Dollar Menu in Danger

McDonald’s has been implementing sustainability measures to prevent global climate change but this company also needs to focus specifically on the serious ramifications climate change will have on its own supply chain

Summary

Climate change promises to negatively disrupt the operations and possibly profitability of fast food chains like McDonalds, as (i) weather disruptions and droughts lead to rising costs of agriculture and food; (ii) scrutiny and regulation over carbon emissions threatens to increase the cost of meat production; and (iii) costs of and pressures to reduce carbon emissions weigh on the company’s transportation costs.

McDonald’s Supply Chain

Generally, McDonald’s works with both independent farmers who supply raw food products (wheat, lettuce, cattle, etc.), and independent suppliers of packaging and equipment.  McDonald’s takes advantage of its scale to maintain very close relationships with these partners.

The sourced ingredients move to food processing plants, which make products like buns and meat patties before being purchased by independently owned and operated distribution centers and delivered directly to McDonald’s restaurants. [1]

http://marketrealist.com/2013/12/mcds-food-come-exploring-supply-chain/
[Figure 1] McDonald’s Supply Chain
Costs of the Fast Food Supply Chain

It may be surprising to note that at the top of the chain, the agricultural industry uses 70% of global freshwater [2]. Unusual weather conditions have had a major effect on raw and processed food prices. These events include (i) the US severe droughts that caused grain prices to spike in 2012 [3]; (ii) the uncommonly low rain in Europe and flooding rains in the US that had the same effect in June 2015 [4]; and (iii) the March 2016 drought in South Africa that killed 5% of cattle, causing cattle futures to spike [5].  These effects are interconnected, as higher grain costs make it more expensive to feed livestock, making that meat itself more expensive.

Moving further down the chain to the food processing plants, there is a preponderance of evidence that meat production contributes to an enormous amount of greenhouse gases–10-25% of global GHG emissions are due to agriculture while 80% of agricultural emissions are attributable to livestock [6]. The US EPA implementation of the Paris climate negotiations involves collecting GHG reports from 41 sectors, but excludes meat production at the moment [7].  If and when this industry begins to be regulated, the costs for this section of the supply chain could become extremely high.

Finally, there is the connecting piece between all the supply chain components: the fleet of trucks traveling from farmers to distribution centers and distribution centers to restaurants.  The fast food chain’s largest distributor, Martin-Brower, works with almost all of McDonald’s 15,000 or so restaurants in North America.  They use one truck per restaurant with 2-3 deliveries/week, resulting in 30-45k truck deliveries a week total [8].  Similarly, Northeast Foods, which works exclusively with McDonald’s delivering grains and baked products, uses 200 tractor-trailers and over 400 delivery trucks to make daily visits to the 15k North American locations [9]. If and when regulations crack down further on carbon emissions in the transportation industry, this could prove to either block or mitigate the efficiency of the inter-supply chain transportation (thus increasing lead times), or it could make the chain more expensive.

What McDonald’s Has Done

It is important to note that McDonald’s is well known for its supply chain (it has been #2 on the Garter Supply Chain Top 25 list for 4 years in row) [10].  McDonald’s also spends a lot of effort innovating ways to make its supply chain more sustainable, as evidenced by the company’s recent focus on Ethics, Environmental Responsibility, and Economic Viability in its Sourcing process.  Since 2012, the company has gone from using 9.3% fiber-based materials in packaging to 53% in 2015, with a goal of 100% in 2020 [11]. McDonald’s has also set and progressed towards equally impressive targets in sustainable coffee use and its beef, fish, and palm oil procurement [12].

[Figure 2] McDonald's Coffee Sourcing
[Figure 2] McDonald’s Coffee Sourcing
What McDonald’s Should Do

McDonald’s should continue its work in mitigating global climate change, but the company also must focus closely on preventing the negative effects of this problem on its own operations.  To mitigate the costs of unpredictable weather cycles, the company could hedge via agriculture futures or use its scale and close relationship with its suppliers to investigate their operations and develop and implement predictive models around the weather.  They could also invest in research around advanced irrigation systems and synthetic water development.

For food processing, McDonald’s should help its other suppliers set goals for sourcing sustainable meat.  As most of these suppliers’ biggest customer, McDonald’s should help with the large upfront costs as it is an investment in the future endurance of the company’s own supply chain.

Finally, for transportation, McDonald’s could similarly get closer to or acquire and consolidate its distribution networks (which differ by food product).  They can either slowly invest in more energy efficient vehicles (an expensive option) or, more realistically, can make the truck routes more efficient by loading full trucks with many different products to go to each restaurant instead of having several underutilized trucks go from different distribution centers to just one restaurant each.

