Ray Dalio, one of the greatest investors of all time and inventor of the chicken nugget. We look into the way a McDonald’s staple is more of a product of financial engineering than any detailed recipe.
Bigger isn’t always better. When you get to McDonald’s size, maintaining a universal menu with a fixed price is hard. The price of grain, beef, chicken, and milk is constantly fluctuating. Sure, that goes for any food business but a small cafe can change the menu and prices to cater to price swings. Maccas is largely expected to keep a fixed menu with fixed prices year round. How does it do it? It starts with the chicken nugget and Ray Dalio. In 1983, McDonalds was looking to introduce chicken nuggets to their menu. Their concern was volatility in the price of chicken would compromise their ability to offer the product at a fixed price. At the time, Ray Dalio’s Bridgewater Associates were consulting for McDonalds and a chicken producer. How could Dalio help lock in a price for the poultry? Well, what influences the price of chicken? As Dalio broke it down, a chicken is just a baby chick plus feed and time. The cost to breed chicks was relatively stable. The price of corn and soymeal varied but could be hedged by trading corn and soy futures. With the ability to guarantee a cost of feed, the farm could sell McDonalds fixed price chicken and the nugget became feasible. Similarly, the McRib is one of the chain’s best selling items yet isn’t always on the menu. It is speculated that the pork burger is only brought onto menus when pork prices are relatively low. Freakonomics covered the theory some time ago but it’s more likely to be a marketing move rather than a supply driven decision.
Starbucks uses a similar method to lock in coffee prices. Using futures contracts, they usually have coffee beans available at a fixed price 12-18 months at any one time.