Project of Supply Chain of Mcdonald

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					anincrediblevoyagethroughtheBigMac™supplychain

McOnomics
2005
3    McDonald’s economic contribution in Brazil
4    the team

5    what’s new in the 2005 McOnomics

6    the hamburger supply chain

12   a look at production costs

13   in the Brazilian market

16   generating income

20   from Brazil to the McDonald’s world

22   tax burden and social expenses

24   quality jobs

26   investment+jobs+productivity=growth




                                                  2   McOnomics2005
McDonald’seconomic
contributioninBrazil

The 2005 McOnomics report, prepared for the second              • In 2004, McDonald’s achieved a market share of almost 14%
successive year by GVconsult, the consulting arm of Fundação      in the Brazilian quick-service food segment.
Getulio Vargas, of São Paulo, shows how McDonald’s activities
have contributed substantially to Brazil’s economic and         • GVconsult’s methodology reveals that McDonald’s supply
social growth in the 26 years the company has been in the         chain added R$1.5 billion to the economy in 2003.
country. This report is based on a rigorous quantitative and
qualitative analysis of the company and its suppliers along     • McDonald’s domestic and international activities accounted
the supply chain. It quantifies the value of production, the       for nearly 66,000 jobs in Brazil in 2003.
added value, the intermediate consumption of raw material,
the jobs, income, investments, taxes and the exports            • Purchases by McDonald’s restaurants in other countries
generated by McDonald’s activities. The McOnomics report          generated more than R$126 million in income in Brazil in
compares these data to that of the Brazilian economy as a         2003.
whole, and particularly the food industry. This study also
analyzes the quality of employment the company provides,        • In 2003, the company’s tax burden in Brazil was no less than
its social responsibility and its contribution to regional        33.8% of the added value; the whole supply chain paid R$448
development.                                                      million in taxes; McDonald’s social expenses amounted to
    Behind the sandwiches, salads and desserts McDonald’s         53.2% of the added value.
serves in its restaurants is a complex supply chain that
generated revenues of more than R$3.3 billion in 2003. The      • In 2003, McDonald’s employees earned 29% more on average
chain’s nearly 1,200 points of sale throughout the country        than the average wage paid by the Brazilian food industry.
serve 1.5 million people daily and employ close to 30,000
people. Below are some more figures from the McOnomics           • In 2003, the company’s employees were 6.5 times more
report, which illustrate the important role McDonald’s plays      productive than other employees in the Brazilian food
in the Brazilian economy.                                         industry.




                                  2005McOnomics          3
theteam


McDonald’s
Coordination
   Flávia Vígio
   Daniela Garrafoni
GVconsult
GVconsult Director
   Prof. Francisco S. Mazzucca
Project Coordination
   Fernando Garcia
Writing
   Fernando Garcia
   Ana Maria Castelo
Research
   Fernando Garcia
   Ana Maria Castelo
   Sérgio Camara Bandeira
   Euclides Pedrozo
   André C. Michelin
Editing
   Edney Cielici Dias
Translation
   Kilter
Design
   André C. Michelin             Acknowledgment
Illustrations                    We would like to thank all McDonald’s staff and suppliers who have
   Bruna Brito                   generously helped in providing the information in this report.




                                   4   McOnomics2005
what’snewin
the2005McOnomics

McOnomics is a term devised by GVconsult that expresses the         many jobs are actually created by the Big Mac supply chain,
economic principles and activities involved in the McDonald’s       from the farm producer down to the chain’s restaurants? What
supply chain. This chain starts on the farms growing wheat          is McOnomics’ tax and social security contribution? Which
and lettuce, some of many vegetables that are part of the           economic sectors benefit most from these activities? How do
McDonald’s menu, and among the ranches or cooperatives that         goods exported to the company’s restaurants in other countries
raise the cattle and chickens supplied to the chain. The supply     impact on the generation of income and wages?
chain also incorporates all the constituents of the production          The third bit of news is that GVconsult’s association with a
process that finally culminates in the Big Mac served to the         renowned learning and research institution has had a positive
customer. These include food processors handling the raw            spin-off: This year, in addition to the economic report, we
materials, service providers, utility companies and many            introduce three comic episodes, which convey the hamburger
other economic activities. In short, a Big Mac is the result of a   supply chain’s economic relations to a wider audience. In An
complex and multi-faceted logistics and distribution system.        Incredible Voyage through the Big Mac Supply Chain, Professor
    This year the McOnomics report has some new features.           Nelson and his grandchildren, Bel and Dudu, meet the people
The methodology developed by GVconsult has enabled to set           behind the counter at a McDonald’s restaurant (Wilson, Sandra,
the company’s activities apart from the rest of Brazil’s food       Daniela and Estanislau). They find out how the sandwiches and
industry. This has made it possible to provide a comparative        soft drinks are produced, they visit the places where this food
analysis of McDonald’s performance compared to that of other        comes from, and are introduced to some figures that show the
companies in Brazil’s food sector. What is the company’s            company’s economic contribution. Thanks to this, readers will
share in the quick-service food market? Who has the highest         learn some important economic principles, such as how the
productivity? Who pays the most taxes? Who pays better wages?       supply chain works, costs and added value. The episodes also
This study answers all these questions.                             cover the most important aspects of food safety.
    Another new feature is a broader study of the indirect              We hope this voyage will be profitable to all.
effects of the chain’s activities in Brazil, which has allowed
us to answer many other vital questions. For instance, how                                                               GVconsult




                                    2005McOnomics            5
thehamburger
                                                                                                                food
                                                                                                   Restaurant   town   farm




supplychain

                                                                            Supply chain is the set of economic activities and
                                                                             companies involved in producing a given good.




