Jacob Goldstein
Jacob Goldstein spent more than a decade as co-host of the Planet Money podcast. He's also the author of the book Money: The True Story of a Made-Up Thing, which the New…
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Herman Petty was a Chicago barber and bus driver who dreamed of running his own business. When his local McDonald’s restaurant was abandoned in 1968, Herman approached the company and said he should be the first black American to be given a hamburger franchise.
Herman and other black pioneers faced unique problems running McDonald’s in America’s inner cities – but their businesses soon flourished and they fought to make the burger giant listen to its black franchisees and customers.
Write to us at businesshistory@pushkin.fm
Pushkin. Too quick? No, it was perfect. Pushkin. Stop.
00:09
Speaker 2
You got it.
00:09
Speaker 1
Jacob? Robert.
00:11
Speaker 3
The year is 1968, and the subject of today's episode is Herman Petty.
00:33
Speaker 4
This was before he was considered a civil rights pioneer. In 1968, Petty was just a guy living on the south side of Chicago who wanted to make some money.
00:43
Speaker 1
Petty was outgoing.
00:44
Speaker 4
He was charming by all accounts. And his jobs really reflected that. During the day, he ran a barber shop in the neighborhood. Would always say he knew everyone and everyone knew him. At night, he had a different view of the same street. He was a Chicago bus driver. On the graveyard shift.
01:02
Speaker 2
Hard working.
01:03
Speaker 1
He was.
01:04
Speaker 4
He was saving his money to start his own business. And we don't know exactly what his plans were, but he must have thought once or twice about a certain opportunity about five blocks away from his barbershop. The McDonald's franchise at 6560 South Stony Island Avenue. This wasn't one of those gleaming suburban McDonald's. It was pretty run down at the time. The owner was a white businessman who was serving a mostly black neighborhood at this point. And it didn't seem like he wanted to invest much in the restaurant. He let things break. He didn't fix them. But he was still willing to take the neighborhood's money. This all changed on April 4th, 1968. Martin Luther King Jr. was assassinated in Memphis. And when people in Chicago heard the news, they took to the streets. In the days following the murder... There were protests and violence in some of the black neighborhoods in Chicago, not on Herman Petty Street. But tensions around the city were very, very high. It was around this time that the white owner of the Stony Island McDonald's essentially abandoned the restaurant, walked away. He told McDonald's executives that he would like to sell the franchise. And Herman Petty, the barber and the bus driver, saw his chance. He traveled out to McDonald's headquarters in the Chicago suburbs, and he told them, it should be me. I want to be the first Black owner of a McDonald's franchise.
02:28
Speaker 1
I'm Robert Smith.
02:28
Speaker 2
I'm Jacob Goldstein, and this is Business History, a show about the history of business. Let me thank right now listener Sean Kelly, who suggested that we do an episode on Black franchise owners in America. Thank you, Sean. He wrote to us at businesshistoryatpushkin.fm, and you should write to us, too. We read all the emails, and they mean a lot to us, and we get good ideas from them, like this show.
02:51
Speaker 4
And a story on franchising is actually perfect for the show, because fast-food franchises have that whiff of.
02:58
Speaker 1
The American dream to them.
02:59
Speaker 4
Like, All you need is a burger brand and a 700-page instruction manual. And with a little hard work, anyone in the country can become a fast food millionaire.
03:09
Speaker 2
That is the promise. That is the theoretical promise.
03:11
Speaker 4
But before Herman Petty, the anyone part wasn't true. McDonald's had 1,000 restaurants at the time, and every single owner was white. Herman Petty marked the start of an unlikely and sometimes tense partnership between McDonald's and the fight for civil rights. Herman Petty showed up to McDonald's headquarters. at exactly the right time. Because inside the company, executives were just starting to realize that they had a problem on their hands. And it's actually surprising it didn't occur to them before they opened their thousands store. But in a weird way, they had sort of avoided coming to terms with race in America. The neighborhoods that they served, though, were changing out from under them. There's the white flight from urban centers. And that meant that white-owned McDonald's franchises were now serving more black and Latino customers. More and more of those white owners had second thoughts about owning these restaurants.
04:10
Speaker 1
So they start quietly.
04:12
Speaker 4
Hunting, McDonald's does, they start quietly hunting for the first black franchisee. They know it's going to be a big deal and they want to find the right person. By the way, this story and a bunch of the stories in today's show comes from an excellent book called Franchise, The Golden Arches in Black America. It's by Marsha Chatelain, won the Pulitzer Prize, by the way. So McDonald's is looking for its first black franchisee. They had one of their black restaurant managers who worked in the D.C. area take the recruiting assignment. Everyone loved this guy. His name was Roland Jones. He had served in the military and would often say that he was used to serving in the military a with black and white bosses and had people report.
04:54
Speaker 1
To him who were black and white.
04:55
Speaker 2
Military was one of the early institutions to be integrated in the United States. Not that early, not as early as you'd like, but decades before this. Yeah, and Roland Jones.
05:03
Speaker 4
Always said the military was why he had success in the white business world. He had a quote here of who he was looking for.
05:09
Speaker 2
Someone who could communicate with the corporate structure and identify with blacks on the grassroots level.
05:15
Speaker 4
Which pretty much described Herman Petty in Chicago. Petty had a pretty simple message for the corporate executives, why he should take over this particular McDonald franchise in his neighborhood.
05:26
Speaker 2
And that was, it's my home.
