Agribusiness Review - Vol. 3 - 1995
Paper 2
ISSN 1442-6951
Raw material supply for McDonald's expanding South -East Asian market:
Have we the capacity?
Steven Jermyn
Executive Vice President, Director of Finance, McDonald's Australia Ltd.
In the time it will take you to read this paper, more than one million people around the world will have eaten at McDonalds. It would take one whole day for that many people to eat at McDonald's in Australia.
Driven by the key strategies of quality, service, cleanliness, and value, McDonald's has achieved international success and growth, with more than 15 000 restaurants operating around the world in 80 countries, including nearly 500 stores in Australia.
McDonald's growth is fuelled by a number of factors including marketing, store development, convenience, customer service, value and more.
Marketing drives people in McDonald's restaurants, and plays an important role in encouraging trials by consumers, and a fun and memorable in-store experience. But McDonald's sustained growth is built on repeat business, repeat visits. If McDonald's did not ensure repeat business, they would be out Of business in Australia in just two weeks. The key determining factor in ensuring repeat business is the delivery of consistently safe, high quality, fresh hot food which satisfies customers' quest for taste and substance.
A major part of that delivery is the performance of McDonald's employees who are the face of the organisation, and who actually deliver the food fresh, hot, and tasty to the customers. McDonald's strict adherence to the highest operational standards, and an ongoing commitment to training, ensures that this important part of the equation will continually ensure complete in-store customer satisfaction on every customer visit.
The second important factor contributing to solid repeat business is the quality of raw materials delivered at the back door. This is an enormous area of challenge and opportunity, both for the company and its Australian suppliers.
To put it in perspective, if McDonald's provides a perfect product 99.9 per cent of the time and a substandard product just 0.1 per cent of the time, McDonald's would sell a substandard and unacceptable product more than once every three seconds at McDonald's around the world. If they were 99.9 per cent correct in Australia McDonald's would not meet customers' expectations 1 000 times every day in Australia. And that is clearly just not good enough. Ninety nine point nine per cent perfect quality is totally unacceptable by McDonald's company standards and their customers' expectations.
McDonald's reputation is at stake every time a McDonald's crew employee serves a customer. As McDonald's grows, the world becomes smaller with the proliferation of mass media and explosion of information technology. More and more people have access to a wider range of media, and more and more often they are reading and listening to news concerning McDonald's. For instance, if someone breaks a tooth after allegedly biting a 'Big Mac' in Australia, it could be expected that the incident would be reported in at least 26 countries within 24 hours. Thus, the information super-highway and media explosion have added a degree of pressure to the company and its raw product suppliers that further enforces the need for a consistently top quality product.
One hundred per cent perfection is an extremely tall order. It calls for an uncompromising commitment to quality' at every stage in the delivery process, especially in the supply of raw materials at the back door of McDonald's stores. McDonald's relies on its suppliers and business partners to share that commitment completely.
Since McDonald's opened its first store in Australia in 1971, there have been some major hurdles on the road to getting the supplier relationship right. However, McDonald's preference for developing mutually beneficial relationships with leading Australian suppliers has enabled many such companies to enjoy substantial growth and to plan for long-term expansion. In 1994, McDonald's in Australia spent more than $500 million on goods and services from more than 100 suppliers, ranging from major companies to small local firms.
McDonald's relationship with its beef supplier, F. J. Walkers, dates back to 1971, when the company opened its first restaurant in Australia. McDonald's specification called for 100 per cent pure beef. Walkers were then slaughtering cattle mainly for export markets, which markets were somewhat unpredictable. The additional business, though small at the time, provided a degree of stability in what was then a comparatively new industry. In 1993 F. J. Walkers achieved the rare status of being approved as McDonald's world reference beef pattie supplier. This achievement was in recognition of the outstanding consistent quality of Walkers' beef patties.
Now in 1995, Walkers not only distributes beef to all McDonald's restaurants in Australia, but also exports to Japan, and is the back-up supplier for all countries in the region.
In 1994 McDonald's exported:
· one million kilograms of lettuce to Hong Kong, Singapore, Guam, Indonesia, and New Zealand,
· one million kilograms of beef to Japan,
· 2.5 million kilograms of cheese to Hong Kong, Japan, Singapore, Malaysia and Taiwan, and
· 11 000 kilograms of whipped butter to New Zealand.