The activities of McDonald’s impact a number of other             the source of the supply chain — from the baked bread to
economic sectors. Sales of restaurants and mini-restaurants       the wheat field — enables us to imagine the number of inter-
help drive a whole production chain. What is apparently           sectoral relations involved in the production of this food, as
a simple hamburger sale is, in fact, the culmination of a         well as the impact they have on income and jobs. This process
succession of steps and complementary processes involving a       has a broad geographical scope, that is, its impact is not
vast number of workers, machinery and technology, generating      limited to the town where the Big Mac is eaten.
income and jobs in agriculture, manufacturing and services.
    To grasp the dimensions of all this, we must see the
process in its entirety. Before a McDonald’s restaurant opens     SUPPLIERS
for business, it must purchase the property, build the premises   All the bread used at McDonald’s comes from a single source
and acquire the machinery. To operate on a daily basis, this      — FSB Foods. This is Latin America’s largest hamburger bun
restaurant must hire people, and buy meat, bread, beverages       producer, with bakeries in the states of São Paulo and Minas
and other food products. Even if the analysis is restricted to    Gerais. Wheat flour, yeast, sugar and hydrogenated vegetable
the activities taking place in the food-supply chain, it will,    fat are all ingredients in this bread. Wheat flour is supplied
nonetheless, reveal the involvement of a large number of          by Cargill, whose mill is in the city of Tatuí, in the state of
players, activities and businesses.                               São Paulo. Cargill buys its wheat from farmers in Brazil and
    Each Big Mac sold in Brazil every year demands many           Argentina. All other products used in baking bread also have
different manufactured products, that is, processed goods         their industrial suppliers. Fleishmann’s yeast comes from Itu,
produced by other companies, locally or abroad. For example,      São Paulo; the vegetable fat is produced in Mairinque, São
bread is produced using wheat flour, which comes from milling      Paulo, also by Cargill; sugar comes from Usina Santa Helena, a
wheat grain, which is sown on a farm field. Going back to          mill located in São José do Rio Preto, São Paulo.




                                                                   6   McOnomics2005
                                                    In 2004, 15,000 metric tons of beef went into the production of McDonald’s hamburger patties

    Yet bread is just one of several products and economic          take this milk, pasteurize it and produce the cheese. The
activities involved in the production of a Big Mac. Other           farm-grown lettuce and other vegetables come mostly from
essential ingredients are beef patties, cheese, lettuce and         the state of Minas Gerais. These products are sold to Refricom,
sauce. The hamburger patties are derived only from beef,            in Itapecerica da Serra, São Paulo, which washes and chops
supplied by cattle bred in the states of Minas Gerais and Mato      the lettuce and adds it to other vegetables that comprise
Grosso do Sul. The cattle are processed at the Marfrig and          the salads. The ingredients of the sauce come from different
Mataboi abattoirs, and the ground-beef patties are produced         sectors involved in the supply chain.
at São Paulo’s Braslo/OSI’s plant. Cheese, another important             Even if we focus only on the main ingredients of a Big Mac,
ingredient, is manufactured from milk produced on farms in          it is clear that its production demands workers with diverse
the states of São Paulo and Paraná; Polenghi and Schreiber          skills, equipment and machinery, and technology that is both




                                   2005McOnomics           7
The McDonald’s
  supply chain
simple and highly advanced. All this means that the number         instance, are produced with seasoned and breaded chicken
of jobs created by the sale of a Big Mac sandwich goes well        breasts and thighs. They are prepared by Braslo/OSI, in São
beyond the restaurant counter clerks. It also includes those       Paulo, and the chicken meat comes from farmers in Brazil’s
working for the companies milling the wheat flour, baking the       southern region. The vegetable fat and flour used in producing
bread, processing the beef patties, distributing the products,     breaded chicken are supplied by Cargill, and come from
producing the cheese and dairy products, harvesting the            producers in Brazil’s central-southern region.
wheat, lettuce and tomatoes, breeding cattle, and so on. And            All these different products involve many production
this is just the Big Mac!                                          phases, which follow specific links and which, in combination,
     But McDonald’s also serves other types of food: chicken and   comprise a single food-supply chain, which starts on the farm,
fish sandwiches, salads, beverages (water, milkshakes, yogurt,      follows the processing plants, and ends up in the service
McFruits and soft drinks), French fries, chicken nuggets,          industry, in McDonald’s restaurants.
and desserts (ice-cream or pies). McChicken sandwiches, for             In 2004, McDonald’s in Brazil had more than 200 direct
                                                                   suppliers. Apart from Braslo/OSI, FSB Foods and Refricon
                                                                   mentioned earlier, another major supplier of McDonald’s is the
                                                                   logistics firm Martin-Brower, which transports products and
                                                                   supplies to the restaurants with a fleet of freezer, cooler and
                                                                   dry-cargo trucks, and Vally, which produces banana pies, apple
                                                                   pies, ice-cream cones and birthday cakes. The huge demand
                                                                   for McDonald’s products has helped these and other companies
                                                                   grow into large, nationwide food processors and distributors.
                                                                   Other major and well-known McDonald’s suppliers are Coca-
                                                                   Cola, Ambev, Sadia, McCain, Batavia, Polenghi, Unilever,
                                                                   Schreiber, Junior, Dixie and Brasilgráfica.
                                                                        Some of the products consumed by Brazilians in local
                                                                   McDonald’s restaurants come from other countries. These
                                                                   include potatoes from Argentina, and fish from southern Chile.
Throughout the McDonald’s supply chain there are 57,700 jobs:
29,700 are direct jobs and 28,000 are in other industries          In its relations with the rest of the world, McDonald’s enjoys a
                                                                   surplus trade balance in Brazil. This means Brazilian suppliers