05:28
Speaker 1
Like, I know this.
05:29
Speaker 4
I run a business on the street. I know everything there is to know about the South Side of Chicago. And he had a particular philosophy. He would say this later in all sorts of interviews. Why don't you give it to us?
05:40
Speaker 2
There's no such thing as a bad community. You just have to concentrate on bringing the good out.
05:45
Speaker 4
Petty spent the day at McDonald's headquarters where he made his pitch. The headquarters are in Oak Brook, Illinois. And apparently they were impressed because when Petty told the story later, he said, give us another one from him.
05:57
Speaker 2
One minute I was in Oak Brook finding out more about McDonald's. And the next minute I was on the telephone telling my wife I'm not a barber anymore.
06:04
Speaker 3
Nice. Nice.
06:06
Speaker 4
They were sending Petty to the McDonald's Training Center, which is delightfully known as Hamburger Center.
06:11
Speaker 2
Don't they have like a McDonald's, like an actual McDonald's and you go and you train it? Have you been there? I feel like you have been to Hattemberger University.
06:19
Speaker 1
I have not.
06:20
Speaker 4
It was in the basement of a restaurant in the early days, basement of McDonald's. And then they had their own suburban training center. I guess it's in downtown Chicago now. But no, it has a complete replica of an entire restaurant where you can learn all the parts. The idea is that if you're going to be an owner of a McDonald's franchise, you need to know how every single thing fits together and works. And apparently in recent years, more and more of it is about management and not how to operate the fryer. But still, you've got to operate the fryer.
06:48
Speaker 2
It's probably easier to operate the fryer now. My guess is the fryer is sort of a robot now, and it's more about dealing with employees and how do you relate to employees and that sort of thing.
06:58
Speaker 1
Yeah, and hiring and recruiting.
07:00
Speaker 2
Tell us what a franchise is. What is a franchise?
07:02
Speaker 1
So it's a legal partnership.
07:04
Speaker 4
We'll take McDonald's. McDonald's has a brand. They have the golden arches. They have a certain menu. They have a way of making the French fries, and they make a deal with a person who wants to open a McDonald's. The franchisee, the local owner, agrees to build out the restaurant, to stick to the rules, to hire the staff, and to pay a small percentage of their sales back to McDonald's corporate.
07:27
Speaker 2
Build out the restaurant is non-trivial in terms of capital. You have to build a restaurant and you can put the name McDonald's on it, but you got to build it is what you're saying. Is that right?
07:36
Speaker 1
Yes. And you are risking your own money. Yeah.
07:39
Speaker 4
That's part of the point. You're risking your own money. You have to bring in the supplies and you get to keep the profits as someone taking the risk. So why does this relationship work? There are a few reasons why a successful hamburger restaurant would want to franchise its brand Why don't you give us one, Jacob, the principal agent problem?
07:59
Speaker 2
So say you're a restaurant. You got your little Jake's Burgers. I want to open 10 more Jake's Burgers. I could hire managers and open them myself, but the manager is not going to be as invested as I am in a literal sense because I own the business. And what the manager is going to want to do is make as much money For himself or herself as possible, but not— Give away fries to his friends. But not for the business, right. So I am the principal in that case, and the manager is the agent, and our interests are not perfectly aligned. This is a historical concern about big companies. Back to at least Adam Smith.
08:35
Speaker 4
So the great thing about a franchise is because the franchisee is taking the risk, they're going to hustle from morning to— till night to sell hamburgers.
08:44
Speaker 2
In the language of the principal-agent problem, they are a principal. It is their own money. So it is now principal and principal and their incentives are aligned. Sell more burgers, make more profits. Yeah.
08:53
Speaker 4
And the other thing that you get from franchising your concept of a restaurant, Jake's, is you get to rapidly expand because you have capital coming in. You have these owners who are putting their own money and you can immediately go to.
09:06
Speaker 1
10 restaurants or 100 restaurants or 1,000 restaurants pretty quickly.
09:09
Speaker 2
Because you don't have to pay to build them all out. All the franchisees are bringing the capital to fund the expansion.
09:15
Speaker 3
Yeah.
09:16
Speaker 4
And here's how the cost would have looked in 1968 for someone like Herman Petty. Petty would have had to pay a franchise fee of $ 10, 000. That just gets you in the door. About the same for a security deposit. And then they have to develop the store, get equipment, pay rent, all this before they open. And that price can go up to, even in 1968, that can go up to $ 150, 000.
09:39
Speaker 2
Have you run this through the CPI inflation calculator? Because I'm going to do it right now.
09:43
Speaker 1
It's a lot. It might be under a million, but close to it.
09:46
Speaker 2
I'm doing it.
09:46
Speaker 3
$ 150, 000?
09:47
Speaker 2
Yeah. You want to guess how.
09:48
Speaker 1
Much $ 150, 000 in 1968 is worth today?
09:49
Speaker 3
$ 972, 000. $ 1.
09:49
Speaker 1
468 million.
09:50
Speaker 2
It was a lot of inflation in the.
10:00
Speaker 4
70s.
10:00
Speaker 2
Yeah, yeah, yeah. So you need a lot of capital. This is not like an ordinary person with a dream. This is not a barber who moonlights as a bus driver is not going to save up $ 1. 5 million.
10:11
Speaker 4
Exactly right. You can borrow some of it. Some of it you can get from a bank. But it was still a lot of money. And this was a big stumbling block in the early days of looking for a black franchisee. There were lots of successful black businessmen in Chicago, but there were very few who could just write a check for this kind of restaurant.
