Company Resources

• Arcos Dorados website
• Recipe for the Future: Arcos Dorados’ ESG website

Resources Mentioned

• Agrotools agriculture intelligence
• Rainforest Alliance certification
• Round Table on Responsible Soy (RTRS)

Related Previous Climate Rising Episodes

• McDonald’s Climate Change Efforts

Guests

Climate Rising Host: Professor Mike Toffel, Faculty Chair, Business & Environment Initiative

Guests:
Gabriel Serber, Vice President of Social Impact and Sustainable Development, Arcos Dorados

Transcript

Editor’s Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:
This is Climate Rising, a podcast from Harvard Business School, and I’m your host, Mike Toffel, a professor here at HBS.

Today, we’re starting a back-to-school series of Climate Rising with a discussion of a case we’re introducing into the classroom here at HBS this fall.

I’m speaking with Gabriel Serber, Vice President of Social Impact and Sustainable Development at Arcos Dorados, the largest McDonald’s franchise in the world. I’ll ask him how Arcos Dorados designs and implements climate solutions across the 20 Latin American and Caribbean countries where they operate and the vast cultural diversity across the region. This conversation builds on an earlier episode where I spoke with Jenny McColloch, McDonald’s Chief Sustainability Officer, about their corporate climate goals.

Here’s my interview with Gabriel Serber of Arcos Dorados.

Gabriel, thank you so much for being here today with us on Climate Rising.

Gabriel Serber:
Thank you, Mike, for having me. It's fantastic to be here with you at HBS and looking forward to the conversation.

Mike Toffel:
In 2022, we interviewed McDonald's Chief Sustainability Officer, Jenny McColloch, and she shared a lot of interesting perspectives from the McDonald's corporate lens. And we're really excited today to talk to you about Arcos Dorados, where the rubber hits the road in Latin America and in the Caribbean where you actually operate the McDonald's franchise in that region of the world. I wonder if we can begin by just asking you to describe your role at the Arcos Dorados and how you got there.

Gabriel Serber:
My name is Gabriel Serber. I am the Vice President of Social Impact and Sustainable Development for Arcos Dorados. And like you said, Arcos Dorados is the largest independent franchisee of the McDonald's brand globally. And we operate in 20 countries and territories in Latin America, from Mexico down to Argentina, including the Caribbean. So we have about 2,300 McDonald's restaurants that we operate, close to 100,000 employees in the company, most of them between 16 and 24 years old. The workforce is very young. It's very important that we talk about these topics, right? Because young generation is looking at what companies are doing to protect the environment and the community and the people.

We have a very diverse workforce. Almost half the management team began their careers at the restaurants. That was my case 33 years ago. My first job was to peel potatoes in a McDonald's restaurant in Argentina, specifically Buenos Aires. And at that point in time, there were only seven McDonald's restaurants in Argentina, and now the company has 2,300 in 20 countries.

I worked in the stores with our current CEO, Marcelo Rabach. We were colleagues at the same restaurant. He was the store manager and I was his assistant manager. So we go back more than three decades, and I think that's part of the culture at Arcos Dorados, right? How 2, 3, 4, 5 kids went into work one day peeling potatoes or cleaning restrooms or cooking burgers and then ended up leading the company. So it's a beautiful story and my intention is to also make sure that we provide those opportunities to everybody at the company.

Mike Toffel:
That's an interesting journey you've had with the company for so long. I think unless you've really been to the region, I don't think people have an appreciation for just how diverse that region is. They're like, "Well, it's North America. It's South America. Maybe there's one culture at each." Of course that's hardly true. It's certainly not true in North America, and boy, it is totally not true in South America. So I wonder if you can tell us a little bit about the differences in the cultures of the countries in which you operate.

Gabriel Serber:
Sure. I think that the differences vary from all kinds of ranges, from currencies to legislation to taste profiles to preferences between beef and chicken, more spicy and less spicy, coffee preferences, darker roast or lighter roast. So depending on where you are in the region, there are local specifications that we need to make sure we take into consideration.

