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McDonald's Searches for the Right Energy Recipe

By Danialle Weaver

On a typical morning, Mark Brownstein walks into one of his 16 McDonald's restaurants in Orange County, California. He turns off the alarm and switches off the lights. Then he flips on the computer and logs in to the corporate management system. There, he checks to see how well he did yesterday, compared with the benchmarks supplied by the home office.

On his screen are a series of numbers that show how much he spent in his two largest expense categories: food and paper products, and labor. Drats! His ratio of sales dollars to crew labor hour was way too low--yesterday, he had crew members sitting around doing nothing.

Then he leafs through the stack of mail and finds a bill from his local power company. His mood nosedives. "Boy, I wish I had a benchmark for energy usage too, " he grumbles to himself. "As it is, I have no way of knowing how much energy I'm using in a given month until I get the bill."

Like Brownstein, McDonald's and its franchisees have long considered energy to be an unpredictable, uncontrollable expense, something akin to "bowling without being able to see the pins." It was an unfamiliar feeling for McDonald's, which issues its franchisees such exacting guidelines for all the other aspects of running a quick service restaurant, including frying time, how long food is held before being purchased, and even how much time cashiers spend waiting on customers.

And it was anathema in a penny business, where profits--and just about everything else--are measured in pennies, or fractions thereof.

In fact, energy is the third-largest cost involved with running a McDonald's restaurant, after two other categories of expenses: food and paper products, and labor. "You've got a lot of things going on in a restaurant that have energy impacts," explains Bob Langert, Director of Environmental Affairs and Energy Management for McDonald's. "You've got freezers at subzero temperatures, coolers refrigerating food, cooking in the kitchen with high-temperature grills and fryers, and [35 million] consumers in and out each day. All that requires energy."

What the franchisees really need is an energy benchmark--such as a kilowatt hour per sales dollar figure--that would allow them to compare their energy usage to stores their size, age, sales volume and weather conditions, says Joe Megacz, the company's Corporate Energy Manager. Ideally, this benchmark would be accompanied by suggestions for improving that performance.

Right now, though, there is no such benchmark.

"Right now," says Langert, "we've got this meter, and all it does is go to the utility company. Part of our bill is based on peak demand, but we don't even know which day we set it. It doesn't tell you why your demand was what it was, or what you could do to better that. There's nothing there."

Almost left at the altar

All told, McDonald's and its 2,700 U.S. franchisees spend a collective $500 million a year on electricity. A typical restaurant has a peak demand of around 100 kilowatts and uses between 500,000 and 700,000 kilowatt hours of electricity each year, depending upon location. The typical annual electricity bill averages around $40,000.

While those numbers are fairly large in the aggregate, they just weren't large enough individually to excite many utilities into giving McDonald's any special attention at all. That's because, up until recently, each McDonald's restaurant bought its own electricity from the local power company. In fact, McDonald's wasn't considered a customer at all, but rather "a metered address at the corner of Main and State Streets," Langert says.

In 1992, McDonald's began looking for ways to reduce the costs of running a restaurant. It was around that time that the debate over electricity deregulation began to heat up in Congress in earnest. By 1994, when the changes set in motion by the landmark Energy Policy Act of 1992 began to be felt outside the Washington Beltway, McDonald's had formed a corporate energy team to look at its options.

And then, an interesting thing happened in the United Kingdom, where customers using more than 100 kilowatts of demand were suddenly free to shop around for new electricity suppliers. Those restaurants pooled their electricity requirements together to qualify for lower rates. And while McDonald's U.S. operators sat on their hands, McDonald's U.K. restaurants achieved an energy costs savings of around 15 percent, Megacz says. That translates into about $2.48 million.

Back in the United States, though, small commercial customers such as McDonald's were left standing at the altar of electricity deregulation. Power suppliers were more than eager to cut sweet deals with huge industrial clients--auto makers, defense manufacturers, even steel mini-mills--to make up once-guaranteed revenues now lost to competition. But smaller, multi-site commercial concerns such as McDonald's were in real danger of being lost in the shuffle.

Finally, in late 1996, Detroit Edison came along with the same bright idea that produced savings overseas: combining, or "aggregating," the electricity requirements of several McDonald's locations and selling power to the collective entity at rates formerly reserved only for big industrial companies. The deal, says Detroit Edison's Dennis Manning, allows McDonald's 235 restaurants in southeastern Michigan to purchase electricity at fixed prices that provide a 10 percent energy savings to each franchisee.