10:29
Speaker 2
This is a much larger problem with wealth inequality. Wealth inequality is much larger than income inequality. And what you need to get more money is money. And you see this catch-22 problem right here in this moment, in this place. If there aren't Black entrepreneurs with the $ 1. 5 million to get on the McDonald's train, they're out of luck.
10:50
Speaker 4
So McDonald's has to figure out a way around this when Herman Petty shows up. And what they decided to do was to waive some of the fees.
10:58
Speaker 1
That's fine.
10:59
Speaker 4
And they allowed Petty to to break a fundamental rule of the corporation, which was he was allowed to have silent partners. Now, McDonald's wanted their owners, investors, in the restaurant every day. They wanted them to feel attached to their one franchise.
11:18
Speaker 2
It's the principal agent thing. They wanted them to have skin in the game. They wanted them to be on the hook.
11:22
Speaker 4
They don't want rich investors from across the country just pouring money into willy-nilly different franchises. But in Petty's case, they said, okay, fine. You don't have the money. If you can find investors, you can have investors. And Herman Petty takes on two white investors, which allowed him to seal the deal. And so December 21st, 1968, Herman Petty takes over the Stony Island McDonald's. He is the first black franchisee. Despite this, it's a pretty historic moment. There wasn't any news coverage at the time, even in the black neighborhood newspapers. But on that cold day in Chicago, it's always cold in December, I don't even look it up. Petty stood behind the counter, surrounded by broken equipment, run down place. And he realizes this is.
12:12
Speaker 1
Going to be more work than he thought. After the break.
12:15
Speaker 2
We'll be back in just a minute. Robert Smith, we've been talking for, I don't know, what, 15 minutes? You have not said Ray Kroc in a McDonald's story.
12:44
Speaker 1
I'm impressed. Nice work.
12:45
Speaker 4
Yeah, for business history, you know, we kept the star self-aggrandizing owner in the background. But, you know, Ray Kroc will not be denied. He's going to push his way through in this story. And one way he pushes his way through is he sort of takes credit in his autobiography for this new diversity awareness at McDonald's. But it was Ray Kroc's style. to take credit for everything. Even the stuff he had no part in. It was really his greatest gift.
13:15
Speaker 2
A classic unappealing characteristic in corporate types.
13:19
Speaker 1
Yes.
13:19
Speaker 2
Taking credit for everything.
13:21
Speaker 1
Yes.
13:21
Speaker 2
You don't want to be in a meeting with that guy.
13:23
Speaker 1
No, not at all.
13:24
Speaker 4
But you could argue that having an iconic person at the top of a corporation who shows you the way, even if they're taking credit for other people's work.
13:33
Speaker 2
You're a Ray Kroc apologist now?
13:34
Speaker 3
Go on.
13:35
Speaker 1
I'm not. I'm not.
13:36
Speaker 4
So, Herman Petty, he did, by signing this franchise contract, he did agree to run his restaurant the Ray Kroc way.
13:45
Speaker 2
Is that in writing? Does it say I agreed to do it the Ray Kroc way?
13:48
Speaker 3
I hope so.
13:49
Speaker 4
It had a name, the Speedy Service System. This was something that Ray Kroc discovered, doing air quotes here, discovered in 1954. This is before there's a McDonald's corporation. Ray Kroc is 52 years old.
14:05
Speaker 2
Prime of his life.
14:06
Speaker 4
And he is hacking it out as a milkshake machine salesman. And the way Ray Kroc tells it is that he notices that one of his customers had bought enough of the multi-mixer milkshake machines to make 40 milkshakes at the same time.
14:24
Speaker 2
Nobody needs to make 40 milkshakes at the same time.
14:27
Speaker 4
Must be a mistake. So Kroc goes out to see for himself. to San Bernardino, California.
14:34
Speaker 2
San Bernardino.
14:35
Speaker 4
To a tiny burger drive-in called McDonald's. And it's run by the McDonald's brothers, actual brothers, Richard and Maurice. They go by Dick and Mac. I love Mac McDonald. And when Ray Kroc gets there, he is pretty stunned. It's a little burger shack, but there are lines of customers waiting outside.
14:55
Speaker 1
Okay.
14:55
Speaker 4
But he sees how fast the lines move. Orders were coming out of the kitchen in under a minute. People are ordering and the line is just moving through. Ray Kroc later wrote, When I saw.
15:05
Speaker 2
It working that day in 1954, I felt like some latter-day Newton who just had an Idaho potato caromed off his skull. Right here in this quote, he's taking credit. Like, Newton figured out the equations of gravity. All this guy did was see something that somebody else had figured out.
15:22
Speaker 1
And said, I should steal that, right?
15:24
Speaker 2
Or buy it, barely.
15:25
Speaker 4
This is the factory model. For hamburgers, it's exactly the same as the Henry Ford model.
15:30
Speaker 2
The McDonald brothers are making the Model T of burgers.
15:34
Speaker 4
Actually, they are doing the Model T of burgers. You had very little choice in what you bought at the restaurant. That was part of the system. So the McDonald brothers came up with this after a string of business failures. They had run a drive-in where they served barbecue and all sorts of other things. But they weren't making any money because... The costs were too high. They had too many workers, too much food wasted.
15:57
Speaker 2
It's tough business. They run a restaurant. It's famously hard business.