For instance, in Brazil, the most consumed breakfast item is Pão de Queijo. So we bring Pão de Queijo to the stores, and we don't sell that Pão de Queijo anywhere else, but in Brazil. So if in Argentina you have medialunas or croissants where we sell those in our stores. But if in Trinidad and Tobago people prefer bone-in chicken, we have the best bone-in chicken in the region. And the same with Panama and Costa Rica and Mexico and Uruguay and Chile. Some very diverse in terms of flavors, preferences. Like I said, some folks in the northern part of the region prefer more chicken. The southern part is more beef oriented and I think it's a fantastic, naturally diverse company. It's not forced or no, we need to be diverse. No, no, we are already diverse from the beginning, so it's beautiful.

Mike Toffel:
Yeah, that's really interesting and we'll come back to some of those cultural differences when we talk about menu offerings because I know that has a big impact as you were already alluding to for breakfast. But as we think about the climate change issues associated with different menu items.

So let's talk about the climate journey that Arcos Dorados is on. I know that the company has thought about environmental issues for a long time, whether it be waste or biodiversity issues, and I think framing it as climate is a more recent phenomenon. And I wonder if you can tell us about that journey. So how long has the interest in climate been there and what's driving the focus on climate?

Gabriel Serber:
all of the ESG consolidated work began in the company in around 2016. We initially focused more on serving the youth opportunities we had in the region. Young people's unemployment is terrible in our region, and that was a material problem for us to find the solution. So along the time this evolved into other different categories, and right now climate change is one of the main topics within our Recipe for the Future, which is our ESG platform. And it comprises different lines of work, like opportunities for young people, climate change, sustainable sourcing, commitment to families, secure economy, and diversity and inclusion.

So if you look at one of the most busy areas of the Recipe for the Future, of course, is the youth opportunity programs and everything connected to climate change, which incorporates sustainable sourcing, and other aspects as well. So we consolidate all of that into one program. And as time went by, the company made certain decisions while we started looking at different programs to make sure that we achieve our own targets, which are connected with the McDonald's brands. But we have also our local Arcos Dorados targets that are relevant for us and our company and our communities. So many, many ingredients coming into a Recipe for the Future. One of the main ingredients, of course, is all of the programs connected to how we tackle climate change.

Mike Toffel:
Great. So let's talk about what are the major ways that Arcos Dorados impacts the climate, and I imagine that's going to be through its restaurant operations. It's also going to be largely through its menu choices and the supply chains that it procures from.

Gabriel Serber:
Recently we completed our greenhouse gas emissions inventory in 2021 for full Scope 1, 2, and 3. I know companies mainly focus on Scope 1 and 2, but the biggest problem is in the Scope 3, which is the supply chain aspect of the emissions and the footprint. We developed a program that caters for the sustainable construction of our buildings, whether it's through LED lighting or water recycling. In the warm weathers of the Caribbean and the northern parts of Latin America all of our restaurants have water tanks connected to the air conditioning system. So as the air conditioning functions, it generates condensation. We collect that water and we use that water then for cleaning purposes or for watering the plants or even flushing restrooms. So about 90 million liters of water every year are collected through that mechanism.

And then recycling and circular economy and oil recycling that we convert into biodiesel or cardboard recycling that we send back to repurposing or cap recycling or uniform recycling. We also look at renewable energy opportunities.

We started in 2020 with 4% of our consumption from our metrics being renewable. 2021, we reached 12%. In 2022 we reached 30%. So you can see a nice growth there of renewable energy participation in our metrics. We look at those opportunities through purchase powers agreement or through local generation with solar panels in the stores covering the parking lots of some restaurants.

Mike Toffel:
So that's primarily on the restaurants and the buildings, and I think your supply chain is something like 90% of the greenhouse gas emissions. Can you talk about where do those come from and what are you working on about that?

Gabriel Serber:
Throughout the 6.5 million tons of greenhouse gas emissions emitted Scope 1, 2 and 3 last year, 93% are within Scope 3, meaning within our value chain. Outside of the restaurants. 7% is our direct emissions, Scope 1 and 2.