So far, though, McDonald's and its energy partners have kept most of the details of their special agreement under wraps. However, because Detroit Edison is a regulated utility, the contract is on file with the Michigan Public Service Commission. The writer obtained a copy under the Freedom of Information Act.

According to the contract, McDonald's and its 63 franchisees agreed to purchase all their electricity from Detroit Edison for a period of at least eight years, for an average price of 8 cents per kilowatt hour. That translates into $6.08 million per month, excluding taxes. McDonald's and its franchisees agreed to buy at least 75,000 megawatt hours per year from Detroit Edison, and pledged that the group will have a combined monthly demand of at least 10 megawatts. McDonald's is barred from self-generation during the length of the contract unless the generation is used for emergency backup, for test purposes, or to replace power interrupted by Detroit Edison.

Beginning in year four, McDonald's can terminate the deal by paying Detroit Edison an early termination penalty of "13.5 times the monthly average revenue (including any payments pursuant to the minimum purchase guarantee) excluding taxes that [Detroit Edison] received during the 12-month period prior to the termination of purchases." Detroit Edison is guaranteed a chance to match any electric rate offered by another power supplier.

Each franchisee pays the following fees under the contract: a customer charge of $13.67 per month; a power supply capacity charge of $12.58 for each kilowatt of monthly billing demand; and an energy charge of $0.0638 per kilowatt hour for the first 200 kilowatt hours of billing demand and $0.0583/kwh for the excess. Also included is a nuclear decommissioning surcharge of $0.0008178/kwh.

These charges per month per restaurant add up to $3,025.60 before the discount, and $2,831,54 after the discount, according to a "sample bill calculation" included in the contract.

Appetite for aggregation

Other deals soon followed. In 1998, McDonald's was participating in retail access pilot programs in Massachusetts, Missouri and Pennsylvania and had inked a deal in California in anticipation of the opening of retail markets there.

The most widely publicized of these agreements was the four-year, $180 million pact the hamburger giant signed in California, with PG&E Energy Services. Under that arrangement, PG&E Energy Services will supply 75 megawatts of electricity to more than 800 McDonald's franchisee and corporate restaurants formerly served by California's investor-owned utilities.

The pact will eventually be expanded to include more than 400 other McDonald's restaurants currently served by municipal utilities, once those areas are open to competition. And dozens of McDonald's suppliers in California have been allowed to opt into the deal, too.

Getting to that point wasn't easy for McDonald's, which ultimately decided to appoint statewide energy teams in each state where retail markets are being deregulated. The team sorts through the competing proposals to find the best deal for McDonald's in that state.

Franchisee Brownstein sat on the California team. "Some of the energy companies came in and wanted to see how naive we were," says Brownstein. "McDonald's is notorious for doing its homework," he says, and many of the companies competing for the business apparently had not. Some of them promised big savings initially, then changed the terms of the deal when negotiations began in earnest. Others offered McDonald's a discount, but when asked, "A discount off what?" they were clueless, he says.

"It was a very intense bidding process," recalls Faye Worthy, director of national account sales for PG&E Energy Services. "They asked very hard questions, and they were very thorough. It was probably one of the most professional procurement teams I've ever worked with, and one of the most knowledgeable."

"McDonald's is very open and honest, and very up front about what it wants and expects," says Kerry Vestile, manager of national accounts for Cadence, a Cincinnati-based power marketing company that is providing about 653 kilowatts of electricity to eight McDonald's restaurants in a Massachusetts direct access pilot program. McDonald's is also "very relationship-oriented," Vestile says. "If you get their business, and you do a good job, the business is yours to lose."

"The three-legged stool"

In fact, relationships matter a whole lot to a far-flung operation such as McDonald's, which must maintain a consistent level of quality across 109 countries and territories. Stable relationships with suppliers are a crucial element in sustaining an infrastructure massive enough to support 12,000 restaurants in the United States--a number that grows by 600 to 1,200 restaurants each year.

