Is McDonald’s Lovin’ the Economic Crisis? Hard times, fast food and health

Despite the slumping economy, tightening credit market, rising food prices and growing concern about obesity, 2008 was a very good year for the McDonald’s Corporation, the world’s largest fast food company. By the end of the year, Mickey D’s hadposted 55 consecutive months of increases in global same–store sales; operated a record 32,000 restaurants in 100 countries and increased the value of shares by 6% and revenues by 7%. Its return on equity, a measure of a firm’s efficiency in generating profits, was 29%, nearly triple the industry average of 10% and the company increased its dividend by 33%. These increases,said the company’s CEO Jim Skinner, show that we are delivering what customers count on from McDonald’s—choice, variety and high–quality food and beverages at affordable prices.

In this report, Corporations and Health Watch examines how McDonald’s has responded to the economic crisis and considers the health implications of recent changes in its corporate practices. The larger goal is to identify new opportunities for public heath advocates to advance their health agenda in a changing economic and political climate.

Only a few years ago, McDonald’s faced some daunting challenges, recently summarized in the New York Times. A rapid pace of expansion had led to declines in service and quality as McDonald’s was unable to hire and train staff quickly enough. In addition, a bevy of critics made McDonald’s a target. In 1999, a crowd of French protesters led by slow food activist Jose Bove dismantled a McDonald’s outlet just days before it was due to open, loaded the rubble onto trucks and tractors, drove it through town and dumped it outside the town hall, winning approval from many French eaters. Eric Schlosser’s 2001 best seller Fast Food Nation revealed the company’s sleazy employment, food safety and environmental practices. Two years later McDonald’s experienced its first quarterly loss ever and its stock dropped sharply. In 2004, Morgan Spurlock’s documentary Super Size Mewarned millions of consumers about the health dangers of the Happy Meal diet.

In 2004, McDonald’s hired a new CEO, Jim Skinner, a long time company manager who had started his career flipping burgers, to revitalize the company’s fortunes. His actions helped to turn the company around. In part in response to declining sales, McDonald’s sold off some recent acquisitions. In 2007, it sold Boston Market, a US chain that is a leader in the fast–casual restaurant category, and a year earlier it had dropped its investment in Chipotle Mexican Grill. Also in 2007, the company sold most of its businesses in Latin America to a developmental licensee organization. In 2008, McDonald’s sold its interest in the British–based Pret–A–Manger, a global company that bills itself as a healthy alternative to fast–food outlets. These divestitures helped McDonald’s to refocus on its core business.

Another change was that McDonald’s learned to rapidly modify its menu in response to economic changes. In the current economic downturn, for example, McDonald’s has emphasized value rather than nutrition. Its 2008 US profits came from increased sales on breakfast biscuits (729 calories, 49 gms fat, without syrup or margarine), Southern style chicken sandwiches (419 calories, 19 gms fat) and drinks. The Dollar Menu is an example of a promotion to encourage customers concerned about price to walk through the Golden Arches anyway. As the company website explains, the Dollar Menu provides you with quality menu items at a good value… We understand how important it is to you—especially these days. That’s why you can depend on us to give you value across our entire menu.

In contrast, a year ago, in better times and a more prosperous place, McDonald’s succeeded in increasing market share in Europe by going upscale. In 2007, the company spent more than $828 million to renovate its European outlets, adding healthier items, catering to regional tastes and adding features such as Internet access and rental I Pods. Sales rose 15%. By the end of that year, the chain was serving 10 million customers a day in Europe, contributing 36% to the companies operating income.

Increasingly, McDonald’s depended on other countries for growth and profits. In 2007, revenues in Europe topped those in the United States. Growth was also strong in Asia, the Middle East and Africa. 
In November 2008, for example, just as the economic crisis was spreading, McDonald’s global sales increased 171% more than its US sales. As Mickey D’s brought its signature products to Europe, Asia and the Middle East, it also sought to accommodate local tastes, a process some have labeled glocalization. In India, for example, it took beef off some menus to accommodate Hindus who don’t eat it.

McDonald’s also changed its marketing, responding to critics more forcefully and using more innovative strategies. For example, its Quality Correspondents program, seeks to win over mothers by taking them on tours of its kitchens, highlighting food quality and healthful options. This cadre of volunteer sales moms can enhance the company’s image and help overcome the single largest barrier to more McD’s sales to children: mothers’ health concerns.

In 2006, McDonald’s introduced a campaign to create gyms in its restaurants, adding exercise bikes, basketball hoops and climbing structures. Its ad campaigns featured svelte, active urban parents and children—their idealized patrons, rather than the more typical customers who were often overweight and struggling to make ends meet. While an editorial in PR Weekcongratulated the company for its emphasis on healthy living, critics charged that the focus on physical activity, like the company’s philanthropic contributions to school fitness programs, served to distract public attention from the company’s role in the obesity epidemic.

