BECG/017
IBS Center for Management Research
The McDonalds 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.
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1
BECG/017
The McDonalds Beef Fries Controversy
Hindus and vegetarians all over the world feel shocked and betrayed by McDonalds deception
and ultimate greed.
Attorney Harish Bharti, on filing the lawsuit against McDonalds, in May 2001.
These are the ways the fries are made in the US, and we dont have any plans to change.
Walt Riker, McDonalds spokesperson, in May 2001.
A CONTROVERSY ERUPTS
In May 2001, a class action lawsuit 1 was filed against the worlds largest fast-food chain
McDonalds, 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 McDonalds were falsely promoted
as being ?100% vegetarian.
Although McDonalds 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 McDonalds 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 McDonalds head office in
Delhi protesting the alleged use of beef flavouring. They submitted a memorandum to the Prime
Minister, demanding the closure of all McDonalds outlets in the country.
Activists also staged protests in front of McDonalds restaurants in south Mumbai and Thane.
Mobs ransacked the outlet at Thane, broke the glass panes and smeared the McDonalds 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 McDonalds 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-McDonalds wave refused to die down.
Meanwhile, more cases were being filed against McDonalds 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 McDonalds Beef Fries Controversy
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BACKGROUND NOTE
McDonalds 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 restaurants 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 McDonalds Corporation. In 1965, McDonalds went public.
By the end of the 1960s, Kroc had established over 400 franchising outlets. McDonalds 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 McDonalds profitability. By the end of the 1970s, McDonalds had over 5000 restaurants with sales exceeding $3 billion.
However, in the early 1990s, McDonalds 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, McDonalds also faced increased competition from supermarkets, convenience stores, mom and dad delicacies, gas stations and other outlets selling reheatable packaged food. McDonalds added only 195 restaurants during 1991-92.
In 1993, McDonalds 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, McDonalds entered into a $1 billion 10-year agreement with Disney. McDonalds agreed to promote Disney through its restaurants and opened restaurants in Disneys theme parks. In 1998, McDonalds took a minority stake in Chipotle Mexican Grill an 18-restaurant chain in the US. In October 1996, McDonalds opened its first restaurant in India.
By 1998, McDonalds 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. McDonalds overseas restaurants accounted for nearly 60% of its total sales. Franchisees owned and operated 80% of McDonalds restaurants across the globe. However, much to the companys chagrin, in 1998, a survey in the US revealed that customers rated McDonalds 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 McDonalds). 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
McDonalds 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-McDonalds day. In the late 1990s, the company had to settle over 700 incidents of
The McDonalds Beef Fries Controversy
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scalding coffee burns. Reportedly, McDonalds 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 McDonalds dismissed her request for compensation for medical bills, she filed a lawsuit against the company.
A McDonalds 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
McDonalds 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 McDonalds
Nutrition McDonalds 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. McDonalds 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 McDonalds 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 McDonalds 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 McDonalds 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 worlds largest user of meat, McDonalds slaughters hundreds of thousands
of cows, chickens, lambs and other animals per year.
Expansion By opening restaurants in developing countries, McDonalds 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 McDonalds 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 McDonalds Beef Fries Controversy
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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 McDonalds 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 giants struggle to uphold its image amidst allegations of unethical practices.
In the light of the companys chequered history of legal problems, the French fries controversy
seemed ?run-of-the-mill. However, when McDonalds 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 dont need to have any vegetarian food.? Commenting on this dilemma, a US based
Hindu vegetarian said, ?We cant 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 McDonalds contained beef. Shah sent an e-mail to McDonalds 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 companys Home Office
Customer Satisfaction Department.
The reply stated, ?Thank you for taking time to contact McDonalds with your questions regarding
the ingredients in our French fries. For flavor enhancement, McDonalds 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 McDonalds 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 Shahs 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 McDonalds.
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 McDonalds Beef Fries Controversy
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McDonalds 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 McDonalds is suggesting that these people are at fault, that they are stupid. This adds insult to injury.?
Interestingly enough, McDonalds statement that it never claimed its French fries were vegetarian was proved completely wrong after Bharti found a 1993 letter sent by the companys 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 McDonalds, 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 McDonalds 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 McDonalds employees repeatedly told customers that there was absolutely no meat product in the fries.
The whole controversy rested on a decision McDonalds 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 McDonalds 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, McDonalds 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, McDonalds decided to add the ?natural flavor, i.e. the beef extract, which was added to the water while the potatoes were being partially cooked.
The ?beef fries controversy attained greater dimensions in India as 85% of the countrys population was vegetarian. Non-vegetarians also usually did not consume beef because Hindus consider cows to be holy and sacred. Eating beef thus a sacrilege. A US based Hindu plaintiff in one of the lawsuits said, ?I feel sick in the morning every day, like I want to vomit. Now it is always there in my mind that I have done this sin.?