16:00
Speaker 4
They did what really very few people had done at the time, which was to think of the burger restaurant like an assembly line. So they pared down the menu, hamburgers, french fries, milkshakes, sodas, and they redesigned the kitchen for maximum efficiency.
16:17
Speaker 1
I love this story.
16:18
Speaker 4
Before they built their McDonald's kitchen, They drew a chalk outline of the place on a tennis court.
16:24
Speaker 1
Oh, yeah.
16:25
Speaker 4
With squares labeled fryer and grill. And they brought in their staff and made them practice making invisible burgers on the tennis court. And they choreographed it like a ballet. They counted the steps. They made sure that every part of the process had a minimum of movement. And if it didn't, they moved the fry station around.
16:46
Speaker 1
This is Taylorism.
16:48
Speaker 2
Remember Frederick Winslow Taylor, this factory guy that early 1900s, he would go into factories with a stopwatch and look at every movement that workers made. I think it's unclear really how much better he made factories. But he was this guru of factory optimization doing what sounds like the same thing these guys were doing out on the tennis court.
17:10
Speaker 4
The theory is if you can save five seconds on a process that's repeated thousands of times a day, that means real money. And the McDonald brothers felt like this would give them the edge in what was a pretty competitive restaurant market along Route 66 at the time. So speedy service system is what they called it. And, you know, you want to put ketchup on your hamburger. The amount of time it takes for someone to get a knife and dip it in the ketchup.
17:34
Speaker 2
Or they're hitting the bottle.
17:36
Speaker 3
Yeah, yeah. No, no, no, no.
17:37
Speaker 4
They had those special metal funnels built that you could fill with a lot of ketchup and has a trigger on it.
17:44
Speaker 1
And you go.
17:45
Speaker 2
The trigger is the exact amount you do on the burger.
17:48
Speaker 4
Every single burger the same every time. And the condiment guy is always in the same place. Can always reach the pumps. Never had to leave the condiment spot.
17:56
Speaker 2
This is also evocative of. factories and industrialization in the early 20th century because it is de-skilling. It is putting the skill into the machine so that the worker doesn't essentially, frankly, have to have the skill. You don't need to be a good cook to work at this restaurant because the machines are doing the cooking. You don't have to know how much ketchup to put on a burger, even. You just have to pull the trigger.
18:21
Speaker 1
The system is the key.
18:24
Speaker 4
And Ray Kroc, you like the name, love the name McDonald's, but He saw that the system could be marketed. So he made a deal with the McDonald brothers to sell the franchises for their restaurant concept. And the deal would be the same for McDonald's number one, all the way to Herman Petty's McDonald's on Stony Island Avenue. Corporate, aka Ray Kroc, would get a cut of the sales, gross sales, two to 3%, right off the top. Franchisee gets all the profits left over after paying for expenses.
18:55
Speaker 1
Okay.
18:56
Speaker 3
Yeah.
18:56
Speaker 1
And it usually works out great for everyone involved.
18:58
Speaker 4
I mean, that's why by 1968, they had a thousand franchises. People were making money. Ray Kroc was making money. But this setup would be a particular challenge for Herman Petty and for the other black owners who are about to come along.
19:13
Speaker 1
First of all, the expenses.
19:15
Speaker 4
Remember, that comes out of the franchisee's pocket. And the expenses to fix up Petty's new store were enormous. And that cost was all on him. Corporate's not paying for this. The restaurant he bought, remember, was a real dump. And someone who worked with Petty later said, why don't you give me a line here?
19:31
Speaker 2
They said not one piece of equipment in his store was in proper working order, if it worked at all. The store looked like it was ready for the wrecking ball.
19:39
Speaker 4
More than that, Petty figured out that the ongoing costs for a McDonald's in a neighborhood like his turned out to be much higher than the restaurants in the suburbs. There were higher insurance costs, which was a form of redlining. They would sometimes have to hire security guards. Their stores were often in rundown or even burned out neighborhoods. So that was the challenge. It was going to cost him more. It's going to cut into his profits. But Herman Petty tackled these problems one by one. For instance, I love this one. When Petty reopened the McDonald's, he discovered that it was this hangout for this notorious gang called the Blackstone Rangers. And they had intimidated the previous owner into hiring some of their members. And then they could just hang out and kind of get paid there. So obviously terrible for the restaurant. Petty didn't call the police. He didn't threaten the gang members. He told the gang that he would no longer employ them. or let them loiter, and amazingly it worked. He later told the Chicago Crusader newspaper, Jacob.
20:41
Speaker 2
He said, because I had a barbershop down the street, I knew everybody in the neighborhood. I knew the kids and I knew their families. And I was able to get them all out of the store. So is he basically saying, you got to stop loitering at my store or I'm going to tell your mom? And they were like, yes, is that what he's saying here?
20:58
Speaker 1
Yes.
20:58
Speaker 4
I assume they were not afraid of rival gangs or the police, but tell your mom.
21:02
Speaker 2
Tell your mom. That is delightful.
21:04
Speaker 4
Petty was also using his knowledge of the neighborhood and his connections to bring people into the store. He'd provide free hamburgers to church functions. He would train local kids. He was this neighborhood celebrity. And by the way, to give Ray Kroc a tiny bit of credit, this was part of the design of the franchise system. That if you had people who cared about their neighborhood, it would actually be great for business, too.
21:28
Speaker 2
This is what you want the small business to be doing. Maybe sponsoring a little league team. That feeling of... this person who lives here and runs this business and is involved with us and we go to the store, that is a nice feeling. And weirdly, there is this giant corporation sort of getting some of that money.