                                                                   10 M c O n o m i c s 2 0 0 5
export more to McDonald’s in other countries
than McDonald’s in Brazil imports from producers
worldwide.
     The diagram of the McDonald’s supply chain
illustrates the company’s economic relations. We
can see it does not just serve its own interests.
It generates economic activities in other supply
chains. The chemical industry supplies the
fertilizer used in growing wheat, sugar cane,
soybeans and oranges; the oil industry provides
the fuel for the tractors that plow the soil, and
the trucks that move the goods to the restaurants;
the auto industry assembles the machinery that
tills the land and harvests the crops, as well as
the trucks that bring the products to McDonald’s;
the textile industry furnishes the clothing worn
by all those involved in this long supply chain; the
paper industry manufactures the cardboard used
in packing and transportation, as well as the paper
for napkins and boxes in which the sandwiches
are served to customers; the plastics industry
manufactures the raw material for cups, straws,
forks, spoons and knives and other packaging;
utility companies provide the electricity, water
and sewerage services.
     In short, all the steps of the food supply chain
                                                             In 2004, McDonald’s restaurants purchased
are related to activities that, because of their                     more than 17.7 million dozen buns
nature, are part of other production chains.




                                     2005McOnomics      11
                                                                                                             In 2004, McDonald’s
                                                                                                               bought R$942.5




alookat
                                                                                                               million worth in
                                                                                                             goods and services
                                                                                                                 from other
                                                                                                                 companies.



productioncosts


The economic relations along McDonald’s supply chain can           locations, etc.), advertising, freight costs necessary to
be measured, which enables us to gauge the extent of the           deliver the goods to all the restaurants, electricity, water and
company’s direct presence in Brazil’s economic life. They also     sewerage, telephones and fuel.
help us estimate McDonald’s impact in generating income and            The sum of all products and services McDonald’s purchased
jobs in the industries and companies that supply products          from other companies in the supply chain totaled R$942.5
to the chain’s restaurants. To do so, first we must gather all      million in 2004. This is what we call the intermediate
the information relative to the costs of preparing McDonald’s      consumption of the McDonald’s corporation. It represents the
meals.                                                             sum total McDonald’s and its franchisees spent on goods and
     In 2004, McDonald’s bought close to R$433.4 million in food   services bought from other economic players in preparing the
and other products necessary to prepare the meals served at        meals served at the chain’s restaurants and mini-restaurants.
its restaurants. These expenses include items such as meats        This gives us an idea to what extent McDonald’s activities
(beef, chicken and fish), bread, potatoes, mix and ice cream,       affect the Brazilian economy.
soft drinks and fruit juice, cheese, lettuce, tomatoes, sauces,        In addition to the amounts paid for raw materials and
clothing, paper and plastic utensils.                              services, McDonald’s also spent R$366 million on labor costs
     In addition to these expenditures, McDonald’s channeled       in 2004. Of this total, wages accounted for 54%, payroll taxes
another R$509 million into other economic activities in            (including social security and government severance fund
2004. This was spent on third-party services (legal services,      contributions) accounted for 18%, and the remaining 28%
information technology, accounting, auditing, consulting,          represented benefits provided to staff. Therefore, the total
security, cleaning, maintenance, etc.), property rental            cost of McDonald’s operation in Brazil in 2004 was close to
(condominium and management fees at shopping mall                  R$1.31 billion.




                                                                   12 M c O n o m i c s 2 0 0 5
                                                                                                               If we lined up
                                                                                                              side-by-side the



inthe
                                                                                                             53 million Big Mac
                                                                                                            eaten in Brazil every
                                                                                                              year, they would
                                                                                                             stretch for 5,000



Brazilianmarket                                                                                               kilometers. This
                                                                                                              is more than the
                                                                                                              distance between
                                                                                                             Brazil’s north and
                                                                                                              south extremes,
                                                                                                             Oiapoque and Chuí!




