Big Mac flies in to review test kitchen

Fast-food conglomerate McDonald's second-in-command Ralph Alvarez has been on a whistle-stop tour of New Zealand and spoke exclusively to the Independent about the challenges and opportunities of a tight commodities market.

It's been a successful second quarter for hamburger giant McDonald's Corporation. Last week the company posted a profit to June of $US1.2 billion.

This was significantly up on a  $US711.7 million loss in the same period last year  after the company  sold its businesses in Latin America and the Caribbean.

Meanwhile, in other areas of the fast-food industry, rising food and fuel prices have taken their toll.

Starbucks Corporation reported net earnings for the second quarter to March were down 28%, to $US108.7m from $US150.8m for the same period last year.

Tough economic conditions have caused McDonald's  to drive cost efficiencies through supplier relationships while trying to maintain price competitiveness, said   Alvarez, who is president and chief operating officer.

"Our plans are working quite well during these times. We're excited by that.

"We don't like some of the cost pressures that we're feeling or [customers] are feeling in the grocery store or at the gas pump, but you've got to manage through it. Those who manage better have a chance to grab a bit more market share. That's what we're hoping to get.''

Alvarez said fast-food retailers could not expect to compete solely on  low prices because they would not make money in the current climate.

"But you better have low prices as an entry point, for when people are a little bit more pinched they still come to you; they still keep that loyalty to the brand. We've been very strong about keeping that.''

The key to dealing with rising commodity prices has been the company's scale and its philosophy of forging long-term relationships with suppliers.

"We don't buy in the spot market. We establish very long-term relationships with our suppliers and processors and consolidate supply into not necessarily large companies,  because in many cases they're privately owned companies but we're a large part of their business.

"We work hand-in-hand during these tough times.''

McDonald's is forward-buying contracts with suppliers to assure costs.

"We'll do some hedging although we don't do it trying to win from a gamble point of view. We hedge for an insurance point of view, so we don't have something run away from us.''

The company has become more diligent on consolidating plants into more labour-efficient, modernised processing facilities.

The purpose of Alvarez's visit to New Zealand was to meet with country managers from Asia/Pacific, Middle East and Africa to work on  plans for the next three years.

Part of these plans include modernisation.  McDonald's is  refurbishing all of its restaurants in New Zealand to reflect a more contemporary, cafe style.

Apart from trialling new store formats, New Zealand is important to the company because it is one of the largest suppliers of beef to the global McDonald's market.

In the year to July 2008 McDonald's purchased $US125m of New Zealand beef.

Alvarez said New Zealand was state-of-the-art in terms of manufacturing and distribution.

"It's one of our favourite places to buy because New Zealand is the expert on trade.

"It's easy to work with; the safest food in the world-type scenario, very predictable on supply.

"New Zealand and Australian beef are in 70 percent of our countries, which is an amazing statistic.

"It's a big part of our US beef supply.''

The company was planning rapid expansion in China for 2008, providing further opportunities for New Zealand exporters. McDonald's already has 950 restaurants in China.

Growth has accelerated rapidly in recent years. This year McDonald's will build 125 new restaurants.

Although New Zealand beef is not exported to the chain's restaurants in China, Alvarez was not ruling out that possibility.

"New Zealand is a strong trading partner for us and with the new free trade agreement with China I am sure it's going to be even stronger.

"With our growth there that's something we'll be very interested in.

 "I would say New Zealand is in a pretty good spot.''

Whatever the country, the key to the chain's  success is  it is largely owner-operated with 80% of the restaurants  run by local, independent businesspeople.

"They are very close to their local community and that is a real strength for us.

"They keep us grounded. They're in there every day feeling, what I call the `hot breath of the customer'. "I would say that is our biggest competitive advantage.''

The company signs up franchisees to 20-year contracts, guaranteeing loyalty and commitment. The only exception is if the lease expires sooner.

"Their own money is at risk with a very long-term mentality of that investment.

"That's one of those unknown stories about what's made McDonald's successful.''

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