21:45
Speaker 4
Don't pay attention to Ray Grog. Pay attention to Herman Petty, is what they're saying.
21:50
Speaker 2
And it worked.
21:51
Speaker 4
The next year, sales increased at the Stony Island McDonald's by 75%. Petty made enough money to buy a second McDonald's franchise.
21:59
Speaker 2
Okay, how he's going.
22:00
Speaker 4
And then eventually a third. By the time he got The third one, people started to know him in the city. When he bought that one, he got a city alderman to improve the lighting and trash collection.
22:12
Speaker 2
You know you're getting somewhere when the alderman improves trash collection for you.
22:16
Speaker 4
Build new sidewalks, he got that. You're improving Chicago one McDonald's at a time.
22:20
Speaker 2
Yeah, one alderman at a time.
22:22
Speaker 4
By the end of 1969, there were 12 black-owned McDonald's across the country.
22:26
Speaker 2
Still not very many, I will say.
22:28
Speaker 4
There was still the question of financing for black owners. McDonald's kept the rules loose, but it was starting to become a problem. The two white owners who had backed Herman Petty had backed a few other Black franchisees. The book McDonald's Behind the Arches by John F. Love talks about how it turned into this disaster. The investors had originally promised to eventually sell their shares back to the Black partners.
22:56
Speaker 1
They did not do that.
22:57
Speaker 4
What they did instead was to start to cheat other people using the restaurant. They didn't pay supplier bills. They fell behind in their royalty payments to McDonald's headquarters. They would arrive early at the restaurant to skim money from the till.
23:13
Speaker 2
Or just basic stealing.
23:14
Speaker 1
Basic stealing. I mean, they're investors, right?
23:16
Speaker 4
But they were taking any profits or sales first.
23:20
Speaker 1
In the book, John F.
23:20
Speaker 4
Love quotes Burt Cohen, an executive at McDonald's, saying about this system and what went wrong.
23:26
Speaker 2
He said, we'd stretched or broken every licensing rule we had, everything that was proven to be successful. It all came back to haunt us. They basically had solved the principal agent problem by making the owner put all the money into the store, and you've solved it. And then they've recreated it by having these outside investors.
23:45
Speaker 4
McDonald's eventually paid to unwind the deals. They're like, this is on us.
23:49
Speaker 1
It's our bad.
23:50
Speaker 4
But as they were trying to grow the number of franchisees, remember there were 12 at this point, they still needed to figure out a way for black entrepreneurs to get financing. And luckily for McDonald's, there was someone who offered to help. Not exactly a fan of the civil rights movement either. That person, President Richard M.
24:14
Speaker 2
Nixon.
24:15
Speaker 4
This is a strange turn in the story, and it is a huge focus of Marcia Chetland's book. But the appearance of Nixon makes sense if you go back half a decade or so to the final years of Martin Luther King Jr. 's life. MLK had started at this time to talk more about economic justice. He had this famous quote he said to striking sanitation workers.
24:36
Speaker 1
Jacob? What does it.
24:37
Speaker 2
Profit a man to be able to eat at an integrated lunch counter if he doesn't earn enough money to buy a hamburger and a cup of coffee? Very compelling. I recall that toward the end of his life, he was moving away from race as a framework primarily and moving toward economic justice more generally.
24:55
Speaker 1
Absolutely. Absolutely.
24:57
Speaker 4
And conservatives at the time, Republicans, who had fought a lot of the integration provisions of the Civil Rights Act, they looked at this and they're like, well, actually, economic justice is maybe something that we can work with. When Richard Nixon ran for president in 1968, he started to use a new term, Black Capitalism. Sort of a riff on black power, but more acceptable for a Republican, black capitalism. Jacob, this is a longer passage, but I just think it's amazing that this is a radio address by Richard Nixon running for president as a Republican.
25:36
Speaker 2
It's no longer enough that white-owned enterprises employ greater numbers of Negroes, whether as laborers or as middle management personnel. This is needed, yes. But it has to be accompanied by an expansion of black ownership, of black capitalism. We need more black employers, more black businesses. We have to get private enterprise into the ghetto. But at the same time, we have to get the people of the ghetto into private enterprise as workers, as managers, as owners.
26:06
Speaker 4
This was a big deal when Richard Nixon was pushing this. Once in the White House, he created the Office of Minority Business Enterprise. And this new office, along with the Small Business Administration, started to provide grants and loans to Black-owned businesses. There was even a special program just to get loans to Black entrepreneurs buying white businesses, the Herman Petty situation. The government ended up heavily subsidizing the growth of fast food franchises in urban neighborhoods. By one calculation, the SBA approved nearly 40,000 total loans to and bank loan guarantees to minority businesses during Nixon's term. McDonald's, yeah, absolutely, but dozens of other fast food brands too, Burger King, KFC. This push by the government ended up being divisive in the civil rights community. On one side, you had the Reverend Jesse Jackson, who was totally on board. The phrase he used was, not civil rights rights, but silver rights.
27:13
Speaker 2
I know.
27:13
Speaker 1
It's very subtle. It's good. It's good.
