Mickey D's -- Eating Cost Increases for Customers
Even though in my opinion, McDonalds would do well by their typical customer's waistline to cut portions given that obesity has risen nearly as fast as commodity prices in recent years, the venerable fast food giant has decided to eat as many commodity price increases for its customers as it can. A recent article in my hometown paper The Chicago Tribune noted that "in the past nine months or so, food prices have been escalating at a rate not seen since the early 1990s ... McDonald's expects the price it pays for cheese to rise 21 percent this year in the U.S., while chicken costs may climb 5 percent to 6 percent ... the company said it expects its 2008 U.S. beef costs to be up 8 percent to 9 percent, well above its prior estimates of flat prices ... Beef makes up about 15 percent of McDonald's commodity costs." What's my suggestion? Cut back on the size of portions by equal amounts (and even charge a few cents less if they feel like they need to). Everyone -- including McDonalds' shareholders and customers -- would be the better for it. The problem is that McDonalds has never done the NPV calculation over the lifetime value of a customer based on health and longevity. If they contribute to killing off a typical frequent customer in their sixties or seventies, they're sacrificing a good ten to fifteen years of additional revenue relative to if they kept them healthy with smaller portions.
- Jason Busch
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Of course, anyone who can eat a McDonald's burger also has no appreciation for the concept of "bread."
Never mind.
The biggest cost though of beef is its impact on global warming. Methane is 21x more 'warming' than CO2 and organic beef is even worse given the time it takes to get an organic cow to slaughter weight. Dairy cows also are part of the equation. So, my friends, it's great that you've switched to a hybrid car and changed your lightbulbs, but you now need to give up cheeseburgers and milk in order to save our planet. I guess it's veggie burgers and soy lattes in our foreseeable future. Otherwise, we need start doing methane reclamation not just in landfills, coal mines, and manure piles, but also in livestock, and that's just not a visual that I care for on a bike ride through Vermont or Wisconsin.
1. In climates of increasing commodity costs, it's even more important for organizations to pull every lever they can to control costs. If your top line's not growing as fast as your product costs, you need to look everywhere for savings. May be a bad analogy given the topic, but spend areas that used to be sacred cows (think marketing, legal, etc) need to be turned into burger meat...
2. The goals of spend management projects need to be adjusted to reflect market realities. Finding your 15% savings you're used to is going to be pretty hard if the underlying commodity costs have gone up 21% just this year. Instead, companies need to focus on finding stable, predictable and safe sources of supply at competitive costs. The best way to do that continues to be through the diligent application of spend management strategies. Cost containment might not be as much fun as hard savings, but it sure beats just accepting the price increases as they come in from your supplier or, worse yet, getting no product at all.