Mcdonalds french fries case

BECG/017

IBS Center for Management Research

The McDonald’s ‘Beef Fries’ Controversy

This case was written by A.Mukund, IBS Center for Management Research. It was compiled from published sources, and is

intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a

management situation.

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 2002, IBS Center for Management Research. All rights reserved.

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BECG/017

The McDonald’s ‘Beef Fries’ Controversy

“Hindus and vegetarians all over the world feel shocked and betrayed by McDonald's deception

and ultimate greed.”

- Attorney Harish Bharti, on filing the lawsuit against McDonald’s, in May 2001.

“These are the ways the fries are made in the US, and we don’t have any plans to change.”

- Walt Riker, McDonald’s spokesperson, in May 2001.

A CONTROVERSY ERUPTS

In May 2001, a class action lawsuit 1 was filed against the world‘s largest fast-food chain

McDonald‘s, in Seattle, US. The lawsuit alleged that the company had, for over a decade, duped

vegetarian customers into eating French fries 2 that contained beef extracts. The lawsuit followed a

spate of media reports detailing how the French fries served at McDonald‘s were falsely promoted

as being ‗100% vegetarian.‘

Although McDonald‘s initially declined to comment on the issue, the company issued a

‗conditional apology,‘ admitting to using beef flavoring in the fries. The furore over the matter

seemed to be settling down, when to McDonald‘s horror, some of its restaurants in India were

vandalized. Activists of Hindu fundamentalist groups – the Shiv Sena, the Vishwa Hindu Parishad

(VHP) and the Bajrang Dal, staged a demonstration in front of the McDonald‘s head office in

Delhi protesting the alleged use of beef flavouring. They submitted a memorandum to the Prime

Minister, demanding the closure of all McDonald‘s outlets in the country.

Activists also staged protests in front of McDonald‘s restaurants in south Mumbai and Thane.

Mobs ransacked the outlet at Thane, broke the glass panes and smeared the McDonald‘s mascot

Ronald with cow dung. About 30 people were arrested and later let off on bail. Company officials

estimated the loss to the outlet at Rs 2 million.

Officials at McDonald‘s India quickly announced that the vegetarian products served in India did

not have any non-vegetarian content (Refer Exhibit I for details). However, despite this

reassurance, the anti-McDonald‘s wave refused to die down.

Meanwhile, more cases were being filed against McDonald‘s – this time in California, US and

Canada. It seemed certain that the company would have to shell out millions of dollars to

settle the class action lawsuit representing the 1 million US based Hindus and 15 million other

vegetarians.

1 A class-action suit is a suit filed to protect the interests of group of individuals who are affected or may

be affected by a perceived fraud or misconduct of a similar nature. The number of people could be as few

as under 10 to millions. Typically, class action suits in the US drag on for years and very often parties

settle out of court within the first year of filing. 2 Thinly sliced, finger-sized pieces of potato, deep fried and served with a sprinkling of salt.

The McDonald’s ‘Beef Fries’ Controversy

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BACKGROUND NOTE

McDonald‘s was started as a drive-in restaurant by two brothers, Richard and Maurice McDonald in California, US in the year 1937. The business, which was generating $ 200,000 per annum in the 1940s, got a further boost with the emergence of a revolutionary new concept called ‗self-service.‘ The brothers designed their kitchen for mass production with assembly line procedures. Prices were kept low. Speed, service and cleanliness became the critical success factors of the business. By mid-1950s, the restaurant‘s revenues reached $ 350,000. As word of their success spread, franchisees started showing interest. However, the franchising system failed because the McDonald brothers observed very transparent business practices. As a consequence, they encouraged imitators who copied their business practices and emerged as competitors. The franchisees also did not maintain the same standards for cleanliness, customer service and product uniformity.

At this point, Ray Kroc (Kroc), an exclusive distributor for milkshake machines expressed interest in the McDonald brothers‘ business. Kroc finalized a deal with the McDonald brothers in 1954. He established a franchising company, the McDonald System Inc. and appointed franchisees. In 1961, he bought out the McDonald brothers‘ share for $2.7 million, and changed the name of the company to McDonald‘s Corporation. In 1965, McDonald‘s went public.

By the end of the 1960s, Kroc had established over 400 franchising outlets. McDonald‘s began leasing/buying potential store sites and then subleased them to franchisees initially at a 20% markup and later at a 40% markup. To execute this, Kroc set up the Franchise Realty Corporation. The real estate operations improved McDonald‘s profitability. By the end of the 1970s, McDonald‘s had over 5000 restaurants with sales exceeding $3 billion.

However, in the early 1990s, McDonald‘s was facing problems due to changing customer preferences and increasing competition. Customers were becoming increasingly health conscious and they wanted to avoid red meat and fried food. They also preferred to eat at other fast food joints that offered discounts. During this time, McDonald‘s also faced increased competition from supermarkets, convenience stores, mom and dad delicacies, gas stations and other outlets selling reheatable packaged food. McDonald‘s added only 195 restaurants during 1991-92.

