McDonald’s Risky Commitment to a Cage Free Eggs Supply Chain

Fortune magazine recently published an article called Inside McDonald’s Bold Decision to Go Cage-Free. McDonald’s announced a 10-year plan to produce cage free eggs; chickens won’t be confined to their cages but can a more natural life. Earlier in their CEO’s tenure, McDonald’s had announced that they would stop using “antibiotics important to human medicine” in its chicken production. These are big changes. Chickens and eggs account for half of the items on their menu.

The Fortune article is mainly a turnaround story. “’The era of mass-produced and processed food that it helped create and came to embody was falling out of favor fast, especially with coveted millennial consumers. ‘There used to be a day when industrial food was viewed as safe and therefore better,’ says RBC Capital Markets analyst David Palmer. ‘The pendulum has swung pretty hard over to the other direction.’”

“When ‘healthy’ was popularly defined as ‘low in fat or calories,’” the world’s second largest restaurant chain “tended to flail. The McLean burger bombed, and salads never made up more than 10% of sales.”

Today things have changed. “‘Wellness has moved from calories, carbs, and salt,’ says Darren Tristano of industry tracker Technomic, ‘to ‘Where did the food come from?’ The terms that are important now are ‘antibiotic- and hormone-free,’ ‘natural,’ and ‘organic.’ ”

But this turnaround depends upon a supply chain transformation. Supply chain capabilities have long been a key driver for companies that want to differentiate themselves based upon cost or service. In the food industry, sustainable procurement is core to product differentiation.

Supply chains this big can’t be transformed overnight. Because of that the company has committed to getting to cage free egg sourcing within ten years. This is not foot dragging, the sheer scale of what McDonald’s is attempting to do is daunting. They currently purchase 2 billion eggs annually and only 13 million are cage free.

Today most eggs are produced at farms that house six hens per cage, leaving each bird with 80 square inches of floor space, “less than the dimensions of a standard sheet of paper.” Their goal is to move to a hen house where “hens are allotted 144 square inches each and can roam anywhere they want inside a complex decked out with perches, nest areas, and litter areas.”

cage free

A Cage Free Hen House

Further, hen houses have a life span of 30 years. To meet their goal, large numbers of egg suppliers will have to invest in new hen houses years before their current assets need to be replaced. “Constructing a cage-free henhouse costs two to three times as much as a caged version, according to estimates by United Egg Producers. All told, the transition could cost about $7 billion” which is about equal to the entire industry’s annual retail sales.

McDonald’s will essentially be creating a new supply chain from scratch as they are doing with their sustainable beef initiative (see Sustainable Procurement is Critical to McDonald’s Future). To support that initiative the company looked to work with test farms, asking big suppliers like Cargill to participate in the program, and collaborated with retailers like Wal-Mart to move the initiative along.

The cage free initiative will undoubtedly use a similar playbook. And in fact, Cargill is again a key supply chain partner in this journey. “In 2009, McDonald’s and agricultural giant Cargill, which obtains and manages the egg supply for the fast-food chain, became founding members of the Coalition for Sustainable Egg Supply.”

This journey is not without its risks. One of McDonald’s core differentiators is the affordability of their meals. McDonald’s will need to make these changes while continuing to provide affordable meals. That means getting large suppliers committed to the program and making substantial R&D investments into achieving highly productive farms that are based on a new design.

“We would always in the past say we can’t talk about it until it’s 100% finished and buttoned up,” says Francesca DeBiase, McDonald’s chief supply chain and sustainability officer, “or we’re going to get some backlash about it.” But now McDonalds announces stretch goals without quite knowing at present how those goals will be achieved, but with the firm commitment that the goals will be achieved. Or as their CEO says, “to give our team the confidence to put their foot on the accelerator.”

McDonald’s shows us that companies have a chance to do “good,” where “good” is defined in a way that resonates with their customer base, while doing well. In McDonald’s case, once their commitment to go cage free was made, nearly 200 other competitors said they would do the same.