Socially Responsible Sourcing: Not So Simple

Jon Malankar, HBS '16
Jon Malankar, HBS ’16

Jumping on socially responsible sourcing bandwagon could leave companies biting the dust. 

Breakfast at McDonald’s is going through all kinds of changes.  Unless you’ve been living under a whopper, you know that McDonald’s now serves breakfast all day.  Not only can you now get an Egg McMuffin at any time of day but those eggs will now be cage-free as well.  In September, McDonald’s announced that it would convert all of its two billion eggs per year to cage-free over the next ten years.  

Before McDonald’s decided to go cage-free, Pizza Hut, Taco Bell and Subway ditched artificial ingredients, Cheerios and Chipotle went non-GMO, and a host of other major players have tried making changes toward more socially responsible sourcing. The trend toward socially responsible sourcing has tremendous potential to do good in the world but companies should be more wary of putting resources toward it because of the significant downside and surprisingly small upside.

Before digging in, let’s talk definitions.  For the sake of this article, we will consider “socially responsible sourcing” as any change in suppliers to better align with what consumers consider responsible or admirable, even if there is no proven harm.  That means morally unambiguous issues like cage-free eggs and child labor are included but also areas where the science is unclear, like GMO foods.  

Socially responsible sourcing is all or nothing. Maybe?

Companies need to think harder about pushing for socially responsible sourcing because any mistake could cause irreparable damage.  Imagine McDonald’s announces its shift to cage-free is complete but one franchisee facing tough times bends the rules to make budget that month.  With such a sprawling footprint of stores and a franchise model, it won’t be easy for McDonald’s to ensure 100% compliance.  All it takes is for one store to step out of bounds and the entire house comes crashing down.  NH Printing Company Ad JPEG

While this is a hypothetical, we don’t have to look far for actual examples.   Looking at McDonald’s old friend, Chipotle, shows how quickly
things can go sideways.  While Chipotle is dealing with bigger issues these days around E.Coli, it wasn’t long ago when the fast-casual chain started making claims about non-GMO ingredients.  Within months,
Chipotle was accused of misleading consumers and engaged in a class-action lawsuit.  In the consumer packaged goods world, PepsiCo had to pay $9 million to settle a lawsuit for “all natural” claims with its Naked juice brand.  In both cases, you could argue that the companies were mostly right but mostly does not make the cut here – you have to be perfect.

Even if the brand is perfect, there is still potential for internal strife within a company.  Look at Cheerios shifting to non-GMO ingredients for its flagship yellow box of regular Cheerios.  One fine day, regular Cheerios was non-GMO, yet Honey Nut Cheerios, the other handful of Cheerios products and all the rest of General Mills were still presumably GMO.

If one brand makes a socially responsible sourcing change, do the rest of the brands have to follow?  PepsiCo and Unilever, which operate as houses of brands, could probably get away with picking and choosing.  Could you imagine Apple saying that the iPhone is made with responsibly sourced materials while the iPad is not?  The need for 100% compliance can often extend beyond a given brand to the entire company as well.

Focusing on sourcing can distract from what originally made a company successful

Misguided efforts will more likely cause brand confusion and distract consumers from the reasons they originally loved that brand.  Consider this example from Lay’s.  In the early 2000’s, sodium became public enemy number one.  Consumers clearly cared about the side effects of excessive sodium consumption, so Lay’s began reformulating its products.  Before long, Lay’s advertising stressed less sodium and virtually ignored the product’s trademark flavor and crispiness.  What happened?  Sales declined.  Consumers don’t want too much sodium but they also don’t buy potato chips because they have less sodium than before.  Lay’s did a U-turn and went back to its traditional “irresistible” positioning.  Sales recovered and all was well again.

The jury is still out on whether any of this matters to consumers

The very real downside could be worthwhile if it’s balanced with tremendous upside.  Despite the slew of socially responsible sourcing announcements in the past year, there is still very little data that indicate they will make any difference.  Is anyone really buying the Egg McMuffin because it has cage-free eggs?  Is anyone not buying an Egg McMuffin if it has regular eggs?  Do cage-free eggs give McDonald’s a competitive advantage against Starbucks, Dunkin Donuts and other competitors?  McDonald’s must have more convincing data on-hand internally because I could not find much in my desktop research.  

AL AD (2)Despite all these potential concerns, companies should still make these socially responsible sourcing changes if they genuinely believe in them.  They should push on anyway if and only if the change is not a quick money grab.  Companies do have the unique power to drive policy.  McDonald’s switching to cage-free eggs will single-handedly cause the egg industry to shape up and migrate to cage-free.  Costs for cage-free eggs will go down and fewer animals will suffer.  This is a good thing.  Companies like Netflix, Adobe and Facebook have led the charge for paid parental leave when our government has dragged its feet.  Uber and AirBnB drive the process to update regulation to revolutionize the taxi and hotel industries.  

These are awesome opportunities that can lead to great things.  If that is the intention though, then companies should not be promoting these changes the same way they would a new menu item.  They should make the change and get back to delighting customers.  This is the best way to drive socially responsible sourcing.