At the tip of McDonald’s supply chain are its 1,131 restaurants         In 2004, average sales per restaurant amounted to R$3.5
and mini-restaurants. Located on streets and in shopping           million, or R$295,000 a month. Of the 548 restaurants, 29% are
malls, these points of sale served more than 1.5 million people    franchises and 71% are owned by the company. During 2004
per day throughout 2004. This amounts to 45 million customers      average monthly sales at franchise restaurants were 11% higher
per month and more than half a billion people a year. If all       than at the company’s restaurants. This difference is largely
Brazilians could go to one of the chain’s restaurants, it could    attributed to the prime locations of franchise restaurants in
be said that each of the 181.6 million people living in the        shopping malls.
country would go to McDonald’s at least three times per year.           To put this figure into perspective, we can mention that if
Every year, customers in Brazil eat nearly 53 million Big Macs.    all transactions of the Brazilian economy in 2004, and those of
    McDonald’s points of sale are present in 134 cities across     Brazil and the rest of the world, are added up, they amount to
21 states of the federation, plus the federal district. It is      R$3.4 trillion. This means that McDonald’s sales represented
interesting to see how the restaurants are distributed. Because    no less than 0.05% of all transactions in the Brazilian economy
of the nature of the business and the food-service technology      in 2004. This revenue represented 0.12% of national income
developed by McDonald’s, its points of sale are concentrated       and 0.19% of all expenditure by Brazilian families on consumer
in the relatively large urban centers (150,000 inhabitants or      goods and services, an estimated R$978 billion.
more), or in areas that attract seasonal crowds, such as resorts        A comparison of McDonald’s sales with all food expenditure
or small towns flanking major highways.                             by Brazilian families provides a measure of the weight of the
    In 2004, daily revenues reached R$5 million for the whole      company. It is estimated that in 2004 Brazilian families each
country, representing average monthly sales of R$153 million       spent around R$571 a month on food, of which R$434 went
throughout the year and revenues of R$1.836 billion for 2004.      towards groceries bought in supermarkets, bakeries, grocery




                                    2005McOnomics           13
3.8%

   23.6%

       72.6%


                                         stores, street markets, and so on. The balance of R$137 was
                                         spent on food eaten outside the home, and of this amount
                                         R$41.20 was spent on quick-service food.
                                              In 2004, food expenses throughout the country totaled
                                         R$203 billion, of which 76% were spent on groceries for home
                                         consumption and 24% on meals eaten outside the home. Meals
                                         eaten in snack shops, mini-restaurants and bars totaled R$21.5
                                         billion. Looking at it this way, it is estimated that McDonald’s
                                         sells close to 0.9% of all the food in the country, is behind
                                         almost 3.8% of all restaurant sales in Brazil, and serves 8.5%
                                         of all meals in the snack shop and bar segment. In the quick-
                                         service food segment alone, McDonald’s has a 13.9% market
                                         share.
                                              Moreover, the human capital involved in this effort cannot
                                         be ignored. Each McDonald’s restaurant employs an average of
       other restaurants
                                         60 people, which added up to a workforce of more than 31,000
   other quick-service                   in 2004. This figure represents about 0.08% of all registered
   food restaurants                      workers in Brazil, 4.1% of all formal jobs in the food industry
                                         — an estimated 768,000 nationwide — and 5.7% of the 586,000
                                         direct jobs provided by snack shops, restaurants and bars in
McDonald’s
                                         Brazil.


               McDonald’s share in the
               food industry, 2004 (%)



                                         14 M c O n o m i c s 2 0 0 5
   13.9%


            86.1%



                                                     AM                                                        RN
                                                      3                  PA             MA           CE        2
                                                                         3              2            10

                                                                                              PI                     PB
                                                                                               1                     3
                                                                                                                PE
                                                                                                                12
                                                                                                                     AL
                                                                                              BA           SE        2
                                                                   MT                         15           2
                                                                   3               DF
                                                                                   21

                                                                              GO
                                                                              8          MG
                                                                   MS                    27
                                                                    2                                      ES
                                                                                                            5

                                                                                                          RJ
                                        Municipalities in Brazil                                          98
                                                                          PR                    SP
                                                                          24                   263
                                        Municipalities with
           other                        McDonald’s restaurants
                                                                                              SC
           quick-                                                                             14
                                  sTATE                             RS
           service food           n° of points of sale
                                                                    28
           restaurants
   McDonald’s


 McDonald’s share in the quick-                                                         McDonald’s restaurants
service food industry, 2004 (%)                                                                in Brazil, 2004



                          2005McOnomics         15
                                                                                                                   In a Big Mac you buy




generating
                                                                                                                    for R$5.90, you’ll
                                                                                                                   find R$3.28 in food
                                                                                                                  and service expenses
                                                                                                                  and another R$2.62 in




income
                                                                                                                   income generated by
                                                                                                                        McDonald’s.




