What works for McDonald’s can also be a boon for large-scale suppliers with an entrepreneurial bent. For example, McCain Foods has invested in a potato processing facility in the Indian state of Gujurat, where it buys from local contract farmers who farm on McCain’s 4,000 acres. As McDonald’s expands in India, McCain is doubling its contract farming area to 8,000 acres. This will allow it to meet McDonald’s demand, but also the growing demand for its own frozen products in retail outlets in India, and thanks to the non-exclusivity and informal arrangement with McDonald’s, increased demand from Yum! Brand’s KFC and Pizza Hut operations in India. McCain now sells its own branded frozen potato items produced in India to China, the Middle East, the U.K., and the U.S.
Risk and opportunity
Potentially, the non-contractual nature of McDonald’s supply agreements presents a risk should major suppliers such as McCain and J.R. Simplot decide to stop doing business with the company on short notice. Yet as long as McDonald’s maintains its operating philosophy of trust-based vendor relationships and, moreover, continues to present growth opportunities to vendors lucky enough to transact with the Golden Arches, this risk should be minimal. As McDonald’s suppliers extend their farming, storage, and distribution systems around the world, look for the humble fry to continue to support the company’s revenue and industry-leading margins for years to come.
The article 2 Stealth Drivers of McDonald’s Global Margins originally appeared on Fool.com and is written by Asit Sharma.
Fool contributor Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide (NYSE:BKW). It recommends and owns shares of Chipotle Mexican Grill (NYSE:CMG) and McDonald’s.
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