27:15
Speaker 4
And silver rights included things like government loans, sure. But also, he was demanding that McDonald's and other corporate franchisors donate to the neighborhoods, donate to education initiatives and new parks and community swimming pools. This was part of his plan to have the wealth of corporate America help neighborhoods all across the country. other civil rights members started to ask, was junk food really the answer to inner city problems? This Office of Minority Business Enterprise gave loans and guaranteed loans and facilitated loans to lots of different companies, but a lot of them were junk food at the time. Ralph Abernathy, the head of the Southern Christian Leadership Conference, said, Jacob?
28:04
Speaker 2
We don't want rich individuals. We want rich communities. I don't believe in black capitalism. I believe in black socialism.
28:12
Speaker 4
Maybe I'm a little bit cynical, but I kind of feel that one of the purposes of Nixon's black capitalism push was to create this divide in the civil rights movement.
28:21
Speaker 1
A wedge.
28:22
Speaker 2
It's a wedge issue.
28:23
Speaker 4
It's a wedge to give some people opportunities, maybe at the expense of other people in the community. Regardless, from the franchisee perspective, this was a great moment. This was government money and guarantees helping them make money and By the end of Nixon's term, McDonald's had gone from one Herman Petty to 116 minority-owned McDonald's outlets. And those franchisees were making a lot of money. The inner city stores started to do more sales and make more money than the average suburban McDonald's. Market research showed that in white communities, McDonald's was an occasional treat. It's a light snack once a month, maybe take the kids out there. In black communities, McDonald's was replacing regular meals. Black consumers were more likely to eat at McDonald's at least once a week.
29:13
Speaker 2
I mean, people eating there all the time were presumably part of the reason there were health concerns.
29:18
Speaker 1
Exactly.
29:19
Speaker 4
And there was already a growing obesity and diabetes problem in Black communities. And people eating there all the time in cities was one of the reasons why McDonald's was like, we need a lot more McDonald's in the inner city and if we're moving into black neighborhoods at a rapid expansion, we need more black franchisees. So McDonald's was reshaping really street life in cities at this point. And soon black franchisees would fight to reshape McDonald's itself.
29:50
Speaker 1
After the break.
30:04
Speaker 3
The break is over. What is it? The 1970s and we're back.
30:16
Speaker 4
The early 1970s, Herman Petty helps create the National Black McDonald's Operators Association.
30:23
Speaker 2
N-D-M-O-A.
30:25
Speaker 1
Exactly right.
30:26
Speaker 4
McDonald's corporate executives were not really happy with franchisees organizing. Remember, there was this balance of power they were trying to keep. And I think they worried not just about black franchisees, but any of the franchisees getting together for regular meetings.
30:41
Speaker 2
Yeah, you guys don't want to talk to each other. Let's talk to us. If you have any concerns, just call the head office and we'll take care of you. Don't talk to each other.
30:48
Speaker 4
Herman Petty, charmer that he was, assured McDonald's that this isn't some radical organization. This is a bunch of people who they know and love running their own franchises. In fact, at first, the biggest complaint from the Black franchisees was they wanted to own More outlets.
31:08
Speaker 1
They wanted more.
31:09
Speaker 4
McDonald's because they were making money and they wanted to invest in more. They just maybe wanted a few restaurants outside, outside of the inner city. So they didn't have so many headaches, so many expenses. And they pointed out that, you know, black operators might be able to bring some valuable experience to the suburbs.
31:28
Speaker 1
Fair enough.
31:29
Speaker 4
This conflict we'd see more and more of over the next few decades between the brand, and the franchisees. Let's talk about that relationship a little bit, but let's do the good side first.
31:41
Speaker 2
You love franchises.
31:42
Speaker 4
I kind of do love franchises because one place the partnership works really well is in product innovation. Who doesn't love innovation? McDonald's, corporate, they have a lot of rules, but I think they realized early on that The same thing we were talking about, about knowing the neighborhood, also meant that you were at the grill as an owner.
32:04
Speaker 1
You knew the product. You knew what you were selling.
32:06
Speaker 4
So they allowed some of these restaurants to become almost laboratories for coming up with new things. So, for instance, the Egg McMuffin. That came from a franchisee in Santa Barbara. who was noticing that his workers were just standing around and doing nothing before lunch.
32:23
Speaker 2
Because all there was was burgers.
32:24
Speaker 1
All there was was burgers. And he played around.
32:27
Speaker 4
He came up with that little metal ring, you know, that makes the egg the.
32:32
Speaker 1
Exact size of the English muffin. Genius.
32:35
Speaker 4
This ends up getting rolled out to the whole nation. Filet-O-Fish came from a Cincinnati franchisee who needed a fish item for Catholics.
32:46
Speaker 2
Don't even eat on Fridays.
32:47
Speaker 3
Yeah.
32:47
Speaker 2
So smart.
32:49
Speaker 1
Filet-O-Fish.
32:50
Speaker 2
I never knew.
32:50
Speaker 3
Yeah.
32:51
Speaker 1
The Big Mac. The iconic... The.
32:55
Speaker 2
Iconic McDonald's burger.
32:56
Speaker 4
The iconic burger was invented by Jim Delegati, a franchisee in Western Pennsylvania. He had a lot of blue-collar workers coming into his store, Western Pennsylvania, and he saw that they wanted something bigger than a McDonald's hamburger, which, you know, is about the size of your fist. And so he started to play around with two-all beef patties, special sauce, lettuce, cheese, pickles... onions on a sesame seed bun. And of course, the crucial middle layer of bread. I don't know how long it's been since you've had a Big Mac. It's like a club sandwich. There's a layer of bread in the middle, which apparently he said they needed because otherwise the two meat patties would slide around and it would fall apart.