To keep things running smoothly, McDonald's simply can't change suppliers every year, explains Tony Spata, the building systems engineer who oversees the company's ambitious building program. "You've got to have repeatability and stability--that's the only way we can lock in things," Spata says. "As long as you do right by us, we're going to stay with you. Normally, we stay with you until you totally screw up. And then we have to sure you're totally beyond salvage before we go out and make a change."

Ray Kroc, the former milkshake machine salesman who built McDonald's into a $10 billion-plus operation before his death in 1984, likened the company's success to a "three-legged stool." The legs represent the company, its franchisees and its suppliers, with each supporting the weight of the McDonald's system equally.

Suppliers who make the cut must be quite familiar with how the hamburger giant operates and must be willing to "invest in the company's success," Langert says.

"When we say 'supplier' at McDonald's, that's a very serious thing, because we have very long-term relationships with our suppliers," says Langert. "Our french fry suppliers are always figuring out how they can produce better french fries, so our customers will like them better and they'll end up buying more french fries."

Eventually, McDonald's wants to develop that same type of special relationships with only a half-dozen or so energy suppliers who are experts in that field.

In that regard, McDonald's is way out in front of its fast food rivals. A Burger King spokewoman says the company is certainly "aware of" the various deals McDonald's has been signing, but is not yet ready to emulate them.

Regional purchasing plans

Eventually, once it becomes feasible, McDonald's will begin buying electricity on a regional basis, with each region including between three and eight states, Megacz says.

"Obviously, it makes sense for us to aggregate at the largest levels that we can," Langert says. "I think that's how we're going to get the best pricing, the best service, the best value."

It's unlikely, however, that McDonald's will eventually buy all its electricity and natural gas from one company, although the possibility hasn't been totally ruled out. Nor will McDonald's attempt to aggregate energy services for franchisees as it has for electricity. Aggregating electric demand made sense because it produced lower prices. But energy services are so intimately linked to the actual operation of the restaurants that headquarters feels it's best not to interfere in those sorts of decisions.

"Our role is to be subject matter experts," Langert says. "We don't do things by mandate from the home office. We set the overall corporate energy direction, and we help set up strategies for the procurement of electricity. We decide what will most benefit our stores in terms of energy management, cost reduction, et cetera. But in order to implement the change, we need to work hand in hand with our owner-operators."

Despite that official "hands-off" policy, franchisees have nonetheless been ordered not to sign any electricity related deals on their own.

"We don't want our owner-operators to be burdened with all the intricacies of deregulation," Langert says. "We want them to spend more time servicing the customer--making sure they don't run out of fries, that they've got enough staff, and that the bathrooms are clean. All those things are way more important, by the way, than our use of energy. Because in the end, it's impossible to grow our business unless they serve the customers first."

The company's entrepreneurial structure is typically considered one of its greatest strengths. However, it does pose some unusual challenges for energy suppliers because there is no single entity responsible for buying decisions, as is the case with a Sears or a Wal-Mart, says Maureen Anton, the McDonald's account manager for Commonwealth Edison.

A close-knit McFamily

While the McDonald's account does pose special challenges, those suppliers who make the cut are likely to be around for a long time. "McDonald's is a marquee name in the national accounts arena," says Worthy, of PG&E Energy Services. "Once you're part of the McDonald's family, they take care of you. They treat their vendors like family."

Because of the value McDonald's places on long-term relationships, the suppliers who are already involved in deals tend to be tapped time and again for special projects with the fast food king. Often, these deals include energy-efficiency projects.

For example, besides the energy supply deal for the California restaurants, PG&E Energy Services is intimately involved in monitoring an energy-efficient McDonald's in Bay Point, Calif., near San Francisco. Cinergy, a partner in the Cadence power supply pilot in Massachusetts, is also helping McDonald's analyze load profiles of restaurants in the Cincinnati area. And Detroit Edison has been performing energy audits for restaurants in southeastern Michigan and is helping McDonald's install a geothermal heat pump in an "energy-friendly restaurant" in Westland, Mich.

That does not mean, however, that these companies are shoo-ins. For example, Enron Energy Services, a power marketer, won the right to procure power for 23 McDonald's restaurants under a small, $250,000 Missouri pilot program that requires a Utilicorp subsidiary to wheel power that Enron purchases on McDonald's behalf. Yet Enron later lost its bid to supply energy to the 100 restaurants participating in the Pennsylvania pilot. That hard-fought victory was won by Peco Energy, Enron's arch-rival.