(798 words)


Citations

[1] http://marketrealist.com/2013/12/franchise-mcdonalds-franchise-agreements-work/

[2] http://web.unep.org/geo/sites/unep.org.geo/files/documents/geo5_for_business.pdf

[3] IBID

[4]  http://www.bloomberg.com/news/articles/2015-06-26/downpours-and-drought-send-wheat-to-biggest-gain-in-three-years

[5] https://schadcommodity.com/cattle-futures-higher-as-south-african-drought-kills-off-5-of-cattle/

[6] http://www.unep.org/pdf/unep-geas_oct_2012.pdf

[7] https://www.revealnews.org/article/us-gives-meat-producers-a-pass-on-climate-change-emissions/

[8] http://www.usanfranonline.com/resources/supply-chain-management/what-are-the-ingredients-in-a-mcdonalds-supply-chain/#.WBzlZuErK8o

[9] http://www.fleetsandfuels.com/tag/mcdonalds/

[10] http://www.usanfranonline.com/resources/supply-chain-management/what-are-the-ingredients-in-a-mcdonalds-supply-chain/#.WBzlZuErK8o

[11] http://corporate.mcdonalds.com/content/dam/AboutMcDonalds/2.0/pdfs/sustainability/McDonald_s_2016_Sustainable_Fiber_Update.pdf?1

[12] http://corporate.mcdonalds.com/mcd/sustainability/sourcing/priority-products.html

[Figure 1] http://marketrealist.com/2013/12/mcds-food-come-exploring-supply-chain/

[Figure 2] http://corporate.mcdonalds.com/mcd/sustainability/sourcing/priority-products.html

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15 thoughts on “Dollar Menu in Danger

  1. Interesting post Serrena. I wonder – do you think menu changes could also have a role in mitigating the effects of climate change on McDonald’s business? For example, processed burgers like the Big Mac are much less popular among younger generations in the U.S. than they used to be. Could McDonald’s both generate demand and mitigate climate change by 1) updating their menu / supply chain with healthier options to appeal to a younger demographic and 2) ensuring that those options are more sustainable to produce (e.g., local fruits / vegetables as compared to beef and pork)?

    1. I definitely agree Carl. McDonald’s should definitely do a better job of helping its suppliers set goals for sourcing sustainable meat. Customers are becoming increasingly aware of the implications of poor quality meat on the environment and their own health and are looking for their meat to be sustainably sourced and responsibly raised. I do not think McDonald’s will ever offer grass-fed meats (which would be way too expensive for McDonald’s operating model and generate costs that would have to be passed on to the customer, ultimately going against its customer value proposition of low priced fast food), but I do think there is an opportunity to work with more sustainable, higher quality suppliers. Getting ahead of this trend toward responsibly sourced meat is especially important as Serrena mentions that Paris climate negotiations involves collecting green house gas reports from 41 sectors, but excludes meat production, which when regulation commences could severely raise costs for this part of the supply chain.

      1. I agree with both Carl and CE. If McDonald’s were to partner with more sustainable suppliers, there would be opportunity to market these advancements to millennials, who’ve grown accustomed to the concept of farm-to-table. There has been an explosion of healthy, farm-to-table fast casual restaurants, most of which are regionally focused (e.g., B.good, Dig Inn). Meanwhile, several large fast food chains such as Chipotle and Panera have made efforts to become more “natural” (i.e., organic, preservative-free, antibiotic-free) and fervently promoted such gains in their marketing collateral. Becoming THE sustainable fast food chain could provide a nice marketing angle for McDonald’s and to Carl’s point, help the brand acquire newer, younger customers who are seeking healthy fast food options. Depending on cost, McDonald’s could think about grouping sustainable products into a higher-end, higher-priced product line, separate from its existing menu.

  2. The connection between the prices of raw and processed food and unusual weather conditions is clearly a significant concern for McDonalds. Because McDonalds’ supply chain is so tightly tied into America’s farmland, I saw interesting parallels between your post and Kaitlin’s post on US Family Farms (https://digital.hbs.edu/platform-rctom/submission/us-family-farms-helping-or-hurting/). Kaitlin suggests that a focus on innovations in irrigation may be an important step for US farms as the effects of climate change become exacerbated. It seems that the incentives of McDonalds and the incentives of US farms are aligned on this issue. Does McDonalds have a significant enough interest in keeping input prices low to help spur irrigation innovation?

  3. Serrena,

    This is interesting and exemplifies the impact on a ubiquitous industry. I liked several of your suggestions for optimizing delivery routes to stores. I think this also contributes to a potentially higher bottom line given the higher utilization of trucks. I like the sense of practicality you’ve put into your suggestions in relation to the operating unit.

    In regards to your suggestion to hedge agricultural futures, I don’t agree that this helps to mitigate climate change as you state. I believe that this mitigates McD’s future risk given volatility of meat prices but does not help to actually stop the impacts of climate change. I also worry that your suggestion of developing predictive models for weather change is significantly outside of McD’s core competencies. McDonald’s is a net user of supplies and I believe that this drives them to look at mitigating that use and the impact of that use. Thus, it makes more sense to me to try to optimize shipping routes and use more recycled goods (post-fiber as you mentioned). Your idea to buy from sustainable sources is a strong one and one in which McD can exert great influence on its suppliers. If you look at the link provided, McDonald’s has already begun to do this: http://news.mcdonalds.com/Corporate/news-stories/2015/Working-together-to-address-climate-change. Some of their “Raw materials” are already sourced from 100% sustainable places such as their fish.
    Lastly, recycling more of their used products would seem to help mitigate their footprint – for example, recycling used cooking oil for other sources may offer a good benefit, environmentally.