If you deep dive on the Scope 3 emissions, you will find that beef emissions take a significant part of the emissions that we generate. Then it's chicken and then it's other commodities. But the main focus is how can we work with our beef suppliers across the region to make sure that they reduce their own greenhouse gas emissions, which at the end will represent a reduction in our Scope 3 emissions. So we are focusing on those key suppliers that typically have science-based targets approved, and we leverage those programs to make sure that they apply those learnings and those technologies into the commodities and products that come to our McDonald's restaurants.

Mike Toffel:
What are some examples of ways that your beef suppliers can reduce emissions?

Gabriel Serber:
Whether it's through adapting the feeding that the cows receive, they are looking at putting on some additives into the feeding that reduce about 13% the methane emissions of the cattle. Also, they're looking at the productivity of the land itself. It's not the same to put one cow in one hectare compared to 10 cows in the same hectare. So the land degradation varies, of course. So we are looking at how productive our farms are or even how they move cattle around to make sure that the land itself does not degrade altogether.

And even looking at what opportunities we have to source beef from enclosed farms, meaning there is no transportation of cattle. The calf is born on the farm and the abattoir is within the farm. So it's a closed system. We avoid emissions for logistics and transporting the cattle across the country. So those are four of the main elements being developed by our suppliers. We talked to them on a weekly basis. I was just two weeks ago in Brazil meeting with our beef supplier there and looking at how they're progressing with their own programs that at the end get reflected on our own greenhouse gas emissions inventory.

Mike Toffel:
I may take a detour into the question of biodiversity. Of course, the Amazon is in the region that Arcos Dorados operates in, and in the past decades, McDonald's corporation and the McDonald's system has been in the news about is there a link between cattle and deforestation. Now, I know that a lot of work has gone on in the ensuing time to separate McDonald's procurement from any encroachment into the Amazon. I wonder if you can talk a little bit about how you manage that issue.

Gabriel Serber:
It's a very complex issue, Mike, but it's a very hot topic for us, for everybody in the food system. We have the Amazon, like you said, within Brazil, within Colombia, within Ecuador. We have very strict policies as to how we source our beef in regards to what levels of deforestation are allowed or not. So we monitor around 7 million hectares of land by satellite.

We use a series of agriculture intelligence company called Agrotools, and they monitor our beef purchases and the cattle movement across Argentina and Brazil, which are the two countries with the most endangered forest systems. And like I said, we monitor these 7 million hectares and we know where the cattle goes and where it comes from, and we know what levels of degradation if any of the forest are happening.

So we have maps that go back a few years in time, and then we compare them to the current satellite photographs that Agritool takes. And I get a monthly report as to what are the results of that work. In 2022, we ended up with a 99.5% accomplishment of our deforestation policy. And we take that very seriously as to the fact that when we find any suspicious whatsoever, part of my job is to talk to our supply chain partners asking to stop purchasing from that particular farm, which might be suspicious of any or some deforestation. That's at the highest level of the company, and it's very important for us. We made tough decisions when they had to be made, and I think that's the right thing to do. So because there is only one Amazon and it's in Brazil within Arcos Dorados region. So we got to make sure that we protect that.

Mike Toffel:
We talked a moment ago about different ways to reduce the climate impact of beef, but of course there's other ways to do it as well. There's for example, lab grown beef is a new and upcoming technology, still expensive, but perhaps something viable down the road. There's shifting menu items, encouraging folks to rely more on chicken, for example, than on beef or the movement toward plant-based items. So I wonder if you can talk about how you think about the range that you offer and how you're monitoring these other developments and maybe how that varies by country given the diverse cultures that you were alluding to earlier.

Gabriel Serber:
In the northern part of the region we sell more chicken. In the Caribbean, we sell significant amounts of chicken. And then in the southern part of the continent, Argentina, Uruguay, Chile, Brazil, we sell more beef products. And we've been working for the past couple of years to better balance what products we offer to the customers. About two years ago, we introduced a line of chicken sandwiches that has been very successful, and across the region we were able to move the needle between the participation of the two proteins.

And then we also bring in, for instance, short term menu items like filet of fish or pork rib sandwiches. There is a food strategy team And we always keep an ESG lens on what's happening on that group. What can we do about packaging, what can we do about protein, what can we do about plastic or paper elements? Again, it's part of how we operate as a company.

