To be Franz

Responsible for the strategic sourcing of beef and pork in north and western Europe, Alex Franz's role, alongside a Spanish colleague working in southern and eastern Europe, is to ensure the smooth running of McDonald's second-largest geographic territory, consisting of 39 European countries with 6,700 restaurants employing 335,000 people and serving 12 million customers a day. No pressure then!

Franz certainly does not look pressurised; in fact he comes across as relaxed and cool. For despite the huge numbers involved, he works directly with just a handful of manufacturing companies on the Continent and just one in the UK, Scunthorpe-based Esca Food Solutions. Franz says the McDonald's business model is to work closely with hand-picked manufacturers in long-lasting relationships, where there is mutual trust and business transparency.

Key supplier

Esca is proof that the model works, despite the risk of McDonald's seeming to put all its eggs into a single basket. Esca was founded in 1978 in a joint venture with the Keystone Food Corporation and the late David Walker to supply hamburgers to McDonald's. Trading as McKey Food Service, it was operating out of a purpose-built plant in Milton Keynes within two years. In 2007, it consolidated production at its 52,000sq ft Scunthorpe plant, following a £2.1m upgrade. Today it employs 170, who operate seven production lines, producing 16m beef and pork patties a week for more than 1,200 restaurants in the UK and the Republic of Ireland (ROI). The manufacturing plant, which runs five beef pattie production lines and two pork lines, claims to be running at a world-class 95% efficiency.

Franz is candid about his relationship with the Scunthorpe plant. "My job is to develop a European beef strategy, to be transparent about it, to communicate it and to review it. Without experts in the beef industry, like the ones we have at Esca, we would not be able to do it."

That strategy incorporates many strands, but the bottom line is to source 35,000t of beef a year from the UK and the ROI, and 5,000t of pork the equivalent of more than 380,000 head of cattle and 78,000 pigs a year. To do so, Esca has to work with 27 abattoirs that source from some 16,000 farms. About 60% of the beef sourced comes from the UK and 40% from the ROI. The main suppliers are Scotbeef, Dawn, Kepak and Southern Counties. The proof of the business model is underlined by the long-term relationship with these companies; Scotbeef and Dawn have both been suppliers for some 25 years.

Production mix

McDonald's suppliers have to work to a specification and, for the UK, it is currently whole muscle cuts from the beef forequarter and flank; no trim is allowed. The beef production mix consists of 70% fresh meat and 30% frozen to ensure the mix stays at 1C and is firm enough for the formed patties to retain their shape. No additives or binders are included during manufacture. Pork pattie production, although small relative to the beef side of the business, has nevertheless been an important development of recent years, driven exclusively by a burgeoning breakfast-time trade in McDonald's restaurants, which now extends from 6am to 10.30am.

Franz's European remit includes quality and food safety. Usually, you would expect purchase price to be key. But, it is not, he insists, to buy at the lowest possible price. "It is no good being pleased if beef is constantly getting cheaper, because in the long term that risks cattle producers going out of business," he says. So the strategy is to devise a more consistent pricing structure, so everyone in the supply chain knows where he or she is going.

The beef supply balance is governed by four factors production, exports, imports and consumption. The main beef unknown is demand. Cattle and beef prices can be notoriously volatile on a week-by-week basis, with the problem exacerbated by the seasons often there is too much beef coming on to the market at the end of the summer and not enough available at the end of the winter, for example. McDonald's, working through Esca, is trying to address this complicated mix of issues by working with suppliers to establish a longer-term pricing structure. There is no futures market for manufactured beef, but Esca does work with suppliers on a forward price three months ahead. Half of its current production supply is agreed on this basis and its purchasing manager Peter Mitchell says he is not averse to looking even further ahead in the interests of everyone in the chain.

For Franz, a predictable price rather than the lowest price is an important issue, not least because he has responsibility for ensuring supplies are available at all times, including when McDonald's launches a marketing promotion. The worst situation for him is to see cattle and beef prices suddenly increase just as restaurant demand rises off the back of a McDonald's promotion hence the drive for longer pricing down the chain.