Experts commented that the issue was not of adding beef extract to a supposedly vegetarian food item it was more to do with the moral and ethical responsibility of a company to be honest about the products and services it offered. According to James Pizzirusso, founder of the Vegetarian Legal Action Network at George Washington University, ?Corporates need to pay attention to consumers who avoid certain food products for religious or health reasons, or because they have allergies. They say they are complying with the law in terms of disclosing their ingredients, but they should go beyond the law.?
4 Tallow refers to shortening made from beef fat.
5 Cholesterol is a soft, waxy substance found in the lipids (fats) in the bloodstream and in all body cells. It forms
cell membranes, hormones and other needed tissues in the body. However, a very high level of cholesterol in
the blood causes cardiovascular diseases and leads to heart attacks and strokes. Foods rich in saturated fats
cause the cholestrol level to rise thereby increasing the chances of cardiovascular diseases. 6 The book provides a detailed account of the negative aspects associated with the products and operations
of fast food giants such as Burger King and McDonalds.
The McDonalds Beef Fries Controversy
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While it was true that McDonalds complied with the Federal Food and Drug Administration 7
(FDA) guidelines by classifying beef extract as ?natural flavor, critics claimed that the company
was trying to ?play with words to brush off the allegations. This prompted analysts to remark that
a large part of the blame was with the weak guidelines stipulated by the FDA. The guidelines did
not require the flavor companies or the restaurants buying these flavors to disclose the ingredients
in their additives as long as they were generally regarded as safe (GRAS 8 ). Analysts added that as
long as the FDA did not make the guidelines more specific, companies could legally get away with
serving dishes containing animal-based products.
Meanwhile in June 2001, another class-action lawsuit was filed in the District Court in Travis
County, Austin, Texas on behalf of all Hindus in Texas, alleging that Hindu moral and religious
principles had been violated by their unintentional consumption of French fries that were flavored
with beef. As public outrage intensified, McDonalds released its conditional apology on its
website, admitting that the recipe for the fries used a ?a miniscule trace of beef flavoring, not
tallow (Refer Table II for McDonalds response to the allegations).
McDonalds said that it issued an apology only to provide more details about its products to
customers. A company spokesperson said, ?Customers responded to the news about the lawsuit. In
the end, we are responding to those customers. We took a fresh look at how we could help
customers get more information about natural flavors.?
Unsatisfied by the apology, Bharti said, ?Apology is good for the soul if it comes from the heart. It
is not an unconditional apology. Why do they go around using words like ?if there was any
confusion in their apology?? Further, news reports quoting company sources said that the apology
did not mean McDonalds was admitting to claims that it misled million of customers by adding
beef extract to its fries. Bharti said that the legal battle would continue and that McDonalds would
have to issue an unconditional apology and pay a substantial amount of money. By this time, two
more lawsuits were filed in Illinois and New Jersey, taking the total number cases of five.
Table II
McDonalds Response to the Allegations
It has always been McDonalds practice to share nutrition and ingredient information with our
customers, including facts about our French fries. In the US, we consistently communicate this
information through in-store posters, wallet-sized cards and various brochures, which offer a
wide variety of dietary details.
McDonalds USA is always sensitive to customer concerns. Because it is our policy to
communicate to customers, we regret if customers felt that the information we provided was not
complete enough to meet their needs. If there was confusion, we apologize.
Meanwhile, here are the details of our French fry production in the U.S. A small amount of beef
flavoring is added during potato processing at the plant. After the potatoes are washed and
steam-peeled, they are cut, blanched, dried, par-fried, and frozen. It is during the par-frying
process at the plant that the natural flavoring is used. These fries are then shipped to our US
restaurants. Our French fries are cooked in vegetable oil at our restaurants.
Contd
7 A US governmental consumer protection body, the FDA promotes and protects public health by helping
safe and effective products reach the market in a timely way and monitoring products for continued
safety after they are in use. 8 GRAS status is awarded after the FDA conducts scientific tests on a product and the product meets the
criterion set for approval. Products which are GRAS are explicitly excluded from requirement for FDA
premarket approval.
The McDonalds Beef Fries Controversy
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Contd
McDonalds 1990 switch to vegetable oil in the US as our standard cooking oil was made for
nutritional reasons, to offer customers a cholesterol-free menu item. This nutrition
announcement received national media coverage, widely broadcasting the facts about our
switch and why we made it.