In regards to the alternative proteins or plant-based products or lab grown meat, in the lab grown meat category, I don't have much to say about that because I don't think it's there yet for the volumes that are required by a business like Arcos Dorados or McDonald's globally.

In regards to the plant-based proteins, we know that's a category that is growing. McDonald's has certain solutions available for the markets that I'm interested in. We are very close to the business research teams that analyze on a quarterly basis, the evolution of the customer preferences. So far, the business case for plant-based alternatives in Latin America is not there yet. It's not a matter of if we are going to do it or not, it's a matter of when is the right timing to do that.

We want to make sure that when we introduce a plant-based product or a vegetarian product, the product comes into a menu, stays in the menu, and it fulfills customer's expectations. We want to make sure that when we go into the game, we do it the right way and we offer a compelling proposition for our customers and the product.

Mike Toffel:
You have these quarterly meetings understanding consumer research, which I imagine is polling or surveys, maybe keeping an eye on competitors' offerings. I think you're also engaged with conversation with your suppliers who also supply some of those other outlets. Is that right?

Gabriel Serber:
The quarterly business reviews and the research happens, we do that systematically. And we also do an annual ESG survey that covers properly say 80% of our stores where we talk about specifically that aspect of the business, what's happening with the preferences of the customers in terms of plant-based. So the 2022 survey has just been completed.

Mike Toffel:
One thing I didn't fully appreciate until recently about the scale of a company whose size is like yours at Arcos Dorados is the limitations that actually scale sometimes places. I think a lot of people think, "Well, scale large companies, they've got all the power in negotiations and all the power in making things happen quickly."

But as I've dug into this a little bit, it seems to me in some cases that's true, but in other cases actually scale, it makes things slower. You may not be willing to offer a sandwich if it doesn't represent some minimal percentage of your sales. And given how large your sales are, that's a lot of sandwiches. And so how many sandwiches would you have to sell of a veggie burger or plant-based meal for it to make sense for Arcos Dorados offering?

Gabriel Serber:
That's a very good question. Wherever we launch a new product we are very eager to see the evolution of the units on a daily basis per restaurant. And I can say that between 30 and 50 units a day per store will be an acceptable range of units. So whenever we polled customers for the plant-based product, we were far, far away from 30, 40 or 50 units a day. And that's why we haven't gone into that offer yet.

We know there is demand. We know it's growing. We know there is a veto power proposition here for people that don't eat beef or chicken. And the other piece is the logistics. So it wouldn't make sense for us to move product from one country to the other to waste it. If we don't sell it, we're going to have to waste it. And that's something that makes me nervous as to the unnecessary food waste. So that's why we're very cautious and we don't want to jump into taking decisions that we know may be problematic in the future.

Mike Toffel:
The veto power issue, just to sort of unpack that a little bit, I think what you're referring to is a group of folks want to go get a meal. One of them isn't interested in a beef or chicken. They want to have a vegetarian option. And if you don't offer that, then you don't just lose their one sale of that one burger, but you lose it of the whole group.

Gabriel Serber:
That's the case. We've seen that happening and most commonly in the younger age brackets where people get together and go out or order through delivery. So that's something that's on our radar. We look at it, we know what we need to do, we're just taking the time to make the right decisions.

Mike Toffel:
And there's also a lot of movement at Arcos Dorados toward lower impact offerings like ice cream and coffee. You're developing those businesses in particular, if I remember correctly.

Gabriel Serber:
Well, coffee is a big, big category for us. We have a particular structure in Arcos Dorados where we operate with an agile methodology, and those teams are divided in squads. So there's a delivery squad, there is a drive-through squad, there is a coffee squad, a chicken squad. So the coffee squad has been working very, very deeply in making sure that we can improve that business and improve it the right way with sustainably sourced coffee and Rainforest Alliance certifications and how we bring that communication to the customer and how we bring that education to the customer as well.

What does it mean to be rainforest certified? What is this little frog in my menu board or in the coffee cup that I get? So the squad for the coffee team is looking at all of these elements of how we sell coffee and what needs to happen for us to grow that business. So yeah, as a matter of fact, there was a meeting in Costa Rica where all the coffee squad got together. They went and visited the farm and they talked to the local farmer about the roasting process and the traceability and the origin of the coffee. So it's serious work, but we do it with a lot of happiness.

