Mcdonald's lawsuit french fries

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.

Claire Latham 14609 Uplands Drive

Lake Oswego, OR 97034 United States

Licensed to print 10 copies, 21 November, 2016. License valid upto 20 February, 2017.

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

To order copies, call +91-9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203, Telangana, India or email: casehelpdesk@ibsindia.org

www.icmrindia.org

1

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

2

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

3

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.

The McDonald’s ‘Beef Fries’ Controversy

4

Most of these allegations were made way back in the early 1980s in a movement spearheaded by

two London Greenpeace 3 activists Helen Steel (Steel) and Dave Morris (Morris). They started their

protests by distributing leaflets containing allegations against the company. Soon, the issue

snowballed into a bitter £ 10 million courtroom battle against the activists.

The company was severely criticized for hiring detective agencies to break into the activist group.

According to an analyst, ―The company had employed at least seven undercover agents to spy on

Greenpeace. During some London Greenpeace meetings, about half the people in attendance were

corporate spies. One spy broke into the London Greenpeace office, took photographs, and stole

documents. Another had a six-month affair with a member of London Greenpeace while informing

on his activities.‖

Steel and Morris were later found to have libelled McDonald‘s by a British court. However, the company

was also found guilty of endangering the health of its customers and paying workers unreasonably low

wages. The case, chronicled completely at www.mcspotlight.org, has become a classic example of a

corporate giant‘s struggle to uphold its image amidst allegations of unethical practices.

In the light of the company‘s chequered history of legal problems, the French fries controversy

seemed ‗run-of-the-mill.‘ However, when McDonald‘s issued a conditional apology, the matter

acquired serious undertones. This was because it was one of the very few instances where the

company seemed to have publicly acknowledged any kind of wrong-doing.

THE BEEF FRIES CONTROVERSY

With an overwhelming majority of the people in the West being non-vegetarian, products often

contain hidden animal-based ingredients. Incidents of vegetarians finding non-vegetarian food

items in their food abound throughout the world. Whether a person has chosen to be a vegetarian

for religious, health, ethical or philosophical reasons, it is not easy to get vegetarian food in public

restaurants. According to the manager of a Thai food cafe in the US, ―We have a lot of customers

already. We don‘t need to have any vegetarian food.‖ Commenting on this dilemma, a US based

Hindu vegetarian said, ―We can‘t blame anybody. You have to find out for yourself. If you have

any doubts, try to avoid it. Otherwise, you just have to close your eyes and try to eat.‖

The French fries controversy began in 2000, when a Hindu Jain software engineer Hitesh Shah

(Shah) working in the US happened to read a news article, which mentioned that the French fries

at McDonald‘s contained beef. Shah sent an e-mail to McDonald‘s customer service department,

asking whether the French fries contained beef or not and if they did, why this was not mentioned

in the ingredient list. Shah soon got a reply from Megan Magee, the company‘s Home Office

Customer Satisfaction Department.

The reply stated, ―Thank you for taking time to contact McDonald‘s with your questions regarding

the ingredients in our French fries. For flavor enhancement, McDonald‘s French fry suppliers use a

miniscule amount of beef flavoring as an ingredient in the raw product. The reason beef is not

listed as an ingredient is because McDonald‘s voluntarily (restaurants are not required to list

ingredients) follow the ‗Code of Federal Regulations‘ (required for packaged goods) for labeling

its products. As such, like food labels you would read on packaged goods, the ingredients in

‗natural flavors‘ are not broken down. Again, we are sorry if this has caused any confusion.‖

A popular Indian-American newspaper ‗West India‘ carried Shah‘s story. The news created

widespread outrage among Hindus and vegetarians in the US. In May 2001, Harish Bharti (Bharti),

a US based Indian attorney filed the class action lawsuit against McDonald‘s.

3 A social activist group based in UK that has been campaigning for a variety of environmental and social

justice issues since the early 1970s. The group predates the more well known Greenpeace International

and the two organizations are unconnected.

The McDonald’s ‘Beef Fries’ Controversy

5

McDonald‘s immediately released a statement saying it never claimed the fries sold in the US were vegetarian. A spokesperson said that though the fries were cooked in pure vegetable oil, the company never explicitly stated that the fries were appropriate for vegetarians and customers were always told that the flavor came partly from beef. He added that it was upto the customer to ask about the flavor and its source. This enraged the vegetarian customers further. Bharti said, ―Not only did they deceive millions of people who may not want to have any beef extraction in their food for religious, ethical and health reasons, now McDonald‘s is suggesting that these people are at fault, that they are stupid. This adds insult to injury.‖

Interestingly enough, McDonald‘s statement that it never claimed its French fries were vegetarian was proved completely wrong after Bharti found a 1993 letter sent by the company‘s corporate headquarters to a consumer in response to an inquiry about vegetarian menu items. The letter clearly bundled the fries along with garden salads, whole grain cereals and English muffins as a completely vegetarian item.

The letter stated, ―At McDonald‘s, we are always reviewing our menu, developing new products and looking for ways to satisfy the diverse tastes of our customers. We feel it is important to offer a variety of menu items that can be enjoyed and fit into any well-balanced diet. With that in mind, we presently serve several items that vegetarians can enjoy at McDonald‘s – garden salads, French fries and hash browns (cooked in 100% vegetable oil), hotcakes, scrambled eggs, whole grain cereals and English muffins to name a few.‖ Further, it was reported that many McDonald‘s employees repeatedly told customers that there was absolutely no meat product in the fries.

The whole controversy rested on a decision McDonald‘s had taken in 1990 regarding the way French fries were prepared. Prior to 1990, the company made the fries using tallow.

4 However, to

address the increasing customer concern about cholesterol control, 5 McDonald‘s declared that it

would use only pure vegetable oil to make the fries in the future. However, after the decision to change from tallow to pure vegetable oil, the company realized that it could have difficulty in retaining customers who were accustomed to beef flavored fries.

According to Eric Scholsser, author of the best-selling book ‗Fast Food Nation: The Dark Side of the All-American Meal

6 ,’ ―For decades, McDonald‘s cooked its French fries in a mixture of about

7% cottonseed oil and 93% beef tallow. The mix gave the fries their unique flavor.‖ This unique flavor was lost when tallow was replaced by vegetable oil. To address this issue, McDonald‘s decided to add the ‗natural flavor,‘ i.e. the beef extract, which was added to the water while the potatoes were being partially cooked.