McDonald's and Its Mystery Meat

Fast-food behemoth McDonald's (NYSE: MCD  ) made big headlines this week by publicly committing to a change in its ubiquitous beef patties. Its goal is to start shifting its patties to environmentally friendly "sustainable" beef by 2016. That's a big and significant move regarding our food supply -- meat, particularly beef, currently tends to be a resource-intensive food that's therefore tough on the environment.

On the other hand, the twist here is that McDonald's hasn't quite figured out what the exact definition of "sustainable beef" would be in context of its commitment. It's definitely something companies need to consider when it comes to standards -- and it's a complicated process in itself. 

Regardless, for McDonald's and the whole competitive food landscape, this is an extremely serious call to action. Investors shouldn't ignore the big picture.

Signs of changing menus
The timing is interesting. McDonald's announcement runs in perfect and timely parallel to last week's news that General Mills' (NYSE: GIS  )  original Cheerios cereal will be marketed as GMO-free, since the consumer goods behemoth has changed some ingredients to avoid genetically modified organisms.

Investors who ignore big shifts like this -- big companies committing to major social or environmental changes -- or dismiss them as disconnected from investing are missing a major trend that's building with each passing year.
When companies as gigantic as McDonald's and General Mills make commitments like these, they can really move the needle in terms of instigating change in agricultural production methods, often related to environmental concerns.

The Golden Arches has recently made a similarly significant change regarding its relationship to the food chain. McDonald's has already started moving to push its suppliers to eliminate gestation crates for breeding sows. It buys 1% of the U.S. pork supply, so when Mickey D's makes a move like this, suppliers listen -- as do competitors, making the shift even more significant.

Back to the beef: McDonald's is the largest beef buyer in the U.S., period. If McDonald's is interested in buying beef that has been raised in an environmentally sustainable manner, the biggest overall takeaway is that corporate mainstreaming of environmentally sustainable business strategies has begun. We're not talking smaller, niche players anymore. We're talking about our most powerful multinational corporations.

Timing is one of the complex parts of a change this big. When massive companies like McDonald's make these commitments, it's going to take at least a couple of years, if not much more, for these changes to actually be implemented. Turning a huge business "ship" so dramatically is anything but easy. Supply issues alone make it difficult.

For example, the oats in the aforementioned GMO-free Cheerios aren't genetically modified to begin with, so General Mills could tinker with the other minor ingredients fairly easily to meet the non-GMO standard. But for other varieties of the cereal, like Honey Nut Cheerios, there are still too many ingredients to make the change within a swift time frame without more onerous costs.

McDonald's has committed to start the shift to sustainable beef by 2016, but it isn't yet giving any specific goal for just how much of the more environmentally kind beef it will buy by that time.

However, according to reports, McDonald's is in discussions with Wal-Mart (NYSE: WMT  ) , environmental organizations, and, of course, the stakeholder group that has a lot riding on this -- suppliers -- on exactly how to define "sustainable beef."

Wal-Mart is a good corporation to work with. The discount giant is working on a sustainability supplier index. That's a huge move given Wal-Mart's major influence on suppliers -- getting their products on the behemoth's shelves is a big sales boon for them. Here's an idea of just how big a deal this is: Wal-Mart uses 60,000 suppliers.

Last April, Greenbiz checked in on the progress of Wal-Mart's index and explained its aims. Among these quoted from a company spokesman:

  • To improve the environmental performance of its most popular products.
  • To further integrate sustainability into Walmart by giving responsibility to the merchants.
  • To drive a productivity loop that reduce[s] costs and ultimately benefits customers.
  • To increase customer trust in Walmart and its brands.

Investors should pay attention, even though such initiatives often sneak beneath the radar. Obviously, although sustainability is part of the rundown, real business benefits are also being increasingly included in such shifts: reducing costs and increasing trust in Wal-Mart, the latter of which is often a weak link for the huge retailer.

Clearly, that is a massive undertaking, and reveals the occasionally difficult ways big changes come about.

Responsibility: A new focus on an old idea
Obviously, big changes are on the way; the path has been paved by smaller companies such as McDonalds' former subsidiary Chipotle, whose Food With Integrity mission includes sustainable sourcing whenever it can include such ingredients given supply. Trends and shifting definitions of competitive advantage are likely driving the progress in these areas.

Corporations wouldn't be spending the time or the money on initiatives like sustainable or organic food if these didn't matter increasingly to the public -- their own customers. The sheer number of companies that are marketing green initiatives, providing corporate sustainability reports and building entire departments devoted to that work, or simply trying to compete with rivals to operate in more impressively sustainable way tells investors something.