Mike Toffel:
So let's turn the tables, and we've been talking so far about decarbonization and the way to mitigate Arcos Dorados’ impact on the climate. The other side of that story, of course, is how climate change is impacting Arcos Dorados, either directly through your stores or indirectly through your supply chain, whether it be coffee as we've just discussed, or the feed that are used by the animals that you procure. What are the biggest impacts that you're seeing or anticipating from climate change on the business and what actions are you starting to take about that?

Gabriel Serber:
Okay, so if we talk about the feed or the commodities, for instance, soy, which is chicken feed, we take that option very seriously as well. We make sure that our soy has the correct certificates of origin of RTRS, Round Table for Responsible Soy. So we source those commodities always looking to our suppliers that can account for the traceability and origin of the feed they're selling our chicken suppliers.

We don't buy that soy, chicken suppliers buy it, but we request the chicken suppliers comply with what sort of origin and what sort of commodity are we asking. I believe the water scarcity element of climate change, it's something that we must even more attention as climate change continues to happen, some temperature rising, and we see these climate events happening globally, and we also connect that to the development of more businesses and more factories being built and more cities growing, et cetera, and more buildings that need more water.

We have some strategies in place to make sure we do our part in the solution. We collect rainfall water and condensation water, so we don't have to use fresh water out of the tap. We as companies, we need to do a better job in looking at that more in detail.

Mike Toffel:
Yeah, I mean, water's a particular issue when you're thinking about the competition for water between residents and household use and then corporate use and farmer's use. There's a very hot political issue in how you divide those rights. And I'm sure given again the diversity of countries in which you operate, the different players have different amounts of power in that conversation.

Gabriel Serber:
Absolutely. It's not the same. Chile, which is a country that suffers almost continuous drought compared to Argentina or Brazil or the Caribbean where it rains every day. So depends on where we are. We need to be more detailed as to what solutions we offer.

Mike Toffel:
So one of the interesting things I've noticed Arcos Dorados doing recently is they issued a sustainability linked bond. So can you help us understand what is that instrument and why did you pursue it?

Gabriel Serber:
Yeah, that's a great question. That's a process that we embarked several months ago. It was a learning process for all of us in the company, a teamwork within finance, within ESG, within supply chain, within the legal department as well. So it was a comprehensive effort by a lot of people within the company, and there was a window of opportunity for the company to look for refinancing of some debt. So this was of course, a decision taken at the board of directors level, along with the executive chairman. They analyzed the different conditions of the financial situation of the company and the market itself. It was right at the beginning of the war with Ukraine and right at the inflation growing problems in the US and the rates, spiking, et cetera.

And so we analyzed all of those elements and the decision was made that it was a good opportunity to go out and refinance some of the debt of the company, but doing through a sustainability linked bond. So it works as a regular bond with initial lower interest rates, which is connected then to very strict key performance indicators for greenhouse gas emissions reduction. So we established our baseline, and we know where we were and we know what we could and wanted to do. So we went out into the market with the banks and with the second opinion providers and a whole set of people taking participation in the process and there came the day when the bond was up for offer in the marketplace. So the company was looking for $350 million, and at the end of the day, the book had between 1.5 and 1.8 billion dollars for taking. And we did it with a very clear commitment and targets for greenhouse gas emissions reduction. By 2025, reduce 15% Scope 1 and 2 absolute emissions, and 12% Scope 3 relative emissions.

So from that moment on, we thought what would be a good way of bringing everybody on board? And this not being only program of finance and ESG, but everybody in the organization? So we opted for connecting the executive compensation with the same targets as a sustainability linked bond.

For instance, in my compensation and all of the managing directors and all of the eligible people across the company, we have a component of our compensation, which is connected to the achievement of the greenhouse gas emissions reduction that we presented at the sustainability linked bond offering. So that triggered very quickly a lot of questions from various people that may have not been involved in ESG decision making, very often. Managing directors, human resources managers in countries, supply chain managers in countries, what can I do? What's the best way of working with my local supplier? What do I need to ask my local supplier to do?