Any activity’s contribution to a nation’s economy is              surplus. This included indirect costs associated with the
determined by the amount of goods or services this activity       production and sale of the company’s goods, payment of self-
adds to all the goods and services produced in this economy       employed professionals, payment of direct and indirect taxes
as a whole. The latest
data available for the                                                  McDonald’s supply chain
                                                                                                               Food          Brazilian
Brazilian economy and Accounts                                 Suppliers      McDonald’s          Total
                                                                                                             industry        economy

the food industry are for
                              Added value                        713,955        736,036       1,449,990       15,560,456    1,395,604,382
2003. Consequently, the
                               Wages                             201,505        262,268           463,773     6,950,148       554,148,834
estimation of McDonald’s
                                 Salaries                       148,046         202,827           350,873      5,401,633      399,881,787
contribution is based on
that year’s figures.              Payroll taxes                   49,762           59,441          109,203      1,548,515       90,136,248


    In 2003, McDonald’s            Social security and FGTS      47,850          58,750           106,600      1,539,465      86,526,494

contributed nearly R$736           Pension plan                     1,912            691            2,602         9,049         3,609,754

million to the Brazilian       Gross operational surplus        454,328         434,594           888,921     8,330,817      738,682,837

economy.      Looking     at     Self-employed professionals      33,793               -           33,793     6,518,062        69,756,604

this added value from            Operational surplus            420,535         434,594           855,128      1,812,756     668,926,232
an income perspective,         Other production taxes             59,673          39,174          98,847        279,491      106,389,884
McDonald’s      contributed
                              Intermediate consumption          876,993         923,499       1,800,492      25,838,398     1,630,562,506
R$262 million in wages and
                              Production value                 1,590,947       1,659,535      3,250,482      41,398,854     3,026,166,888
payroll taxes, and about
                              No. of individuals working         28,026          29,689             57,716    2,546,969       67,334,200
R$435 million in operational


                                                                                      The McDonald’s supply chain and the
                                                                                   Brazilian economy, 2003 (R$ thousands)



                                                                   16 M c O n o m i c s 2 0 0 5
withheld by the company, investment and
capital remuneration. The added value and          Clothing and furniture

R$923.5 million representing intermediate                   Dairy industry

consumption resulted in McDonald’s total                  Plastic utensils
revenues of R$1.7 billion in 2003.
                                                              Meat packers
    Of the R$5.90 consumers paid for
                                                Steel, iron and metallurgy
a Big Mac, R$3.28 accounted for the
costs McDonald’s incurred in buying the              Public administration

ingredients, and all other goods and services          Chemical products
necessary to prepare this sandwich. The
                                                            Construction
balance of R$2.62 represents the amount
                                                        Paper and printing
McDonald’s added to the Brazilian economy
in the form of wages, taxes and company           Machinery and equipment

profit.                                                 Extractive industry
    The R$736 million the company
                                                        Financial industry
contributed in 2003 represented nearly
                                                         Other industries
4.5% of all value added by the country’s
entire food industry. Moreover, McDonald’s                     Oil refinery

activities supported 1.2% of the personnel                         Utilities
employed and 3.6% of this industry’s payroll
                                                                Transport
in Brazil. The R$39 million the company
                                                                     Retail
paid in direct production taxes represents
12.3% of all taxes paid by the Brazilian food         Telecommunications

industry.                                                 Property rental

    Yet this is not the only income                               Services
McDonald’s activities generated within
                                                     Farming and ranching
the Brazilian economy. Companies directly
supplying products or services to McDonald’s


                                                                               Indirect income generated in McDonald’s
                                                                                         supply chain, 2003 (R$ millions)



                                   2005McOnomics         17
also pay wages and taxes, and earn profits.
                                                              Oil refinery
One such company is FSB Foods, which
supplies bread, and which also creates                      Dairy industry

indirect income when it purchases wheat                Chemical products
from Cargill. Similarly, other suppliers
                                                          Property rental
and their suppliers will generate income
                                                       Extractive industry
throughout the Brazilian economy.
    It is estimated that for each R$1.00                          Utilities

McDonald’s contributed to the Brazilian                 Financial industry
economy in 2003, the companies or
                                                Steel, iron and metallurgy
enterprises which formed part of its supply
                                                      Telecommunications
chain, from the farms to the restaurants,
generated a further R$0.97, or R$714               Clothing and furniture

million, towards the country’s economy.                     Meat packers
Out of this figure, R$202 million represents
                                                     Public administration
wages and payroll taxes paid by McDonald’s
                                                          Plastic utensils
suppliers, R$454 million accounts for these
companies’ operational surplus, and R$60          Machinery and equipment

million refers to direct taxes on production.           Paper and printing
    This income, added to that which
                                                            Construction
McDonald’s generated, totaled R$1.45 billion
                                                         Other industries
in 2003, which represented 0.10% of Brazil’s
GDP. The industries that benefit most from                       Transport

McDonald’s activities are farming, services                         Retail
(particularly the advertising industry), real                    Services
estate, telecommunications, trade and
                                                     Farming and ranching
transport. The sum total of all transactions
taking place within the McDonald’s supply


                                                                                   Indirect jobs provided in McDonald’s
                                                                                                     supply chain, 2003



                                                                 18 M c O n o m i c s 2 0 0 5
chain reached R$3.250 billion, or 0.11% of
all operations carried out in Brazil.
     Following this line of thinking,
McDonald’s not only provided 29,700 direct
jobs (including administrative personnel
as well as staff from restaurants, both
company-owned and franchises), but its
activities supported an additional 28,000
jobs in other industries of the Brazilian
economy, a total of 57,700 people
employed. The principal sectors benefiting
from these jobs were farming and ranching,   Municipalities with
                                             McDonald’s suppliers
services, trade and transport.
                                             Municipalities with
     Overall, the McDonald’s supply chain    McDonald’s restaurants


paid R$464 million in wages and taxes and
generated R$889 million in operational
surplus. The companies comprising this
chain also paid a total of R$99 million in
direct taxes on production.