McDonald’s has also agreed to take voluntary steps to modify its products to improve their nutritional quality. In 2006, under the auspices of the Council of Better Business Bureaus (CBBB) and the National Advertising Review Council (NARC), McD’s joined 9 other major food companies to increase the percentage of healthy foods in advertisements targeting children younger than 12; change the product mix in ads targeted at children, stop advertising their products in elementary schools and stop deals for product placement in TV shows and movies. In 2008, with Burger King and KFC, McDonald’s promised the British Food Standards Agency, to cut the levels of fat and salt in their products and to serve more salad.

At the same time, the company took on its critics more forcefully. Fictititous information irresponsibly published and reported in the media has people questioning the quality and safety of fast food in general, said CEO Skinner. In 2006, according to the Wall Street Journal, McDonald’s hired a public relations firm to counter Eric Schlosser’s charges against the company.

By 2008, these changes—and a declining economy—had helped to turn the company around. The growing sales and healthy profits led financial analysts to be bullish on Mickey D. Goldman Sachs analyst Steven Kron told investors that recent growth in sales and profits temper lingering concerns that a global economic slowdown will impact the company’s results. CEO Skinner saidWorldwide turbulence is barely affecting our business. We are growing worldwide, especially in Europe we have significant gains.

New Vulnerabilities

Despite the optimism on Wall Street and at corporate headquarters, McDonald’s does face some vulnerabilities. Although McDonald’s may be better able to weather the credit squeeze than smaller chains, some analysts see clouds on the horizon. The company plans to build McCafes, specialty coffee bars in its 14,000 US locations, at a cost of $100,000 each. Jonathan Kaufman, chair of McDonald’s national advertising committee, told investors that lenders will definitely be looking at your ratios, your cash flow, your profit and loss, which they always did, but I know they’re going to take a harder look. What will change absolutely is interest rates. To date, 6,500 of the US outlets have installed McCafes. If the remaining franchises have trouble getting credit, they might not be able to join what the company hopes will be a promising profit center that can draw in new customers.

Another threat is the gyrating commodity prices. In the first part of 2008, global food prices rose sharply and in July 2008, McDonald’s warned investors that rising chicken and beef prices might reduce profits. Increases in beef and cheese prices recently led McDonald’s to take the double cheeseburger (468 calories, 26 gms of fat and 1137 mg of sodium) off the Dollar Menu, advising franchises to price it at $1.19. To make up for the loss, the company added a new McDouble Burger made with two all–beef patties and a single slice of cheese—one less than in the chain’s traditional double cheeseburger. This change will save McDonald’s six cents a burger and spare eaters some calories, fat and sodium. In the longer term, rising demand for beef and chicken in emerging markets in Asia, Latin America and elsewhere is likely to lead to further price increases, making it difficult for fast food companies to keep prices down and cost conscious customers in.

And while globalization has contributed to McDonald’s profits, it also raises some risks. In the last decade, Mickey D has become a symbol for the United States and as US power and prestige have declined, that identification can present problems. At a recent demonstration against the Israeli attack on Gaza held in Malaysia, reports Al Jazeera, former Prime Minister Mahatir Mohamed urged those working for McDonald’s and other US companies to quit their jobs. In October 2008, the Venezuelan government of Hugo Chavez ordered more than one hundred McDonald’s restaurants to close down for 48 hours because of alleged tax irregularities. Whether a new adminsitation in Washington will make the US and its products less of a target remains to be seen.

Globalization also offers critics of McDonald’s opportunities to learn from each other and devise global strategies to counter the company. Now that Mickey D has agreed to hold the salt in its British outlets, it can be expected that health advocates and officials in the US and elsewhere will make similar demands. Evidence shows that the salt in processed food is a major contributor to cardiovascular and other diseases.

At a recent meeting of the International Task Force on Obesity in Sydney, Australia, several public health organizations proposed the Sydney Principles to spell out what governments need to do to reverse the epidemics of obesity and diabetes. (See Box 1). With their focus on protecting children from deceptive or manipulative advertising, strong regulation and global standards, these principles could be seen as a threat by McDonald’s and other global chains. Should pressure build for an international treaty to give these principles the force of law, marketing opportunities for children could be constrained, threatening profitability and the important task of recruiting lifetime customers for Happy Meals.

Box 1

The Sydney Principles

    1. SUPPORT THE RIGHTS OF CHILDREN.
      Regulations need to align with and support the United Nations Convention on the Rights of the Child and the Rome Declaration on World Food Security which endorse the rights of children to adequate, safe and nutritious food.

    1. AFFORD SUBSTANTIAL PROTECTION TO CHILDREN.
      Children are particularly vulnerable to commercial exploitation, and regulations need to be sufficiently powerful to provide them with a high level of protection. Child protection is the responsibility of every section of society – parents, governments, civil society, and the private sector.

    1. BE STATUTORY IN NATURE.
      Only legally–enforceable regulations have sufficient authority to ensure a high level of protection for children from targeted marketing and the negative impact that this has on their diets. Industry self–regulation is not designed to achieve this goal.

