00:41:23,410 --> 00:41:26,170
Speaker 4: Black man looks like Brooklyn, maybe, or maybe a Hollywood

823
00:41:26,190 --> 00:41:27,230
Speaker 4: set version of Brooklyn.

824
00:41:27,250 --> 00:41:30,030
Speaker 1: He's coming down the stoop. Someone says, hey, isn't that Calvin?

825
00:41:30,640 --> 00:41:32,760
Speaker 4: I haven't seen him for a while. Wonder where he's headed.

826
00:41:33,420 --> 00:41:35,680
Speaker 4: Someone says, I heard he got a job. And then

827
00:41:36,180 --> 00:41:39,250
Speaker 4: These young women say, looks like responsibility has been good

828
00:41:39,290 --> 00:41:43,049
Speaker 4: for him. And at the very end, he turns around

829
00:41:43,090 --> 00:41:45,969
Speaker 4: his cap and he's behind the counter of McDonald's and says,

830
00:41:46,150 --> 00:41:48,940
Speaker 4: welcome to McDonald's, may I help you? Welcome to McDonald's,

831
00:41:49,000 --> 00:41:49,540
Speaker 4: may I help you?

832
00:41:50,300 --> 00:41:51,259
Speaker 2: These ads were.

833
00:41:51,960 --> 00:41:53,120
Speaker 1: A phenomenon.

834
00:41:53,560 --> 00:41:56,320
Speaker 2: A national thing. I remember them growing up in the suburbs.

835
00:41:56,640 --> 00:42:00,219
Speaker 4: Ran for years. Calvin gets promoted to manager, and it's

836
00:42:00,260 --> 00:42:02,700
Speaker 4: this huge deal. Everyone in the neighborhood is talking about manager.

837
00:42:02,920 --> 00:42:05,839
Speaker 4: He starts to recruit his fellow teenagers to work at McDonald's. Remember,

838
00:42:05,880 --> 00:42:07,640
Speaker 4: this is a McDonald's ad. It starts to seem like

839
00:42:07,660 --> 00:42:11,020
Speaker 4: a soap opera. People start to speculate in the ad

840
00:42:11,739 --> 00:42:13,400
Speaker 4: that he owns his own franchise.

841
00:42:14,400 --> 00:42:16,399
Speaker 1: Not yet, he says. Not yet.

842
00:42:17,239 --> 00:42:20,339
Speaker 4: They have a very cheesy 80s quality to them, but

843
00:42:20,940 --> 00:42:22,560
Speaker 4: If you look back on it, like this was a

844
00:42:23,040 --> 00:42:28,630
Speaker 4: huge announcement to the world that the black franchisees had

845
00:42:28,910 --> 00:42:31,950
Speaker 4: a lot of power at McDonald's, that they were shaping

846
00:42:32,850 --> 00:42:37,109
Speaker 4: the feel-good ad of the year for McDonald's was coming

847
00:42:37,160 --> 00:42:39,100
Speaker 4: from their experience and coming from Tom Burrell.

848
00:42:39,580 --> 00:42:42,360
Speaker 1: And it changed all advertising.

849
00:42:42,460 --> 00:42:45,060
Speaker 2: Well, it's interesting to think about this now. I mean,

850
00:42:45,120 --> 00:42:47,480
Speaker 2: you were talking about the earlier ads being the very

851
00:42:47,560 --> 00:42:53,180
Speaker 2: generic suburban ads. white family. And now, I mean, of course,

852
00:42:53,219 --> 00:42:55,360
Speaker 2: the internet is a big part of this, but now

853
00:42:55,580 --> 00:42:59,450
Speaker 2: advertising is niches, a million niches. And, you know, you

854
00:42:59,469 --> 00:43:01,530
Speaker 2: go on Instagram and you get the ad just for you.

855
00:43:01,630 --> 00:43:04,210
Speaker 2: Like these pants are perfect for you. They are not

856
00:43:04,230 --> 00:43:06,530
Speaker 2: the generic pants. They are the Robert Smith pants.

857
00:43:07,090 --> 00:43:10,050
Speaker 4: And I would say Tom Burrell with his Chicago advertising

858
00:43:10,130 --> 00:43:12,230
Speaker 4: firm was one of the main reasons for that, who

859
00:43:12,270 --> 00:43:16,009
Speaker 4: just said you should speak directly to a customer, not

860
00:43:16,230 --> 00:43:19,330
Speaker 4: all customers. Whatever the current double Dutch ad is, I

861
00:43:19,930 --> 00:43:20,290
Speaker 4: wouldn't know.

862
00:43:20,870 --> 00:43:24,730
Speaker 2: There are a million double Dutch ads, one for every

863
00:43:24,810 --> 00:43:27,430
Speaker 2: single person at some margin.

864
00:43:27,770 --> 00:43:30,770
Speaker 4: To wrap up the story today, there are hundreds of

865
00:43:30,810 --> 00:43:35,529
Speaker 4: Black McDonald's franchisees who control well over a thousand restaurants.

866
00:43:36,090 --> 00:43:40,100
Speaker 4: Huge source of wealth in the Black community. Also, as

867
00:43:40,140 --> 00:43:43,660
Speaker 4: we touched upon before, it's this source of worry because

868
00:43:43,719 --> 00:43:47,900
Speaker 4: Black urban neighborhoods are more saturated than ever with with

869
00:43:47,980 --> 00:43:49,880
Speaker 4: fast food more saturated.

870
00:43:49,440 --> 00:43:52,100
Speaker 1: Than white neighborhoods. All the studies have been done on this.

871
00:43:52,660 --> 00:43:55,799
Speaker 2: And the high rates of obesity, diabetes, things that come

872
00:43:55,840 --> 00:43:57,700
Speaker 2: from eating a lot of fast food, or at least

873
00:43:57,739 --> 00:43:58,589
Speaker 2: are correlated with.

874
00:43:59,010 --> 00:44:03,730
Speaker 4: Obviously, I'm cheering on Herman Petty and the black franchise owners.

875
00:44:04,270 --> 00:44:05,230
Speaker 1: And good for them.

876
00:44:05,250 --> 00:44:07,450
Speaker 2: Who are making money and owning businesses.

877
00:44:07,770 --> 00:44:13,110
Speaker 4: Herman Petty would eventually own eight McDonald's. He died in 2009.

878
00:44:13,110 --> 00:44:15,399
Speaker 4: But his role in changing the face of franchising wouldn't

879
00:44:15,440 --> 00:44:18,980
Speaker 4: really be recognized until a decade later. His original McDonald's

880
00:44:19,020 --> 00:44:21,979
Speaker 4: now has a little museum featuring photos from his early

881
00:44:22,040 --> 00:44:25,200
Speaker 4: days and old signage. City of Chicago named a street

882
00:44:25,260 --> 00:44:29,189
Speaker 4: after him. And in the neighborhood at the new Obama

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Speaker 4: Presidential Center in Chicago, there is a Herman Petty classroom,

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Speaker 4: a room named after him. It's sponsored by McDonald's.

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Speaker 2: Today's show was produced by Gabriel Hunter Chang. It was

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Speaker 2: engineered by Sarah Bruguier. Our showrunner and editor is Ryan Dilley.

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Speaker 2: And our video editor is Matt Nielsen. I'm Jacob Goldstein.

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Speaker 1: I'm Robert Smith. Thanks for listening.