As a local business in 121 countries, our French fry process varies country-by-country to
account for cultural or religious dietary considerations. For example, in predominantly Muslim
countries as in Southeast Asia, the Middle East and Africa McDonalds strictly conforms to
halal standards. This means no use of beef or pork flavorings or ingredients in our French fries.
In India, where vegetarian concerns are paramount, no beef or pork flavorings are used in our
vegetarian menu items.
Our ?McDonalds Nutrition Facts brochure uses the term ?natural flavor in the ingredient list
for French fries. This description is in full compliance with and permitted by the US Food and
Drug Administration (FDA).
Source: www.mcdonalds.com
THE AFTERMATH
The courtroom battle had entered the 11 th month when McDonalds announced that it would issue
a new apology and pay $ 10 million to vegetarians and religious groups in a proposed settlement of
all the lawsuits in March 2002. Around 60% of this payment went to vegetarian organizations and
the rest to various groups devoted to Hindus and Sikhs, childrens nutrition and assistance and
kosher dietary practices 9 .
The company also decided to pay $ 4,000 each to the 12 plaintiffs in the five lawsuits and post a
new and more detailed apology on the company website and in various other publications.
McDonalds also decided to convene an advisory board to advise on vegetarian matters.
In April 2002, McDonalds planned to insert advertisements in newspapers apologizing for its
mistakes, ?We acknowledge that, upon our switch to vegetable oil in the early 1990s for the
purpose of reducing cholesterol, mistakes were made in communicating to the public and
customers about the ingredients in our French fries and hash browns. Those mistakes included
instances in which French fries and hash browns sold at US restaurants were improperly identified
as vegetarian. We regret we did not provide these customers with complete information, and we
sincerely apologize for any hardship that these miscommunications have caused among Hindus,
vegetarians and others.?
Unhappy with the monetary compensation the company was offering, Bharti said, ?Wish I could
do better in terms of money. But our focus was to change the fast food industry, and this is a big
victory for consumers in this country because we have brought this giant to this.?
Though $ 10 million was definitely a pittance for the $ 24 billion McDonalds, what remained to
be seen was whether the case would set a precedent and make corporates throughout the world
more aware and responsible towards their customers or not.
9 The term ?kosher is used to describe foods or other animal products that are fit for consumption
according to the religious rules of the Jewish community. By ensuring that the food is kosher, the Jews
believe that they recognize the value of the life taken, while at the same time integrating religion into
their dietary practices.
The McDonalds Beef Fries Controversy
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QUESTIONS FOR DISCUSSION:
1. Analyze the various allegations levelled against McDonalds before the French fries controversy. Why do you think the company attracted so much hostility and criticism despite
being the number one fast food chain in the world?
2. Discuss the French fries controversy and critically comment on the companys stand that it had never claimed the fries were vegetarian. Do you think the company handled the controversy
effectively? Give reasons to support your answer.
3. Discuss the steps taken by McDonalds to play down the French fries controversy and critically comment whether the company will be able to come out of this unscathed.
The McDonalds Beef Fries Controversy
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Exhibit I
What Happened in India
In May 2001, Managing Directors of McDonalds India Vikram Bakshi (Bakshi) of Delhis
Connaught Plaza Restaurants and Amit Jatia (Jatia) of Mumbais Hardcastle Restaurants said at
a press conference, ?We are open to any kind of investigation by the authorities, from the state
or central governments. We categorically state that the French fries and other vegetarian
products that we serve in India do not contain any beef or animal extracts and flavouring of
whatsoever kind.?
Bakshi said that the company had developed a special menu for Indian customers taking into
consideration Indian culture and religious sentiments. McDonalds officials circulated official
statements by McCain Foods India Pvt. Ltd. and Lamb Weston, suppliers of French fries to
McDonalds India, stating that the fries were par-fried in pure vegetable oil without any beef
tallow or any fat ingredient of animal origin.
People were however skeptical of the companys assurance because it had made similar false
promises in the US as well. Their fears came true when it was revealed that Lamb Westons
supplies had been rejected after they failed to meet standards set by McDonalds. McCain
Foods was still in the process of growing the appropriate potatoes and needed another two years
to begin supply. The French fries were being sourced from the US.
However, tests conducted on the French fries and the cooking medium by Brihanmumbai
Municipal Corporation (BMC) and the Food and Drug Administration (FDA) confirmed the
fries contained no animal fat.
Source: IBS Center for Management Research.
The McDonalds Beef Fries Controversy
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Exhibit II
McDonalds Financial Performance Summary
Source: www.mcdonalds.com
? Includes $378 million of pretax special operating charges primarily related to business reorganization in the US and other global change initiatives, and the closing of 163
underperforming restaurants in international markets.
? Includes the $378 million of pretax special operating charges noted above and $125 million of net pretax special nonoperating income items primarily related to a
