A McDonald's 10 piece chicken McNuggets box is photographed at the Times Square location in New York March 4, 2015.
(Reuters) - McDonald's Corp's decision last week to phase out human antibiotics from its U.S. chicken supply will add to costs of production in a tight-margin business that are likely to be borne mostly by poultry companies.
McDonald's, whose top chicken suppliers include giant Tyson Foods Inc, has given its producers two years to eradicate all antibiotics used on humans from barns and hatcheries. It's going to be expensive and may take longer than planned: switching to antibiotic-free chickens could increase on-farm costs by up to 3 percent. Perdue Farms, a supplier with about a third the volume of Tyson, told Reuters it's taken more than a decade and millions of dollars to make such a change.
McDonald's will use its purchasing muscle as the world's largest restaurant chain to avoid passing extra costs on to customers, increasingly lower income as more affluent diners prefer competitors like Chipotle Mexican Grill Inc, said analysts including Morningstar's R.J. Hottovy.
Marion Gross, McDonald's senior vice president of North America supply chain management, declined to say how much the company’s costs for chicken could rise. Rather, she told Reuters, the project is "an investment" to meet customer demand.
While veterinary use of antibiotics is legal, controversy has grown over routine feeding of antibiotics that are important to humans to otherwise healthy chicken, cattle and pigs in a bid to stave off disease and help the animals grow more quickly.
The risk is that overuse could spur the creation of so-called superbugs that develop cross-resistance to antibiotics used to treat humans. Reuters found last year that major U.S. poultry firms were administering antibiotics to their flocks on the farm far more pervasively than regulators realized.
The poultry industry maintains there is little evidence that bacteria which do become resistant also infect people. However, more restaurants and retailers are heeding the concerns of consumers, straining meat supplies.
Sandwich chain Chick-fil-A in 2014 gave its producers five years to meet its commitment to go antibiotic-free for chicken. Perdue is a major supplier to Chick-fil-A.
Costco Wholesale Corp., the nation's third-largest retailer that annually sells 80 million rotisserie chickens, told Reuters Thursday it has a "large" appetite for chicken free of these medically-important antibiotics.
The company is aware of the supply difficulties and won't commit to a timeline, said Craig Wilson, vice president of food safety for Costco.
WHO PAYS THE PRICE?
Some of the extra costs of cutting out antibiotics could be borne by franchisees, which could cut labour hours, waste and utility costs to offset higher meat prices.
But most analysts expect McDonald's to push the costs back onto its suppliers, who may not have the market power to resist. The top four U.S. chicken processors control about 53 percent of the domestic market, according to the National Chicken Council.
McDonald's "carries a lot of clout with suppliers," and some of them are dependent on the chain for survival, Hottovy said.
Tyson and Keystone Foods, part of Brazil-based Marfrig Global Foods SA, both told Reuters they have significantly reduced medically-important antibiotic use in their flocks and are positioned to meet McDonald's and other customers' needs. However, neither company would answer specific questions about how such drugs are used on-farm and in hatcheries.
SLOW CHANGES
Perdue, the fourth-largest domestic chicken producer, began removing antibiotics used for growth promotion in 2002 amid consumer questions about what was being put into the animal feed, said Bruce Stewart-Brown, senior vice-president of food safety, quality and live operations.
Now more than 95 percent of the chickens it produces are raised without antibiotics approved for human use, and more than half are raised with no antibiotics of any kind, according to the company.
The transition led to unexpectedly high bird mortality rates, a need for more chicken houses and spending at least $4 million more a year on vaccines than rivals who haven't made the switch, among other things. Birds raised without antibiotics also generally take three to nine days longer to reach their market weight, Stewart-Brown told Reuters -- or as much as 20 percent longer than conventionally raised birds.
McDonald's two-year deadline is "a really fast timeframe to do it right and be predictable to your customers and your supply," Stewart-Brown said.
Birds raised on farms without antibiotics take longer to reach optimal slaughter weight, resulting in higher feed costs and death rates, forcing companies to ramp up with more eggs at the hatcheries, said Tom Elam of FarmEcon, an agricultural consulting company.
"The ones that aren't quite as good with keeping up with their biosecurity, it's going to cause some issues," Elam said. "This change is not free."
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