The trend toward sustainability and responsibility is there, even though many investors aren't yet identifying their importance when they're simply looking at companies' straight financials or valuation metrics. 

Many companies have or are formed with this kind of responsibility built into their original foundations, which is better yet. But overall responsibility and the trust that gives to the public isn't exactly an old concept. Decades of cutting corners for profits and becoming less concerned with externalizing costs have resulted in too many companies that simply aren't responsible or built for the changing definition of good corporate citizens.

Obviously, there is a long way to go and a lot to iron out. Huge beef buyers such as McDonald's do rely very heavily on factory farms and other forms of mass production to churn out all those Big Macs.

Who knows, maybe we'll see even bigger changes than we can yet imagine. Take solutions to big problems through new technology as an example. Not too long ago, Google co-founder Sergey Brin helped fund an experiment to grow beef in test tubes. This was a personal decision on his part, given his interest in more sustainable meat production, and his interest hinged on the environmental aspects of that particular form of agriculture.  .

The big-picture takeaway should be that consumer desires are changing drastically toward responsibility and sustainability. The definition of competitive advantage is likely taking on some different facets as well -- many of them green and sustainable. The changes that are coming aren't a mystery -- it's time to acknowledge the trends and assess them in our business analyses to find good investments and avoid the poor ones.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

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Read/Post Comments (10) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2014, at 3:53 PM, gskinner75006 wrote:

    Even though this won't do McDonald's stock any good, it's best to just buy prime beef on the hoof from a rancher. Not hard to do at all. I buy a cow ever three years. Vacuum sealed and cut they way I want. This way you know what you are getting and you don't have to deal with Choice, Select, Preferred, and look what I found laying over here. Go in with a friend on a side. Get three friends and have a quarter. You'll never go back to the supermarket for beef, and when you have that fresh cooked burger, you'll wonder why you ever went through a drive through.

  • Report this Comment On January 12, 2014, at 12:03 PM, HoosierRube wrote:

    McDonalds has been running down the road of activist blogger appeasement for quite some time now.

    They have totally forgotten about their customers and serving them. And now are trying to serve the activists (and you cant swing a dead cat without hitting a dozen social activists these days) who are not the target customer of McDonalds.

    You can see how well this is working out fof MickyD's. The numbers tell me that its not working out well for the company, its investors or its customers. And the pat me on the back social activists could care less about any of that.

    McDonalds is dead to me.

  • Report this Comment On January 12, 2014, at 5:46 PM, SkepikI wrote:

    Awww, Alyce I'm shocked that you don't know what sustainable Beef is....obliviously vat-grown from gene spliced sustainable algae of course. Not complex at all. ;-)

    To be modestly more serious however, I am glad to see you include this bit of information that should have been in a previous article on Cheerios:

    <For example, the oats in the aforementioned GMO-free Cheerios aren't genetically modified to begin with,>

    And if I am not mistaken, the root cause of that is because the gene-splicers have not found it efficacious or economic to mess about with oats period. So my guess is NONE of the oats grown are gene spliced. Which of course does NOT mean GMO free as a whole definitional argument and "GMO free cartel" sphere is springing up.

    One could say we have been "Genetically Modifying Organisms" for thousands of years by selection. Of course that is not what the "Cartel" wants to advance. The Cartel wants the GMO wary crowd to buy into the Cartel's branding exercise so the Cartel can prosper.

    Thus, only if the Cartel ASSURES you, I and Cheerios that the ingredient is "GMO-free" can it be so.... Lets see anyone top that logic for job security.

  • Report this Comment On January 13, 2014, at 11:02 AM, Sketch71 wrote:

    There's nothing responsible about General Mills' GMO-free "commitment." It is a win for pandering to fear and misinformation and a loss for science.

    Then again, if climate change predictions start coming true with their possible dire effects on food security, I'm sure most people would chose GMO over starvation. Until then I suppose there's nothing wrong with people wanting to pay higher food prices in exchange for scientific ignorance.

  • Report this Comment On January 13, 2014, at 6:17 PM, MelissainVA wrote:

    Hybridization which occurs in nature and which humans have been assisting for thousands of years is NOT the same thing as genetic modification/engineering.

    Hybridization occurs between the same species and occurs in nature (even though it may be spend up with human help). Genetic modification is done in a lab with gene slicing and frequently bundles genetic material from multiple species.

    No one knows how this will play out. Despite protests to the contrary it has NOT been scientifically studied because in most cases Monsanto and others do not even allow their GMO seeds to be used in scientific studies. They ask us to simply "trust them".