In 1993, McDonald‘s finalized an arrangement for setting up restaurants inside Wal-Mart retail stores. The company also opened restaurants in gas stations owned by Amoco and Chevron. In 1996, McDonald‘s entered into a $1 billion 10-year agreement with Disney. McDonald‘s agreed to promote Disney through its restaurants and opened restaurants in Disney‘s theme parks. In 1998, McDonald‘s took a minority stake in Chipotle Mexican Grill – an 18-restaurant chain in the US. In October 1996, McDonald‘s opened its first restaurant in India.

By 1998, McDonald‘s was operating 25,000 restaurants in 116 countries, serving more than 15 billion customers annually. During the same year, the company recorded sales of $36 billion, and net income of $1.5 billion. McDonald‘s overseas restaurants accounted for nearly 60% of its total sales. Franchisees owned and operated 80% of McDonald‘s restaurants across the globe. However, much to the company‘s chagrin, in 1998, a survey in the US revealed that customers rated McDonald‘s menu as one of the worst-tasting ever.

Undeterred by these developments, the company continued with its expansion plans and by 2001, it had 30,093 restaurants all over the world with sales of $ 24 billion (Refer Exhibit I for key statistics of McDonald‘s). By mid 2001, the company had 28 outlets in India, spread across New Delhi, Bombay, Pune, Jaipur and on the Delhi-Agra highway.

THE TROUBLED HISTORY

McDonald‘s has had a long history of lawsuits being filed against it. It had been frequently accused of resorting to unfair and unethical business practices – October 16

th is even observed as a

‗World anti-McDonald‘s day.‘ In the late 1990s, the company had to settle over 700 incidents of

The McDonald’s ‘Beef Fries’ Controversy

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scalding coffee burns. Reportedly, McDonald‘s kept the coffee at 185 – approximately 20 hotter than the standard temperature at other restaurants – which could cause third degree burns in just 2- 7 seconds. An 81-year old woman suffered third degree burns on her lower body that required skin grafts and hospitalisation for a week. After McDonald‘s dismissed her request for compensation for medical bills, she filed a lawsuit against the company.

A McDonald‘s quality assurance manager testified in the case that the company was aware of the

risk of serving dangerously hot coffee, but it had no plans to lower the temperature or to post a

warning on the coffee cups about the possibility of severe burns. In 1994, the court declared

McDonald‘s guilty of serving ‗unreasonably dangerous‘ hot coffee. The court awarded punitive

damages of $ 2.7 million dollars, which was later lowered to $ 480,000.

The company also had to settle multi-million dollar lawsuits in many other cases such as the one

filed by a woman who was permanently scarred by an extremely hot pickle slice in a hamburger

and a customer who found the crushed head of a rat inside his hamburger. There were a host of

other allegations against the company (Refer Table I for some notable allegations).

Table I

Allegations against McDonald’s

Nutrition – McDonald‘s high fat, low fibre food can cause diseases such as cancer, heart

problems, obesity and diabetes, which are responsible for about 75% of premature deaths in the

West. McDonald‘s refuted the allegation saying scientific evidence has never been conclusive

and that its food can be a valuable part of a balanced diet. The company also argued that it had

the right to sell junk food just like chocolate or ice-cream manufacturers did. However, critics

claimed that the company should at least refrain from advertising the products as nutritious,

sponsoring sports events and opening outlets in hospitals.

Environment - McDonald‘s has been accused of destroying tropical forests to facilitate cattle

ranching. Although the company claimed that the one million tons of packaging it used was

recyclable, it still was accused of causing environmental pollution due to the litter generated.

Advertising - McDonald‘s annual ad spend of over two billion dollars was criticized for

exerting a negative influence on children and exploiting them. Through its collectable toys,

Ronald the clown, TV advertisements and promotional schemes in schools, it has an extremely

strong hold on children.

Employment – Though McDonald‘s has generated millions of jobs worldwide, it is accused of

offering low wages and forcing local food outlets out of business. Charges of discrimination,

curtailing workers‘ rights, understaffing, few breaks, illegal hours, poor safety conditions,

crushing unionisation attempts and kitchens flooded with sewage, and selling contaminated

food were also levelled against the company.

Animals – As the world‘s largest user of meat, McDonald‘s slaughters hundreds of thousands

of cows, chickens, lambs and other animals per year.

Expansion – By opening restaurants in developing countries, McDonald‘s is creating a

globalised system in which wealth is drained out of local economies into the hands of a very

few rich elite. This results in self-sufficient and sustainable farming being replaced by cash

crops and agribusiness under control of multinationals.

Free Speech – McDonald‘s uses its clout to influence the media, and legal powers to intimidate

people into not speaking out against it. Many media organisations that voiced strong opinions

on the above issues have been sued by the company.

Source: IBS Center for Management Research.