                                                                      Distribution of restaurants and suppliers
                                                                             in the Big Mac supply chain, 2004



                                 2005McOnomics   19
fromBrazilto
                                                                                                               In 2003, products
                                                                                                             exported to McDonald’s
                                                                                                               around the world
                                                                                                              generated 7,843 jobs




theMcDonald’sworld
                                                                                                              and R$126.4 million in
                                                                                                                income in Brazil.




McDonald’s does not directly export any products or services.       Consequently, if we add the income derived from
Yet many of its 210 suppliers along the Big Mac supply chain    Brazilian exports to McDonald’s restaurants around the
in Brazil export goods to the company’s restaurants in other    world to that derived from the company’s activities in
countries. Brazilian products are shipped to the European       Brazil, the total income generated amounts to R$1.6 billion,
Union, Mercosul and Chile, the Middle East and Japan,           with 66,000 jobs supported in the Brazilian economy in
which means that McDonald’s not only generates economic         2003.
activity in Brazil, but its worldwide operations also provide                                                  McDonald’s
jobs and income to Brazilians.                                  Accounts
                                                                                                                 In other
                                                                                                In Brazil                      Total
     In terms of volume and value, the two chief export                                                         countries

                                                                Added value                     1,449,990         126,403    1,576,394
products are processed meats and juice concentrates.
                                                                 Wages                            463,773          33,937      497,710
It is estimated that in 2003 these two export businesses
                                                                  Salaries                       350,873           25,345      376,218
accounted for US$46 million, the equivalent to R$141
                                                                  Payroll taxes                   109,203           8,591       117,794
million. Applying the employment and income coefficients
                                                                     Social security and FGTS     106,600          8,396       114,996
of the processed meat, juice and vegetable oil industries            Pension plan                  2,602              195        2,798
found in the third table of the Methodology Annex, we            Gross operational surplus       888,921           56,375     945,297

estimate that demand for these Brazilian products abroad          Self-employed professionals      33,793           1,395       35,188

created a further 7,843 direct and indirect job positions,        Gross operational surplus       855,128         54,980       910,109

and earned R$126.4 million in income in 2003. This foreign       Other taxes on production        98,847          36,092       134,938

demand also generated in Brazil an additional R$248 million     Intermediate consumption        1,800,492         121,200     1,921,692

up the supply chain in 2003, and R$34 million in wages and      Production value                3,250,482        247,603    3,498,085

                                                                No. of individuals working          57,716          7,843       65,559
payroll taxes.


                                                                             McDonald’s in Brazil and in the world, and
                                                                           the Brazilian economy, 2003 (R$ thousands)



                                                                20 M c O n o m i c s 2 0 0 5
Importer countries




                                          Where Brazilian products are headed
                                               in the McDonald’s world, 2003



                     2005McOnomics   21
taxburden
andsocialexpenses
                                                                                                                     Out of every R$10
                                                                                                                     McDonald’s adds,
                                                                                                                   R$3.40 go to taxes.




Part of the income generated by McDonald’s is transferred                 higher than that of the average Brazilian company and 5.3
to the government in the form of taxes and social-security                percentage points above the tax burden of other food-industry
contributions. In 2003, taxes withheld and paid by McDonald’s             companies that do not deal with alcoholic beverages. This
amounted to nearly R$249 million.                                                          McDonald’s supply chain             Food        Brazilian
                                         Accounts
Seventy-one percent of this total                                                    Suppliers     McDonald’s     Total      industry*     economy

comprised taxes on production, mainly Production taxes                                   96,983        177,342     274,326     2,072,706   180,576,269

manufactured-products tax (IPI) and       ICMS                                            27,294       118,333      145,627      1,472,951    52,731,074

                                          IPI/ISS                                          5,950         17,930      23,881       290,653    13,453,695
sales tax (ICMS), which amounted
                                          Import tariff                                     2,128             136     2,264         39,477   4,535,688
to R$136 million. The balance (29%)
                                          Other specific taxes                              1,939          1,768       3,707       30,045     3,505,837
consisted of income and property
                                          Other production taxes                          59,673         39,174     98,847        239,581  106,349,974
taxes, and included R$58.8 million
                                         Income and property taxes                       102,184          71,721    173,905    2,367,438   170,066,452
of employer contributions to the          Real-estate property tax (IPTU)                   2,190          4,118      6,308        101,980    4,233,754
Brazilian social-security system (INSS)   Automotive property tax (IPVA)                   3,550                -     3,550         25,625      5,276,512

and the government severance-fund         Tax on financial operations and
                                                                                           5,954          7,859       13,813      168,058      10,563,011
                                           transactions (IPMF/CPMF)
system (FGTS).                            Social security and FGTS                        47,768        58,750      106,518     1,539,465   86,526,494