    Even if you believe GMOs are safe, McDonalds main issue with "sustainable beef" is about getting away from the CAFO feed lots (completely separate issue from GMOs). If you want to eat beef that has been raised while wallowing in its own filth and survived to slaughter only based on the massive amounts of drugs (antibiotic resistance anyone) that have been feed to it, then go for it. But to claim that this is "healthy" is simply wrong.

  • Report this Comment On January 15, 2014, at 3:16 PM, BBRAF wrote:

    I venture to say that you do not know that GMO is harmful.Certainly it has been extensively tested from its use in this country for years.Paranoia however makes for better press.

  • Report this Comment On January 15, 2014, at 6:35 PM, SkepikI wrote:

    "Any sufficiently advanced technology is indistinguishable from magic" Aurthur C. Clarke

    Just as Hybridization is not random natural selection, I suppose it is accurate to say gene-splicing is not Hybridization. No doubt one could have a wonderful esoteric argument about the risks of mutation vs gene-splicing. Then you could proceed on to the humane attributes of lot or pasture feeding meat animals vs chasing down deer elk, and bison with your own two feet. Follow that with do soybeans scream when you tofu them?

    Each time some new technique for working on food productivity arises it carries with it both advantages and risks, and drags along various views on should we burn the witches at the stake or shower them with gold and praise. No doubt Louis Pasteur was threatened within an inch of his life more than once.

    While I have my doubts about wasting antibiotics on plumping animals only to find we will create the resistant diseases that will control the population, I keep an open mind about targeted gene-splicing. Perhaps that is naive. Burying science and burning researchers at the stake seems more naive than that.

  • Report this Comment On January 16, 2014, at 9:19 AM, Khalig wrote:

    I agree with gskinner75006. Fresh meat has much better results in taste and flavor in contrast to frozen meat that has traveled all the way from Australia (found in Restaurant Depots). As an alternative to gskinner75006's suggestions, you could look for Halal meat markets as they usually carry freshly butchered meat from animals raised locally. Halal meats are typically less bloody because the blood is mostly released from the animals' body during execution unlike animals that are killed by electroshock. However, do your due diligence and find a place that's highly hygienic and you can trust their source.

  • Report this Comment On January 16, 2014, at 3:08 PM, stan8331 wrote:

    As baby boomers careen toward retirement, we seem to be entering a period of rapid social change. A decade ago, I would not have believed anyone who asserted we would see the broad, rapid cultural shifts that are now upon us.

    With healthy alternative grocers like Whole Foods and Trader Joe's growing by leaps and bounds, and restaurants like Chipotle and Panera Bread doing the same, it seems McDonald's and other big food companies are beginning to prepare for a time when their customers will be far more concerned with the details of food sourcing than has been the case in the past.

    As far as I'm concerned, that's both a hopeful sign for the planet and good business judgement for the companies who are not expending their resources in desperate attempts to cling to the status quo.

  • Report this Comment On January 17, 2014, at 3:44 PM, TMFLomax wrote:

    Thanks for the thoughts everyone...

    I'm going to try to touch on a few...

    I have definitely heard both sides of the arguments about GMOs. Plus there are emergent pro-GMO arguments (climate change not to mention the feeding of all the world's people given huge populations, and some places simply can't farm without some kind of technological help).

    Then again, I don't really have a high degree of trust given the power of companies like MON and occasional things that strike me as abusive, i.e., the farmer situations (and of course it's not the only company that works on GMOs, it just gets all the flak and bad PR), things that feel like regulatory capture, etc. I recognize I'm not a scientist, but some things bug me. (Feels a little "Frankenstein" themed, but anyway.)

    Overall, though, my firmest stance as an investor who examines corporate behavior is simply clear GMO labeling so that people can simply make the choice and more awareness that as things stand now, it really is in just about everything. Pro and con education -- fine. But, the ability to identify it.

    I brought the GMO & Cheerios development up because it is similar just in terms of what companies are recognizing many consumers are increasingly demanding (or distrusting) as stan8331 points out about the cultural shifts and consumer behavior.

    MelissainVA, thanks for that contribution. Agreed about using very different species for some of these things -- it doesn't seem wise. The factory farming issue is a huge one (and at the heart of sustainability concerns as you say!). Whether it's environmental degradation, animal treatment, or like you said, unwise/unhygienic issues that can (and sometimes does) sicken lots of people (such a great point) even if they aren't interested in "animal welfare." It's not sustainable in any sense when those kinds of risks are floating around (plus from the economic stance, many externalized costs).

    Oh and yes, I agree stan8331 fully that the big companies ARE starting to prepare -- and it is what they should do to compete given a lot of indicators out there about the shifting consumer behavior. The fact that they're competing is a significant indicator!

    Thanks for the discussion!

    Best,

    Alyce

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