  4. Thank you, siyer for the very interesting perspectives on Burgers. In terms of climate change, one of the things that I believe adds to your point is the impact of livestock in global Methane emissions. Livestock is one of the current ongoing concerns regarding Greenhouse emissions because Methane is 23 times more destructive than CO2 and we currently have 1.5bn animals being raised around the world for agriculture purposes. How to deal with that problem is one of the questions that should be a major concern for fast-food chains with a global footprint such as McDonald’s, as it is one we’ll have to deal with eventually.

  5. In class we discussed the pros and cons of IKEA expanding their supply chain to own or lease forests to have better control over sustainability. Given the scale of McDonalds and the sheer number/size of supplier it needs to work with to obtain raw ingredients, I wonder what type of consideration McDonald’s has given to owning farms. It would certainly be a deviation from their current business model but I would assume could reduce cost and give McDonald’s more control.

  6. This is really interesting! McDonald as one of the most influencial food purchaser really have huge impact on the environment and it’s good to know that they start to take initiatives toward the climate change challenge. And if they can shift the current negative preventive measures to more positive measures that will be really powerful. With their scale and relationship with the suppliers there are definitely a lot to do. And maybe they can also modify their menu to incorporate some enviromental friendly food, which will also be a good education to the children. Thanks for sharing!

  7. Great post siyer. I thought your hedge idea was pretty interesting from a financial perspective, although I’m not sure it will help McDonald’s mitigate climate change. One thing that really struck me was how much water McDonald’s is ultimately responsible for as part of their supply chain. I was wondering whether they’ve started looking at any water recycling/reuse initiatives, or whether such initiatives would be material to reducing their water footprint? I just read another post on Tyson investing in meat replacement products and I’m wondering if McDonald’s would ever entertain the idea of serving meat replacement menu item’s in order to be more sustainable? Great work.

  8. Very interesting article, siyer. Interestingly, I worked on a similar topic, focusing on McDonald’s France supply chain. As you might know, France is one of the top international markets for McDonald’s and a market that they have successfully been using over the years as a testing ground. In the post I wrote, I detail the initiatives that they took, including how adapting their trucks has allowed them to be more efficient in their supply chain and how changing their “last mile” fleet to electrical vehicles has proven to be very useful. I fully understand that some of these initiatives are more efficient in France and Europe due to the higher fuel prices and shorter distances but we could definitely imagine that they could scale some of these practices in North America.

  9. Serrena, thank you for this wonderful post! You have shared powerful insights regarding climate change and the burger industry. Given McDonald’s scale, you would think that it would be in a position to make a meaningful impact on the environment, through its agricultural practices, its supply chain system, and its transportation system. Clearly, there is still room for improvement, which you have thoughtfully highlighted.

  10. Great post Serrena! McDonalds used to be a top 3 reason to visit the U.S. during my summer vacations as a kid growing up in Ghana. I would shamefully supersize everything. Anyway, on a more serious note, it is great to see that McDonald’s is taking the necessary steps to help mitigate the impact of climate change. Similar to some of the other Panda’s, I think tweaking their menu to offer items that are more sustainable to produce will help address the problem. Though I do not think the average McDonald’s customer cares about where McDonald’s sources its meat and produce, as a leader in the industry, I think it is important that McDonald’s continues to implement environmentally friendly practices not only to prevent disruptions in its supply chain, but to set an example for other players in the industry.

  11. Very interesting read! I imagine Walmart’s supply chain innovations (e.g. packing materials) could be great for other industries dependent on distribution networks to emulate. Transportation related to healthcare services are also one of the major ways in which the healthcare sector contributes to greenhouse gases. I wonder if hospitals and their related distribution networks could invest in those packing materials for healthcare products — the amount of waste from packing materials in hospitals is actually staggering! Do you know whether Walmart has promoted these packing strategies or if other players are adopting them?

  12. Very interesting post Siyer. I appreciate you diving into multiple effects climate change will have on the supply chain. What your post leads me to believe is that eventually McDonalds may need to source more ingredients more locally and/or update the menu to reduce ingredients that are tied to high green house gas emissions. If this happens then I do start to wonder about the viability of the business because of the increased ingredient costs and McDonald’s no longer being able to fulfill a key value proposition of being a cheap meal. How do they compete when they are selling food at similar prices to higher end establishments?

  13. As one of the biggest companies in the world, this was a really interesting read for me. I loved hearing your analysis on how their food production affects the environment from a greenhouse gas point of view. What is even more worrisome to me is that the effect these trucks you referenced have the on the world, since there are so many McDonalds globally at this point. I would love to hear more about your hedging idea, I think this option has been helpful for many companies across the globe. These commodity markets can often be in contango, where the long dates futures can be tough to trade as prices whip around with high volatility. They will need to get an advanced group structured investment specialists (I need a job hire me McDonalds!) to do this for them, and could take advantage of these hedges to even turn a profit in their respective commodities. Great post, loved reading it!

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