Phil Eastman, director of Peco Energy's national energy team, says the company won the $1 million contract to broker power for McDonald's because the agreement included a price cap and performance guarantees. And, not surprisingly, it also included energy audits that will identify energy-saving opportunities. Overall, the pilot should save franchisees around 13 percent, he says.

And once the pilot program ends at the end of 1998, Peco fully expects to continue buying power for those McDonald's restaurants and hopes to begin serving all 400 restaurants in Pennsylvania.

Also a Pennsylvania also-ran was Chicago's Commonwealth Edison, which has been working with McDonald's for several years to develop customized benchmarking studies comparing energy costs and usage at more than 400 restaurants in the Chicago area. ComEd also is working on several telemetering projects and is developing a customized consolidated billing system for McDonald's headquarters in Oak Brook, Illinois.

Meanwhile, ComEd's parent company, Unicom, has been collaborating closely with McDonald's in the installation and testing of a micro-turbine generator in a new energy-efficient restaurant in Bensenville, Illinois. Beta-testing is set to begin in 1998, and because of the restaurant's proximity to headquarters, the experiment is expected to be watched quite closely.

The "pint-sized power plant," as some have called it, could help McDonald's shave peak electricity usage or even shed load, in areas with high-cost electricity, such as the Northeast.

Perhaps even more promising to McDonald's, however, is the micro-turbine generator's potential to expand the company's fast-food franchise internationally. "We've run out of easy countries," says Spata, the engineer. "There are still a lot more out there, but procuring reliable power is getting more and more difficult."

The micro-turbines might even be able to supplement, or even supplant, the sometimes unreliable diesel generators used by international franchisees, assuming there is a source of natural gas or other fuels to run them. Heck, the thing might actually run on waste shortening from the fryers, Spata says. Far-fetched, perhaps, but worth exploring.

The Energy-Efficient McDonald's

Another concept McDonald's found very much worth exploring is the idea of becoming more holistic when it comes to designing energy efficient buildings. These are called TEEM restaurants for "The Energy Efficient McDonald's." There are now four TEEM restaurants--in Bay Point, Calif., Colorado Springs, Colo., Bensenville, Illinois and Buford, Ga., near Atlanta.

While the restaurants are very similar, each one has a different twist. For example, the Bay Point store has individual meters on all the major appliances, lighting and other energy-consuming devices. These include electric meters on the grills and fryer, as well as individual gas meters on the furnace and water heater.

PG&E is collecting data on the total energy usage of the appliances, breaking down power consumption and maximum demand for each system. That should help McDonald's figure out that electricity benchmark it needs for its franchisees.

The TEEM stores were an outgrowth of the "green architecture" movement of the early 1990s, as well as a partnership McDonald's entered into with the Environmental Defense Fund in 1991.

At the time, you'll recall, McDonald's was under heavy fire from environmental groups for using polystyrene foam clamshell packaging for its sandwiches as well as paper products bleached with chlorine. McDonald's also accused of generating too much waste, consuming too much energy, and not recycling enough.

The company was even blamed for causing the destruction of tropical rain forests by farmers clearing land to raise cattle for McDonald's hamburgers.

In 1991, the McDonald's-EDF partnership produced a list of 42 ways to reduce, reuse and recycle the solid waste generated by the restaurants. McDonald's also pledged to use more recycled products, and, by late 1997, "McRecycle USA" had purchased more than $2 billion worth of recycled products.

The partnership was a good experience for McDonald's, which had, for the first time, provided an outside group with confidential information about its restaurants. "I can't tell you how wonderful it was to work with experts in their field," Langert says. "Not that this has any direct bearing on energy, but what I'm leading up to was that we could invite in experts outsider of our business--even environmentalists. We had 10 different organizations come in--the concept was to bring in different points of view and have these people--in a very open fashion--challenge what we were doing."

In fact, the experience with EDF eventually prompted McDonald's to seek the expertise of the energy companies it now deals with, Langert says.

"Sophisticated energy management systems are not what we're interested in," Langert says. We're interested in developing simple systems that are easily executed at the store level, and that can be repeated, time after time. We want something that's easy to understand and easy to train on. The energy management issues that we work on are not going to make sense, or live long, unless the owner-operators can understand them."