It triggered a lot of discussions within the company. And the key matter for us is to again, educate our employees and our people here as to what it means and what can they do on a daily basis to make sure the company achieves the targets.

Mike Toffel:
Yeah. One interesting commonality between the sustainability linked bonds and using those same goals as part of the executive compensation package is it's tapping into the idea of loss aversion, where psychologically people are much more concerned about losing something than they are about gaining something, even if it's the same dollar amount. And so in the sustainability linked bond, you will lose your reduced interest rate to the tune of millions of dollars if you don't achieve the target.

And similarly, folks in the executive team can lose thousands of dollars if they don't contribute in a meaningful way to the shared goals that you've set for yourselves. Those are both pretty innovative moves. We've heard about the idea of linking executive compensation to sustainability targets for a long time, a lot more talk than action. And sustainability linked bonds is a fairly new instrument as well. At what level of the organization did these decisions, big decisions, have to get made? I imagine, although you favor these, that you didn't just get to snap your fingers and make it so. So, who is involved in these types of decisions?

Gabriel Serber:
I think the most senior person in the company, our executive chairman. He's driving that force through the company, along with the CEO, along with the leadership team, along with the country managers. But that's one of the things that is particular to our company, Arcos Dorados. Even though we understand policy and framework and all of that, those topics, we are as well into action.

So if there's a framework for sustainability linked bonds, and there's a framework for executive compensation, it may happen that some companies or some people just look at the framework and decide not to do anything. Whereas in our case, we look at the framework, we bring it into the company, we execute it, and we make it happen. Of course, that is a personal risk for me. I will have a lot of people chasing me and my team as to what are we going to do from an ESG perspective to make sure we reduce the greenhouse gas emissions.

I think it's the most interesting piece is how to connect and bring everybody on board.

Mike Toffel:
Great. Super interesting. So a question we ask of all of our guests is to give our listeners some advice. For those interested in working in the space of business and climate change, what do you advise them? Where are the opportunities of the future? What resources do you find helpful that they might as well? Anything goes here.

Gabriel Serber:
Well, since I've taken this role as a head of ESG at Arcos Dorados, I've learned tremendous amount of things I never thought I would learn in my previous phase of my career, running the business for the company in different countries and regions. So when I transitioned over to the ESG group at Arcos Dorados, my first decision was to study and learn. What are other people doing? What are other companies doing? What are governments requesting? What's academia developing? And I think the more and more we investigate and we learn, I think it proves the case that education is one key element of how companies and persons need to behave.

Education, I mean at all levels, either from the board of directors education, looking at ESG matters, to management teams making decisions for the business, and then to consumers making their own choices as to where they go and what they do. My advice would be to learn, understand there's a lot of resources out there that can help anybody who's interested be more acquainted. Of course, there are very detailed technical matters, which I think are properly managed by the technical people. They know what they're doing, and we rely on those developments.

And of course, also bring yourself into the game. Don't look at this as this is somebody else's problem, but it's to begin with your problem and then what happens in your company. And one of the biggest learnings that I had very quickly was all of this work that we do should not be part of a group of people sitting somewhere completely removed from the day-to-day business of the company. This is something that needs to be within how the company operates.

The analogy that I always make, you can look at ESG as the cover of your phone. My phone has a cover and it's protecting me and I comply, and the phone is covered, nothing's going to happen. But the way we look at it, and the way I look at it personally, is all of this work must be an app within the phone. So it has to be built in the phone and something that you use every day, you configure, you access, you open, you utilize every day.

Because if we look at it as a cover, we will end up just being compliant with whatever regulations are in place. But if you look at it as a function of the business, then you start seeing people paying more attention and willing to contribute and wanting to do things and connecting financial strategies of the companies with executive compensation, with programs that actually are taking impact on the business itself.

Mike Toffel:
Well, it's been a really interesting conversation. Thank you for joining us to share your journey with Arcos Dorados and its efforts to address climate change. Really appreciate your time.

Gabriel Serber:
Thank you, Mike. It's been a pleasure and looking forward to keeping in touch.

Mike Toffel:
Great. Thanks.

That was my interview with Gabriel Serber, Vice President of Social Impact and Sustainable Development at Arcos Dorados.