    1. TAKE A WIDE DEFINITION OF COMMERCIAL PROMOTIONS.
      Regulations need to encompass all types of commercial targeting of children (e.g. television advertising, print, sponsorships, competitions, loyalty schemes, product placements, relationship marketing, Internet) and be sufficiently flexible to include new marketing methods as they develop.

    1. GUARANTEE COMMERCIAL–FREE CHILDHOOD SETTINGS.
      Regulations need to ensure that childhood settings such as schools, child care, and early childhood education facilities are free from commercial promotions that specifically target children.

    1. INCLUDE CROSS BORDER MEDIA.
      International agreements need to regulate cross–border media such as Internet, satellite and cable television, and free–to–air television broadcast from neighbouring countries.

  1. BE EVALUATED, MONITORED AND ENFORCED.
    The regulations need to be evaluated to ensure the expected effects are achieved, independently monitored to ensure compliance, and fully enforced.

Source: http://www.iotf.org/sydneyprinciples/#TheSydney

More broadly, the tension between globalization, a single brand identity with a relatively homogenous international market, and glocalization, a segmented and diversified market, also presents challenges. Each approach demands a different business model and different marketing strategies. Whether Mickey D’s can straddle that divide remains to be seen. AsNaomi Klein and global justice advocates point out, the power of a global brand is also its Achilles heel. On the other hand, the risk of one hundred local variants is that the global company loses its competitive edge and the potential for economies of scale. In either choice, McDonald’s greatest vulnerability is its image and both global and local strategies offer critics and food advocates tempting targets including health, the environment, labor practices, animal rights, and the company’s disproportionate political influence.

Impact on Health

In the coming years, how McDonald’s responds to the changing economy could set new standards for the fast food industry and therefore for global health. In the worst case scenario, Mickey D and other fast food companies continue to search for the cheapest foods, emphasizing the lower cost and higher profit calorie dense and nutrient poor processed foods at the expense of fruits, vegetables and healthier options. In addition, in this scenario, these companies continue heavy and aggressive marketing, using a mix of low prices and sometimes deceptive health claims to entice customers with stretched budgets and few other options for eating out. As more people fall into poverty, cheap calories will become more attractive, leading to growing rates of obesity and greater disparities in obesity and diabetes between the better off and the poor.

Some nutritionists worry that a continuing recession could worsen this trend, contributing to obesity. In a recent interview, Adam Drewnowski, the director of the Nutrition Sciences Program at the University of Washington in Seattle told Reuters that consumers are going to economize and as they save money on food they will be eating more empty calories or foods high in sugar, saturated fats and refined grains, which are cheaper. He noted that obesity is a toxic result of a failing economic environment and that studies in California suggested that a 10 percent rise in poverty translates into about a 6 percent increase in obesity among adults. Eileen Kennedy, Dean of the Friedman School of Nutrition Science and Policy at Tufts Universityexplainedthe reality is that when you are income constrained the first area you try to address is having enough calories in your diet. And cheap sources of calories tend to be high in total fats and sugars. Thus, the McDonald’s Dollar Menu offers consumers the dubious bargain of might saving money at the expense of their waistline and health.

On the international front, continued pressure from developed nations to improve their business practices could lead McDonald’s and other companies to move even more aggressively to capture markets in India, China and elsewhere, visiting American–style epidemics of obesity and diabetes on these nations as well.

A more optimistic scenario is that McDonald’s and other fast food companies, governments and local, national and global public health organizations could agree on new ground rules that would require companies to consider the health impact of their practices and reject strategies that were good for business but bad for health. Preliminary assessments of compliance with voluntary agreements do not provide much grounds for optimism. A 2006 review of McDonald’s compliance with its voluntary agreements to restrict marketing to children commissioned by the World Health Organization found thatindustry’s voluntary efforts to self–regulate are inadequate. Our case studies support this conclusion. McDonald’s continues to emphasize marketing of its core products to children. The authors concluded food companies cannot resolve the childhood obesity dilemma on their own. For business reasons alone, they cannot—and will not—stop making and marketing nutritionally questionable food products to children.

This report suggests that the economic crisis has helped McDonald’s to attract new customers with inexpensive products high in calories, fat, sodium and salt; to extend its global reach; and to avoid the criticisms leveled by nutritional and environmental critics. While McDonald’s is by no means the worst offender on these fronts, its size and market share make it an important force and a global pace setter. By developing new ground rules for corporate behavior and new responsibilities for governments to protect health, food advocates can help to prevent the current economic crisis from exacerbating global health crises.

 

Nicholas Freudenberg is Distinguished Professor of Public Health at Hunter College and Founder and Director ofCorporations and Health Watch.

 

Posted January, 2009

Photo Credits:
1. afagen
2. haynes
3. jburgin 

Check out CHW’s profile on McDonald’s from November, 2007, McDonald’s and Children’s Health: The Production of New Customers, and visit the Corporations and Health Watch archives for interviews, profiles, and news on industry influence in science and health.


 

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