Friday, January 4, 2013

McDonald’s Pursuit of the Perfect Potato

By Ken Boyer, Fisher College of Business, Ohio State University,
Next time you bite into a hot, crunchy, delicious French fry give a moment’s thought to the journey that this lone fry took from the field to your mouth.  This is something that occupies much of the waking thoughts of Mitch Smith, McDonald’s agricultural products director.  The company buys over 3 billion pounds of potatoes per year – that’s a lot of spuds.  And getting on the coveted list of McDonald’s supplier’s is the key goal of farmers around the world.

After Ray Kroc developed the franchising system for McDonald’s in the early 1950s, the company took off, growing to become the world’s biggest restaurant system – with 31,967 restaurants in 118 countries around the globe.  The company had sales of $23.5 billion in 2008 and it is estimated that the company serves food to 1% of the individuals on planet earth on a given day and over 5% of all Americans.  Most of this success is due to the company’s keen attention to the numerous details, challenges and opportunities of managing its daily operations and supply chain.  The company has excelled both in creating a standardized system for providing reliable, consistent quality in service of millions of meals per day as well as a supply chain system par excellence long before the term was coined and in a service sector business rather than a manufacturing oriented business that many people presume “need supply chain expertise”.

Jack Simplot founder of Simplot approached Ray Kroc with the idea of switching from fresh to frozen French fries in the early 1960s.  The company had been having substantial problems managing the distribution, inventory and supply of fresh potatoes – according to Simplot “They were having a hell of a time maintaining potato quality in their stores.  The sugar content of the potatoes was constantly going up and down, and they would get fries with every color of the rainbow.  I told him that frozen fries would allow him to better control the quality and consistency of McDonald’s potato supply.”  In 1964, Simplot invested $400,000 (equivalent to over $5 million today) to put potatoes in cold storage during the summer – but the experiment failed when all of the potatoes rotted.  Undeterred, Simplot returned in 1965 with another proposal – converting from fresh to frozen potatoes.  McDonald’s executives carefully researched the possibilities and discovered that the traditional freezing process drained structure and flavor from French fries.  Ice crystals would form in the potato during freezing, resulting in ruptured starch granulates.  McDonald,s worked with Simplot to develop a process to dry French fries with air, run them through a quick freezing cycle, then freeze them.  The result was a reduction of moisture in the frozen French fry, which improves its crispness.  After Simplot volunteered to build a production line for the new process, McDonalds rewarded the company with 50% of its potato business (up from 20%) – which in 1992 meant a total of 1.8 billion pounds of French fries.  Today, Simplot is a more than $4 billion a year business and supplies approximately 40% of McDonald’s total demand.

Today the competition among suppliers for a piece of the potato pie is intense.  It has been seven years since the fast food behemoth has approved a new variety of potato to the three approved varieties currently on its list.  The mainstay potato is the Russet Burbank which provides the best taste, but has some substantial limitations – it takes a long time to mature/grow, requires huge quantities of water and is vulnerable to rots and disease.  This means that farmers must douse it in chemicals – a practice that customers and socially conscious investors would like McDonald’s to reduce or eliminate.  And yet … these are the best tasting potatoes.  The second major variety is early-maturing Canadian-bred Shepody potatoes that make up a large percentage of fries sold in August – October.  Unfortunately, these potatoes don’t store very well.

So, in November the company switches focus to Ranger Russet fries, followed by Umatilla Russets, which store better and fill our bellies from December until February.  Umatilla Russets were the last potato variety approved by the company in 2002.  The remainder of the year (March – August) consists of the standby Burbank Russets brought west to prime potato country of Idaho, Oregon and Washington by Luther Burbank in 1875.

In 2008, Idaho farmers planted 57% percent of their land with Russet Burbanks, while it accounted for 41% of all potato production across the 8 largest potato-growing states in the U.S.  Yet, because of the high cost of growing Russet Burbanks and the need to use massive quantities of pesticides, the search for a new variety is intense.  The tasting rooms at McDonald’s corporate headquarters in Oak Brook, IL employ scores of people to test for taste, texture and consistency.  Perfume-wearing intruders are chased  from tasting rooms in order to prevent contamination from fry samples randomly pulled from restaurants across the U.S. for monthly examination by representatives of the three main supplier’s to the giant: J.R. Simplot, Canada’s McCain Foods Ltd. And Omaha, Nebraska based Con-Agra Foods.
While these suppliers may resent McDonald’s ability to supervise them and control their actions, they are also eager to maintain or increase their current level of business.  The same is true of the thousands of farmers that contract or sell to Simplot, McCain or Con-Agra.  As Jeanne Debons, the director of the Potato Variety Management Institute notes: “It’s a card game, where McDonald’s holds nine-tenths of the cards”.  The institute was established in 2005 by the Idaho, Oregon and Washington potato commissions to handle licensing and royalties from new varieties developed at federal research facilities and universities. 
So, in this multi-billion dollar business, McDonald’s will test and taste and suppliers/farmers will jockey for position.  According to Mitch Smith: “If we [McDonald’s] can find a variety that … with less inputs, water or whatever, that’s something we’re looking for.  To date, there are not a lot of varieties that perform consistently enough”.   In other words, in the stomachs of people around the world, French fries are no small potatoes.

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