33:37
Speaker 2
So it's like a friction. It's an adhesive agent.
33:41
Speaker 4
He starts to serve it for a year, takes it to McDonald's headquarters.
33:44
Speaker 1
They love it. They're the ones who name it the Big Mac. It was adopted by the whole system.
33:49
Speaker 4
These are the ways in which franchisees and brands can work together. But there were also conflicts. And this came from the crucial difference between how McDonald's and how the owner-operators made their money. We've gone over this before, but I want you to think about this. McDonald's corporate gets a cut of sales. So anything that brings in more customers is good for McDonald's corporate.
34:14
Speaker 2
More revenue, more gross revenue. But the problem is... What an owner cares about is not gross revenue, but profit.
34:23
Speaker 1
Exactly right.
34:24
Speaker 2
What I think of here is when those ads on McDonald's are like, come on down and get the dollar menu or whatever it is now, the value menu. So that's going to drive up revenues. But if they're selling it below cost, it's going to drive down profits or even at cost. That's going to be good for McDonald's corporate because they get the cut of the gross, but bad for the owner because they're living off the net, the profit. And suddenly, you know, we talked about the franchise model solving the principal agent problem, but at that margin, they're not aligned. They're not aligned in that instance.
34:58
Speaker 4
And it creates a lot of conflicts, not just with McDonald's, but with all fast food restaurants. You'll hear this occasionally where the brand will say, we have this great idea. And the franchises are like, how are we going to make that? How are we going to serve this? How are we going to survive on that price, that national price?
35:13
Speaker 2
Well, and more generally, I will just say in the critiques of franchises section, not specific to McDonald's, but more generally, there is a critique of franchises that basically comes down to the power dynamic, where you have these people who want to be entrepreneurs, but don't have that much knowledge, often don't have that much capital. And then you have this giant company that And often the terms of the franchise agreement favor the big company in various ways at the expense of the franchise owners. And again, not necessarily McDonald's in particular, but that is a standard and it seems in some cases valid critique of some franchises.
35:51
Speaker 4
I think that's right.
35:52
Speaker 1
I think that's right.
35:53
Speaker 4
And I think a lot of these things the franchisees don't realize until they've been operating a year or two.
35:57
Speaker 1
And they think, oh, this is hard.
36:01
Speaker 2
And, oh, the parent corporation is selling me supplies at some marked-up price, and I have to buy it from them under the corporate agreement, under the franchise agreement, or something like that.
36:10
Speaker 4
To be clear, McDonald's never sells anything to its franchisees. It makes deals that everyone benefits from. This was one of Ray Kroc's principles.
36:18
Speaker 2
So that seems like an instance where you're keeping the incentives aligned.
36:21
Speaker 4
But I'll tell you one of these points at which the conflict happens, and that's in the advertising budget.
36:26
Speaker 3
Huh.
36:27
Speaker 1
Franchisees contribute money.
36:29
Speaker 4
To a national advertising fund, and that costs them money, cuts into their profits. But McDonald's headquarters figures out how to spend it. Now, going back now to Herman Petty and the newly organized black franchisees, they were putting money into this national advertising fund in the early 70s, but they hated the ads that McDonald's was coming up with. In the 1970s, McDonald's would buy TV or magazine ads that featured, don't be surprised, white customers and white servers at a white McDonald's. And for the black franchisees, they're like, this does not speak to my customers on Stony Island Avenue. This is a huge waste. You're not even running these ads setting aside the white actors. You're not even running them on black TV shows, black radio stations. You're not putting print ads in Ebony or Jet magazines. We are throwing this money down the toilet. McDonald's, to their credit, they hear this. And they hired a black advertising executive in Chicago. In fact, the very first black advertising executive in Chicago, Tom Burrell.
37:37
Speaker 2
Robert, you did a story about this with Sonari, with Sonari Glinton at Planet Money, a great story.
37:42
Speaker 1
It was a great story.
37:43
Speaker 4
Because it was the whole story of Tom Burrell. And doing this story was a revelation to me because at the time, In order to sell products, the idea was you have to have an ad that appeals to everyone.
37:58
Speaker 1
It should be generic.
37:59
Speaker 4
That was just the principle in advertising. And generic at the time usually meant white. And when you would see black people in ads, it was oftentimes the same ads with the same words and the same set. They just swapped out black actors to say the same lines. And when Tom Burrell started his advertising agency, he had a motto. And he said it so often that other people just quoted it back to us constantly when we did this episode. And that motto was, black people are not dark-skinned white people. And what he meant was you have to write the ads from scratch from a black perspective and talk about things that those customers actually care about. This was Tom Burrell's big idea, and he was brought in to do this for McDonald's. And one of the first things he told the company is that you are alienating people Black customers. You're not just not attracting. You are alienating Black customers without realizing it.
38:54
Speaker 2
It's like a negative ad. The ad is driving away customers.
38:58
Speaker 4
So, for instance, a McDonald's ad would show the whole family, white family, piling into a car to go to McDonald's for a treat. And Burrell pointed out that Black consumers in the inner cities, they used McDonald's differently. Jacob, give me this Burrell quote from Planet Money about how Black consumers use McDonald's.
39:16
Speaker 2
He said McDonald's was not used as a place where the family would go. McDonald's was used as a place where working people would go and take a break whenever they had a chance. It was a place where children would go very often by themselves.
39:29
Speaker 1
And that wasn't being reformed.