The Asian opportunity: do we have the quantity and quality?
McDonald's can be regarded as a microcosm of Australia's opportunity in Asia McDonald ' s is essentially a buyer of meat, milk, and potatoes. McDonald ' s is not selling rice and other traditional Eastern foods in McDonald ' s restaurants in Asia; McDonald's is selling the same burgers and fries as anywhere else in the world. And all that is a huge opportunity; the trend for Western food in Asia is a huge opportunity for all Australian producers of meat, milk and potatoes. In terms of volume, 12 of the top 20 McDonald's restaurants in the world last year were in Hong Kong. The volume of raw product purchased by McDonald's restaurants in Asia in 1995 included:
- 40 million kilograms of bee{
- 100 million kilograms of potatoes, and
- 12 million kilograms of lettuce.
In 1994, the top 20 products purchased in the region were valued at over A$1 billion. This is expected to rise to almost A$3.5 billion by the year 2000.
Australia's unique selling point to new Asian markets needs to be that we can guarantee to supply the consistent quality needed to meet customer expectations. It's not about supplying the best we can produce, but the best that is demanded. Australia should focus on the basic principles of customer service, and the importance of building supplier relationships.
Consistent guaranteed supply has been a key challenge for McDonald's lettuce suppliers. Three years ago, McDonald's bought lettuce from the market and was affected by fluctuating market prices, product quality and quantity. In partnership with the processor and broker, McDonald's developed and launched a 'guaranteed supply strategy' with the intention of developing regionally based grower teams committed to McDonald's. The aim of the guaranteed supply strategy' is the provision of the highest quality product at an annually negotiated contract price. In return, the growers have guaranteed to them quantities and prices, the ability to become involved in continuous improvement initiatives, and the opportunity to grow with a dynamic and stable company.
As a result, lettuce grower teams were set up in Werribee and Lindenow in Victoria, and Gatton in Queensland. The success of this partnership has been outstanding, and will serve as a model for the future.
McDonald's local lettuce supplier is now exporting to Hong Kong Singapore. Guam, and Indonesia and is the backup supplier for the entire Asia Pacific Region. The commitment to teamwork and guaranteed supply has been a major factor in entering and securing overseas markets.
Besides in relation to lettuce, success has also been achieved in guaranteeing quantity and quality in the supply of pickles. There has never been a pickle industry of any note in Australia, and McDonald's had no choice in the past but to import its requirements. Despite the fact that McDonald's could provide a stable and growing market, for many years the few Australian producers showed no interest in developing a local industry, especially in relation to quality consistency demanded by McDonalds.
However, in 1990 a farmer in Griffith who wanted to grow and process pickles for McDonalds approached McDonald's. The challenge was to meet McDonald's high expectations in relation to quality and consistent quality and, over time, beat the imported price. The supplier continues to score extremely well against the US competitor, and McDonald's is now considering the possibility of export markets.
McDonald's world famous french fries provide a good case study for examining the fourth important factor required to achieve long-term export success - cost competitiveness.
French fries are considered by many to be McDonald's most popular menu item. They are produced from the Russett Burbank potato, which is a long, cylindrical, and slightly flattened potato with shallow eyes and a reddish brown colour.
Within the region, apart from in Australia and New Zealand, all McDonald's french fries are supplied from the US. However, in 1994, McDonald's Australia was informed that the US was experiencing a supply shortage, which was predicted to worsen over the coming few years. McDonald's Australia immediately formed a team to review all Australian and New Zealand suppliers with a view to assessing which companies could be competitive in the region. Three suppliers were thoroughly investigated.
The measures undertaken by the suppliers to meet the challenge of suppling potatoes for french fries proved nothing short of extraordinary. One particular supplier left no stone unturned in the quest to fully exploit this opportunity, including negotiations with freight lines, packaging suppliers and the potato growers themselves. The results were extremely encouraging, and there were trials in several Asian countries with the Australian product in the latter half of 1995.
In the longer term, McDonald ' s expects Australia to become a major supplier of french fries to the Asian Region.
Guaranteed supply, quality consistency, and cost competitiveness are collectively the key to penetrating and growing in the Asian market. Australia has the ability to produce the quality required by our customers in the region.
McDonald's Australia has established mutually advantageous relationships with Australian companies that are committed to achieving excellence in the areas of guaranteed supply, quality consistency, and cost competitiveness.
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