Spot market difficulty

The cattle- and beef-buying market is effectively a spot market because it relies on day-to-day price movements. Trying to set up long-term price deals is disrupted and distorted by the impact of imports. A futures market, where producers put up a quantity of animals or meat for sale and processors buy it, was set up by the Meat and Livestock Commission in the 1980s, but failed to really work because there were not enough buyers. Part of the problem may be that the UK is too small a market to sustain a futures system; perhaps it needs to be looked at on a European-wide basis.

In some respects, price planning is a straightforward black-and-white issue and, ironically, it is the black-and-white part of the cattle industry that is now becoming part of the supply solution and an increasingly important part of Franz's beef strategy. A dairy calf initiative, based on the successful Blade system pioneered by Southern Counties with initial help from Esca some 10 years ago, is resulting in an increasing supply of young dairy-bred bulls coming on-stream at various supplying abattoirs. Eight separate schemes are now running, including an extension of the Blade scheme at Linden Foods in Northern Ireland. These schemes saw nearly 9,000 head of dairy-bred bulls entering the McDonald's supply chain last year. "We expect this figures to be about 15,000 this year," said Franz. Under the Blade scheme, producers get a price for the animals guaranteed up to 14 months ahead. Until these initiatives were introduced, up to 250,000 young males calves were disposed of on-farm every year because they had little or no value.

Many of the long-term indicators are relevant to all the European markets that Franz is responsible for. They show more people visiting McDonald's restaurants and the likelihood of increasing meat consumption around the world as affluence grows. This, in turn, is likely to put even more pressure on the supply situation and Franz's role is to co-ordinate his response across Esca plants and other McDonald's suppliers throughout the rest of Europe, as well as in the UK. .

Evolution

Strategy is a living, evolving entity, says Franz, although the long-term indicators for doing business in the UK are unlikely to change much. Beef production in the UK has moved from a state of decline to one of relative stability and cow beef production has now peaked. But the UK is still only about 80% self-sufficient, so it will continue to rely on the ROI for supplies. The demand for mince deriving from core forequarter product now stands at 49% of total beef demand and this rising demand continues to ratchet up the pressure on securing assured supplies.

Needless to say, with such an extensive geographical area, Franz spends at least two or three days a week travelling. It is a cosmopolitan existence within a cosmopolitan company his counterpart in southern Europe is Spanish, his immediate boss is French and the business division is run further up the line by an Austrian. Different cultures within Europe have different ways of doing business, he says. In the south, business is conducted with a certain amount of emotion. And in England? "I like the way everything is very structured in the UK," he says.

Structured, yes, but with UK production centered on just the one Scunthorpe plant even one with high efficiency what happens if it burns down? There is a contingency plan. With up to five days' worth of stock in-store at other locations, there would be time to organise production supplied from other Esca plants in Europe in the event of the unthinkable. It is Franz's job to make sure the contingency is in place and works. Not that he expects to implement it any time soon.

Climate change focus

Another issue is rapidly coming over the horizon is implementing a climate change strategy. The ball is not completely in Franz's court, although it may be if preliminary research at farm level is extended to eventually cover the processing and manufacturing sectors too. McDonald's is currently entering the second year of what is an initial three-year look at the issue of climate change. An initial analysis of McDonald's European carbon footprint has shown that its supply chain represents the biggest part of its entire greenhouse gas emissions.
In what is claimed to be a ground-breaking project to help beef farmers reduce their carbon footprint McDonald's is working with independent rural consultancy and energy auditing company The Eco2 Project. A programme using what is said to be the world's most sophisticated on-farm greenhouse gas calculator will measure farm emissions. Specialist consultants will initially be working with 350 beef farms in the UK and the ROI to help them make reductions through natural farming practices and supply chain efficiencies.
The project is being piloted in the UK with the aim of bringing about significant carbon reductions by harnessing the efficiencies of dairy and beef production, by improving existing suckler cow farming techniques and practices, and by generating further supply chain efficiencies as well as delivering real financial benefits to farms. Even relatively small changes can result in carbon savings on beef farms, McDonald's insist. The restaurant chain is hoping to take the lessons and insight gained from the project and build on it by developing appropriate further projects in other markets in Europe.

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