Abstract:

The case examines the controversy involving the global fast food major McDonald's, which was accused of wrongfully selling its French fries as 100% vegetarian products when they contained beef flavoring. It explores in detail the events that led to the controversy and the company's reactions to the allegations. The case also discusses the eventual settlement of the lawsuit with the company paying damages to vegetarian groups and accepting that it had gone wrong.

Background Note

McDonald's was started as a drive-in restaurant by two brothers, Richard and Maurice McDonald in California, US in the year 1937. The business, which was generating $ 200,000 per annum in the 1940s, got a further boost with the emergence of a revolutionary new concept called 'self-service.' The brothers designed their kitchen for mass production with assembly line procedures. Prices were kept low. Speed, service and cleanliness became the critical success factors of the business. By mid-1950s, the restaurant's revenues reached $ 350,000. As word of their success spread, franchisees started showing interest. However, the franchising system failed because the McDonald brothers observed very transparent business practices. As a consequence, they encouraged imitators who copied their business practices and emerged as competitors. The franchisees also did not maintain the same standards for cleanliness, customer service and product uniformity. At this point, Ray Kroc (Kroc), an exclusive distributor for milkshake machines expressed interest in the McDonald brothers' business. Kroc finalized a deal with the McDonald brothers in 1954. He established a franchising company, the McDonald System Inc. and appointed franchisees. In 1961, he bought out the McDonald brothers' share for $2.7 million, and changed the name of the company to McDonald's Corporation. In 1965, McDonald's went public. By the end of the 1960s, Kroc had established over 400 franchising outlets. McDonald's began leasing/buying potential store sites and then subleased them to franchisees initially at a 20% markup and later at a 40% markup. To execute this, Kroc set up the Franchise Realty Corporation. The real estate operations improved McDonald's profitability. By the end of the 1970s, McDonald's had over 5000 restaurants with sales exceeding $3 billion. However, in the early 1990s, McDonald's was facing problems due to changing customer preferences and increasing competition. Customers were becoming increasingly health conscious and they wanted to avoid red meat and fried food. They also preferred to eat at other fast food joints that offered discounts...

The Troubled History

McDonald's has had a long history of lawsuits being filed against it. It had been frequently accused of resorting to unfair and unethical business practices - October 16th is even observed as a 'World anti-McDonald's day.' In the late 1990s, the company had to settle over 700 incidents of scalding coffee burns. Reportedly, McDonald's kept the coffee at 185 - approximately 20 hotter than the standard temperature at other restaurants - which could cause third degree burns in just 2-7 seconds. An 81-year old woman suffered third degree burns on her lower body that required skin grafts and hospitalisation for a week...

A Controversy Erupts

In May 2001, a class action lawsuit1 was filed against the world's largest fast-food chain McDonald's, in Seattle, US. The lawsuit alleged that the company had, for over a decade, duped vegetarian customers into eating French fries2 that contained beef extracts. The lawsuit followed a spate of media reports detailing how the French fries served at McDonald's were falsely promoted as being '100% vegetarian.' Although McDonald's initially declined to comment on the issue, the company issued a 'conditional apology,' admitting to using beef flavoring in the fries. The furore over the matter seemed to be settling down, when to McDonald's horror, some of its restaurants in India were vandalized. Activists of Hindu fundamentalist groups - the Shiv Sena, the Vishwa Hindu Parishad (VHP) and the Bajrang Dal, staged a demonstration in front of the McDonald's head office in Delhi protesting the alleged use of beef flavouring. They submitted a memorandum to the Prime Minister, demanding the closure of all McDonald's outlets in the country Activists also staged protests in front of McDonald's restaurants in south Mumbai and Thane. Mobs ransacked the outlet at Thane, broke the glass panes and smeared the McDonald's mascot Ronald with cow dung. About 30 people were arrested and later let off on bail. Company officials estimated the loss to the outlet at Rs 2 million. Officials at McDonald's India quickly announced that the vegetarian products served in India did not have any non-vegetarian content (Refer Exhibit I for details). However, despite this reassurance, the anti-McDonald's wave refused to die down. Meanwhile, more cases were being filed against McDonald's - this time in California, US and Canada. It seemed certain that the company would have to shell out millions of dollars to settle the class action lawsuit representing the 1 million US based Hindus and 15 million other vegetarians...

The Beef Fries Controversy

With an overwhelming majority of the people in the West being non-vegetarian, products often contain hidden animal-based ingredients. Incidents of vegetarians finding non-vegetarian food items in their food abound throughout the world. Whether a person has chosen to be a vegetarian for religious, health, ethical or philosophical reasons, it is not easy to get vegetarian food in public restaurants. According to the manager of a Thai food cafe in the US, "We have a lot of customers already. We don't need to have any vegetarian food." Commenting on this dilemma, a US based Hindu vegetarian said, "We can't blame anybody. You have to find out for yourself. If you have any doubts, try to avoid it. Otherwise, you just have to close your eyes and try to eat."...

The Aftermath

The courtroom battle had entered the 11th month when McDonald's announced that it would issue a new apology and pay $ 10 million to vegetarians and religious groups in a proposed settlement of all the lawsuits in March 2002...