    In relative terms, these taxes        Income tax                                      26,733             994      27,727       532,310  45,095,680

represented 33.8%, or R$736 million,      Federal tax on net profit (CSLL)                 8,836                -     8,836              -    15,661,353

of the value added by the company         Others (ITR)                                       7,153              -      7,153             -    2,709,648


in 2003. Taking the added value as a Total tax burden                                     199,167     249,063      448,230     4,440,145   350,642,721

                                          Percentage tax burden on added value             27.9%        33.8%        30.9%          28.5%          25.1%
reference, we find that the tax burden
                                          Notes: (*) Except IPI and ICMS on sales of alcoholic beverages.
was almost 8.7 percentage points


                                                                                           Taxes paid by McDonald’s and the Brazilian
                                                                                                       economy, 2003 (R$ thousands)



                                                                               22 M c O n o m i c s 2 0 0 5
means McDonald’s, which had a 3.9% market share in 2003,          company’s gross profits, and amounting to R$52 million in 2003
was responsible for almost 5% of all taxes paid by the food       — are added to these figures, we arrive at R$392 million in
industry in Brazil, except of course IPI and ICMS associated      social expenses, or 53.2% of the company’s added value in
with alcoholic beverages.                                         2003. This contribution rose to R$413 million in 2004.
    Yet these are not the only taxes McDonald’s pays. If we           Among the company’s social programs, one of the most
consider all direct and indirect taxes embedded in products       important is McDia Feliz (McHappy Day). In 2004, this initiative
sold by the burger chain (including taxes paid by its many        collected R$6.3 million, which corresponds to 0.8% of the value
suppliers), a total of R$448 million was paid to federal, state   McDonald’s added to the economy during the year, an amount
and local treasuries in 2003. This means that, in addition to     estimated at R$814 million.
the R$249 million paid by McDonald’s, the company’s suppliers
paid R$199 throughout the supply chain. The table illustrates     Social expenses                               2003              2004

how this tax burden is broken down into different taxes and       Wages                                       262,268            262,867

contributions, particularly ICMS and other production taxes,       Salaries                                    202,827            197,702

such as Cofins and PIS/Pasep, as well as employer contributions     Payroll taxes                                59,441             65,165

to INSS and FGTS. The total amount of these taxes represented     Employee benefits                             74,204             79,433

27% of the company’s sales in 2003.                                Food                                         44,378            44,225

    To put these figures into proportion, we can say that the       Transport                                    14,984             15,694

R$448 million McDonald’s supply chain paid in taxes is more        Pension plan                                    691                321

than the R$412.3 million the federal government spent on           Healthcare plan                              10,220             11,209

sports, culture and leisure in 2003, according to the National     Workplace safety and health                    1,727            3,038

Treasure Secretariat. It is also 2.5 times the amount the          Professional development                        493             2,990

federal government invested in housing and sanitation.             Others (additional benefits)                    1,711            1,956

    Yet the contribution the company makes to social welfare      Social and community programs                   2,912            2,584

goes beyond the payment of taxes. It includes expenses such       Taxes on income and property*                  52,145           68,558

as wages and payroll taxes, which amounted to R$262 million       Total                                        391,528            413,442

in 2003, employee benefits, which were R$74 million, and the       Percentage of added value**                    53.2%             50.8%

company’s community and social programs, which amounted           Notes: (*) Includes corporate income tax, CPMF, IPTU, education allowance,
                                                                  professional training, PIS and Cofins; (**) McDonald’s added value in 2004
to R$2.9 million. Once associated taxes — paid out of the         was estimated in R$814 million.




                                                                                                              McDonald’s social
                                                                                                        expenses (R$ thousands)



                                   2005McOnomics           23
                                                                                                          A typical McDonald’s
                                                                                                         employee is young, has




quality
                                                                                                         ten years of education
                                                                                                         and works 30 hours a
                                                                                                          week. Women account
                                                                                                         for 55% of this labor




jobs
                                                                                                                 force.




In 2003, 51% of those employed by the Brazilian food industry       graduated from upper secondary institutions comprised only
were women, and 49% were men. The ratio among McDonald’s            37% of the labor force, while only 2.8% were attending or had
staff shows the company employs slightly more women (55%)           graduated from college. While McDonald’s staff had an average
than men (45%).                                                     of 10 years of schooling, the food industry’s employees had an
    Another interesting aspect of McDonald’s workers is their       average of 8.5 years of education.
age. In 2003, McDonald’s employees were six years younger, on           The high productivity of the McDonald’s labor force can be
average, than their peers in the country’s overall food industry.   attributed to substantial investments in technology. Yet there
Indeed, 87% of the company’s employees are between 16 and           is another important factor: the education of the company’s
21. In the Brazilian food industry, most workers with formal        staff. In 1997, McDonald’s Brazil opened its Hamburger
employment contracts (71%) fall in the 25 to 45 age bracket.        University, a training center found in only six other countries
Young people (aged 16 to 21) account for only about 16% of all      in the world (including the United States). These R$7 million
formally employed individuals. What is especially remarkable        facilities aim to coordinate regional training centers and
about the young age of McDonald’s staff is that the job             staff development programs, among other activities. In 2004,
opportunities the company offers represent the first formal job      McDonald’s invested no less than R$3 million in professional
for many young Brazilians.                                          development. In addition to these direct expenses, it is
    This youth is also reflected in the education of McDonald’s      estimated that McDonald’s has invested close to R$17 million
staff. Nearly 94% have finished, or are still attending, upper       allowing its workers to attend outside and in-company training
secondary school and 5% are college graduates or students.          courses, all on company time. This figure amounts to 1.8
Compared to other Brazilian food-industry companies, the            million hours of training.
McDonald’s labor force is, on average, better educated. In              Considering that most of McDonald’s staff are still quite
2003, food industry employees who were attending or had             young and studying, their working hours play an important role