39:30
Speaker 4
In the ads. And so Burrell starts to come up with ads that better reflect black culture. And at first, they're pretty basic ads. But then he starts to introduce... these things from the black community that maybe a lot of America had not seen at the time. I will admit, in the early 1980s, when I was a kid, the first time I saw Double Dutch, you know, the jump roping thing?
39:54
Speaker 2
Yeah, with two ropes.
39:55
Speaker 1
Was in a McDonald's commercial. They had a McDonald's commercial with Double Dutch jump ropes.
40:00
Speaker 2
In your defense, you were living in Utah.
40:01
Speaker 1
I was living in Utah at the time. But they would list off the menu and do Double Dutch.
40:06
Speaker 2
You know, I think my kids learned the learned the thing that the kids said in that ad when they were kids, like not even from a commercial, just, I don't know, jumping rope or something. Let me see. Big Mac filet of fish, quarter pounder French fries, icy Coke milkshake, sundaes and apple pies. I think that was, was that that ad? I think so. Yes.
40:27
Speaker 4
Tom Burrell came up with an ad that is being passed down to this day.
40:31
Speaker 2
By word of mouth to my children, who probably never saw a McDonald's ad.
40:35
Speaker 4
Burrell also had this big realization, which was that McDonald's wasn't just a place for Black people to eat. McDonald's was also a place where Black people worked. And in some of these neighborhoods, it was a major employer. And as we know, in many neighborhoods, it's the first job that many teenagers get, McDonald's. He launched a series of ads known in the industry just by one name, Calvin, because it was about this black teenager named Calvin.
41:03
Speaker 1
Should we just watch?
41:04
Speaker 3
Yeah.
41:05
Speaker 1
Yeah, let's watch this ad. We'll narrate. Don't worry. You see a young.
41:11
Speaker 4
Black man looks like Brooklyn, maybe, or maybe a Hollywood set version of Brooklyn.
41:15
Speaker 1
He's coming down the stoop. Someone says, hey, isn't that Calvin?
41:18
Speaker 4
I haven't seen him for a while. Wonder where he's headed. Someone says, I heard he got a job. And then These young women say, looks like responsibility has been good for him. And at the very end, he turns around his cap and he's behind the counter of McDonald's and says, welcome to McDonald's, may I help you? Welcome to McDonald's, may I help you?
41:38
Speaker 2
These ads were.
41:39
Speaker 1
A phenomenon.
41:41
Speaker 2
A national thing. I remember them growing up in the suburbs.
41:44
Speaker 4
Ran for years. Calvin gets promoted to manager, and it's this huge deal. Everyone in the neighborhood is talking about manager. He starts to recruit his fellow teenagers to work at McDonald's. Remember, this is a McDonald's ad. It starts to seem like a soap opera. People start to speculate in the ad that he owns his own franchise.
42:02
Speaker 1
Not yet, he says. Not yet.
42:05
Speaker 4
They have a very cheesy 80s quality to them, but If you look back on it, like this was a huge announcement to the world that the black franchisees had a lot of power at McDonald's, that they were shaping the feel-good ad of the year for McDonald's was coming from their experience and coming from Tom Burrell.
42:27
Speaker 1
And it changed all advertising.
42:30
Speaker 2
Well, it's interesting to think about this now. I mean, you were talking about the earlier ads being the very generic suburban ads. white family. And now, I mean, of course, the internet is a big part of this, but now advertising is niches, a million niches. And, you know, you go on Instagram and you get the ad just for you. Like these pants are perfect for you. They are not the generic pants. They are the Robert Smith pants.
42:55
Speaker 4
And I would say Tom Burrell with his Chicago advertising firm was one of the main reasons for that, who just said you should speak directly to a customer, not all customers. Whatever the current double Dutch ad is, I wouldn't know.
43:08
Speaker 2
There are a million double Dutch ads, one for every single person at some margin.
43:15
Speaker 4
To wrap up the story today, there are hundreds of Black McDonald's franchisees who control well over a thousand restaurants. Huge source of wealth in the Black community. Also, as we touched upon before, it's this source of worry because Black urban neighborhoods are more saturated than ever with with fast food more saturated.
43:37
Speaker 1
Than white neighborhoods. All the studies have been done on this.
43:40
Speaker 2
And the high rates of obesity, diabetes, things that come from eating a lot of fast food, or at least are correlated with.
43:47
Speaker 4
Obviously, I'm cheering on Herman Petty and the black franchise owners.
43:52
Speaker 1
And good for them.
43:53
Speaker 2
Who are making money and owning businesses.
43:55
Speaker 4
Herman Petty would eventually own eight McDonald's. He died in 2009. But his role in changing the face of franchising wouldn't really be recognized until a decade later. His original McDonald's now has a little museum featuring photos from his early days and old signage. City of Chicago named a street after him. And in the neighborhood at the new Obama Presidential Center in Chicago, there is a Herman Petty classroom, a room named after him. It's sponsored by McDonald's.
44:27
Speaker 2
Today's show was produced by Gabriel Hunter Chang. It was engineered by Sarah Bruguier. Our showrunner and editor is Ryan Dilley. And our video editor is Matt Nielsen. I'm Jacob Goldstein.
44:38
Speaker 1
I'm Robert Smith. Thanks for listening.
The Hosts
Robert Smith
Robert Smith, co-host of the Business History podcast, is a Professor of Journalism at Columbia University and contributing host of NPR's Planet Money where he tells stories about how the…
