McDonald’s and China: Watch your back

Food safety in the supply chain is once again making news, this time centred on McDonald’s supplier Shanghai Husi Food Company which was apparently re-processing meat that had gone well past its expiry date and sending it along with a smile to the Golden Arches.

The story, which sounds credible enough, includes many of the classic food processing sins (filth, adulteration, mislabelling) plus illegal and underage workers. The impact – including temporarily halting some item sales – hit not only China, but also Japan and Hong Kong. And, in addition to McDonald’s, big restaurant brands including KFC and Starbucks were also affected.

Did we learn nothing from the horsemeat scandal?

The wild, wild east

China is, of course, no stranger to food safety scandals, having spent 20-odd years hell-bent on growth at all costs. I am reminded of the early days of industrialisation when health and safety were a secondary concern at best. Upton Sinclair’s famous and impactful novel The Jungle chronicled a similar story in Chicago a century ago. This kind of thing shouldn’t still be happening. And yet, it is.

One obvious reason may be the axiom linking higher risks to higher returns. Just as miners, cattlemen and industrialists rushed headlong into the lawless and wild west of 19th century America, so too are businesses taking the gamble on China today. Data from our recent CSCO survey shows that 184 out of 299 consumer products respondents listed China as one of their top three countries for growth. 120 of these said that China was the number one country their company saw as its best opportunity for growth.

At the same time, this survey also flags China as “too risky to operate in” for 65 respondents in our overall pool, including 13 from the consumer products sector. Among these Sinophobes, 71% are concerned about IP breach compared to only 59% for respondents overall. There is also a somewhat higher level of worry about safety and quality incidents – over 80% cite this risk as a concern.

Still, when all is said and done, consumer companies can’t seem to resist the China opportunity – over 90% are already on the frontier placing their bets.

We must protect this house

Risk has many faces, but for McDonald’s, which has seen 6% of its market capitalisation lost since this scandal broke, the threat attached to food safety ought to be scary enough to trigger substantial action. Interbrand ranks McDonald’s as the seventh most valuable brand in the world; Forbes ranks it sixth. As one of only three restaurants to make the Forbes list (along with Starbucks at 76 and Subway at 92), the role of a reliable supply chain supporting the brand promise should be of the utmost importance.

Unfortunately, most supply chains still lack the multi-tier visibility necessary to back such a brand promise. The recent European horsemeat scandal showed that even in the most heavily regulated and mature economy in the world, multinationals with megabrands were mostly caught off guard when the food chain failed. China, according to Elizabeth Economy of the Council of Foreign Relations, has 500,000 food processing plants, compared to only 30,000 in the United States and only one inspector for every 420 farms. China has a lot of territory to cover and too few resources to do it justice.

All of which means supply chain leaders must take an increasingly aggressive role in assuring standards in supplier operations. Elizabeth Economy, for instance, cited Walmart’s proactive approach, which includes occasional farm-to-store supply chain traces and dedicated vans for surprise inspections. The overarching trend is toward a narrower base of suppliers with deeper and more collaborative relationships that include education on standards driven from the brand owner back.

McDonald’s will probably weather this scandal well enough, given consumers’ amazing ability to forgive and forget, but I hope they can turn a negative into a positive by attacking food safety going forward. Considering its #2 ranking in the Gartner Top 25, I have to believe they can do better.