                                                                    24 M c O n o m i c s 2 0 0 5
in helping them conclude their studies. In
2003, McDonald’s employees worked an
average of 30 hours a week, which is 37%
less than their peers in the Brazilian food
industry.
     In short, McDonald’s makes a
meaningful contribution to the employment
effort by helping provide jobs to women
and young workers looking for their first
jobs. McDonald’s provides opportunities for
individuals with upper secondary education
and invests in their professional training.
This brings higher productivity, which in
turn earns McDonald’s staff better salaries.
In 2003, McDonald’s workers earned 17.5%
more, on average, than their peers in
the country’s food industry. In fact, if
we consider that the company’s staff is
younger, works less and comprises more
women than men, in light of the country’s
existing practices, it would be expected
that McDonald’s staff earned less than their
peers in the food industry. Yet the opposite
is the case. In 2003, McDonald’s employees
earned 29% more than individuals of
similar age, sex, education and working-
hour characteristics employed by other               On average, McDonald’s employees in Brazil work 30 hours a week, which is 37% less
                                                     than other workers in the Brazilian food industry. This enables employees to further
companies in the food industry.                          their education, because 99% of them split their days between work and school




                                    2005McOnomics   25
investment+
jobs+
productivity=
growth                                                                  If you are bigger you grown less. This is called the
                                                                   convergence effect. McDonald’s enjoyed substantial growth
                                                                    from 1990 to 1995. From 1996 to now, the company has grown
                                                                                less but at a still respectable rate.




Economic growth is a phenomenon that can be summed up             million per year. This is McDonald’s contribution to the first
in three words: investment, employment and productivity.          aspect of Brazilian economic growth.
McDonald’s has contributed to economic growth in Brazil in            Regarding the second aspect, McDonald’s was responsible
all three areas.                                                  for creating more than 30,000 new jobs in the food industry
     In the 26 years McDonald’s has been in Brazil, the number    from 1990 to 2003. In addition, more than 57,000 new jobs
of the company’s own restaurants and those of its franchisees     were created throughout the hamburger supply chain. This
reached 548 in 2005, an average growth of 22% in the past 16      means that the labor force employed by McDonald’s grew
years. During this same period, the chain’s revenues grew at      20% per year. This fact is particularly meaningful if we
a rate of 12.1% per year in real terms, a per-capita growth       consider that during the same period the Brazilian economy
in revenues of 10.6% per year. These are remarkable figures,       created new jobs at a rate of only 0.9% per year. Therefore,
particularly if we consider that Brazil’s GDP rose 2.5% per       McDonald’s accounted for 0.7% of the 7.8 million jobs created
year and per-capita income increased a mere 1% during this        in the country since 1990.
period.                                                               In 2003, each McDonald’s employee was responsible for
     By 2004 McDonald’s investments amounted to R$1.15            R$24,800 of added value, or the equivalent of R$15.30 per
billion, or R$44 million per year. In the past two years alone,   hour worked. By comparing these figures with those of the
the company invested nearly R$123 million in Brazil. A study      food industry, and the country as a whole, the magnitude of
conducted by Pires and Garcia (2004), which analyzes, among       McDonald’s contribution to productivity becomes apparent.
other things, the effect investments have on the Brazilian        On average, each Brazilian worker was responsible for
economy, reveals that the country’s GDP would be 0.01%            generating R$20,700 in 2003, the equivalent of R$9.57 per
smaller had McDonald’s not invested in Brazil. This means the     hour worked. This means McDonald’s employees are about
company’s presence there represents a welfare gain of R$200       60% more productive than the average Brazilian worker —




                                                                  26 M c O n o m i c s 2 0 0 5
including those employed by the manufacturing industries,       company’s presence in the country − its technological edge,
which are quite productive. If the bar and restaurant           which generates an additional R$181 million per year. We
industry is singled out, this gap becomes even wider. Each      therefore estimate total welfare gains of R$378 million per
employee in this sector accounted for R$6,100 in 2003, or       year. This outstanding performance by McDonald’s is partly
R$2.36 per hour worked. In short, McDonald’s employees,         due to generous investments in technology. As shown in the
on average, are 6.5 times more productive than their            Methodology Annex, McDonald’s total productivity rose 3.6%
peers in this industry. This highlights another benefit of the   per year from 2000 to 2004.




                                                                                                  McDonald’s sales and
                                                                                                   GDP per capita (R$)



                                  2005McOnomics          27

				
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Description: Project of Supply Chain of Mcdonald document sample