Treat Your Customers Well Instead of Bean Counting

Why should you, a small business owner, prioritize treating customers well instead of focusing solely on your bottom line? That’s what our favorite bookkeeping mensch,   Paul Rosenblum, has been doing for over 2 decades. So on the 30th anniversary of the McDonald's Hot Coffee Case (yes, it’s been that long), he’s taking a look at what happened and what could have happened instead. Because as we all know, McDonald’s had the money to keep this story from blowing up. So why did this happen? And, of course, how can knowing this help keep you grounded while navigating the tricky world of business?

Transcript

Episode #40 

I must start this episode as feeling ‘recharged’, since I got back from vacation just a few days ago.  I never realize how much I need some time off from the stress of bookkeeping year in and year out. I’m (a renewed, recharged, and fresh – at least for another week or two), Paul Rosenblum. 

All of the other episodes in this podcast have been with a theme of either bookkeeping or tax based information, or information for business owners who aren’t bookkeepers.  However, this episode is very different.  The last time I devoted a 2-hour class to this story was back in 2007 or 2008, when I was teaching a specialized class in bookkeeping and had the time in the 6-week course to fit this in.  If you are over 30, you might remember this real case, if you are younger, you might not. It’s worth including this story in this podcast. Please, after you listen, email me, and let me know if I can continue these kinds of stories or cases in the newsletter (still trying to figure out how to use the newsletter in the best way possible). 

So, gather ‘round and let me tell you about the 1994 story of ‘The McDonald’s Hot Coffee Case’.   (Let’s get some marshmallows and a fire going) --- 

First, the information in this episode is from two websites – (1) The American Museum Tort Law and (2) Wikipedia. 

I relate this story to you from the accounting viewpoint (mainly), but you can draw your own conclusions.  

In 1994, (the trial took place August 8th – 17th so it’s the 30th anniversary of this case). A 79-year-old woman by the name of Stella Liebeck purchased hot coffee from a McDonald’s restaurant to go and brought it out to the car which her grandson was driving.   He parked the car in the parking lot.  Ms. Liebeck put the coffee cup between her knees and removed the lid to add cream and sugar and she spilled it in her lap. She was wearing sweatpants, which held the hot coffee against her skin. In about 3 seconds, she had third degree burns over 16 percent of her body – the skin was burned away to the lawyers of muscle and fatty tissue. She had to be hospitalized for eight days and required skin grafts and other treatments. Her recovery lasted 2 years.

She offered to settle with McDonald’s for $20,000 to cover her medical expenses, but McDonald’s refused.  Her attorney filed suit in the US District Court for the District of New Mexico, accusing McDonald’s of gross negligence. 

Ms. Liebeck’s attorneys argued that at 180 – 190 degrees was defective and more likely to cause serious injury than coffee served at any other establishment. 

When the case went to trial, experts testified how hot coffee should be, and McDonald’s coffee was 30-40 degrees hotter than coffee served by other companies. The evidence showed and the jury learned that 700 other people, including children, had been burned before. 

Here's my editorial point in this:  McDonald’s knew that hundreds of others have been burned because of their hot coffee but chose not to change their policies or lower the temperature of their coffee. They did the math, or ‘bean-counting’ as we call it in the field -- with billions of cups of coffee served annually, the number of burns was not significant. 

The goal of the lawsuit was to try and right a wrong. Kenneth Wagner, Ms. Liebeck’s lawyer said this:  “We knew, before the lawsuit was filed, that the temperature of the water was 190 degrees or so, and the McDonald’s franchise documents required that of the franchisee” .

Fact:  Most home coffee makers produce coffee that is between 135 and 150 degrees. 

Some other restaurants served coffee at 160 degrees, which can also cause burns, but it took around 20 seconds – enough time to wipe away the spilled coffee.  

Her lawyer said this: “Our position was that the product was unreasonably dangerous, and the temperature should have been lower. “ 

The jurors awarded Ms. Liebeck $200,000 in compensatory damages for her pain, suffering and medical costs, but eventually that was lowered to $160,000 because they found her 20% responsible.  They also awarded her 2.7 million dollars in punitive damages. 

This is the accounting part of this episode: 

The 2.7 million dollars represented two days of McDonald’s coffee sales. 

It was reported that the parties settled for a confidential amount, thought to be less than $500,000.00.  

This case spawned a documentary made in 2011 by lawyer Susan Saladoff) called “Hot Coffee” (which you can stream by the way), that told the true story after all the myths and bad press that this case had gotten throughout the years.

One of the reasons the case was brought was because Liebeck was concerned about the number of other people who had been burned by McDonald’s coffee, including children. The states’ product liability laws contain instructions about warnings. “They must be in a conspicuous place and must warn the product’s user of possibly dangerous features”.  

Those are the facts of this case. 

Now here are my thoughts:  

1. Why didn’t McDonald’s settle for $20,000.00 when Ms. Liebeck offered to settle for reimbursement of medical costs? 
2. Why was coffee that hot for years?

Maybe this is why -- 

Why didn’t they settle for $20K, pocket change to them? Since so many others were burned and McDonald’s had settled, they took their chances.  They stood their ground. The quality control manager actually said that the number of settled claims was insufficient for the company to change its policies. Changing policies would mean adjusting the coffee makers to lower temperatures company wide. During discovery, witnesses testified that they had no intention of lowering the temperature of its coffee.  However, a post-verdict investigation found that the temperature of the Albuquerque McDonald’s had been reduced to 158 degrees, still high, but less likely to cause serious burns if spilled.

The operations manual of the coffee makers that McDonald’s were using indicated that the coffee temperature should be at around 158 degrees, but McDonald’s chose to  ignore those instructions.

Why was coffee that hot for years?  McDonald’s claimed that the reason for serving such hot coffee in its drive-in window was because the people purchasing the coffee were typically commuters who wanted to drive a distance with their coffee, hence the coffee would stay hotter longer and to fully extract the flavor.

And now for my thoughts: 

Why did they settle with burned victims for years without changing policies? 

1. Large companies, in my experience, are slow and reluctant to change.  If they are making a good profit, why change policies. Pay out and settle with people and keep it quiet and continue doing business the way they have always done. This is called ‘bean counting’ – that is figuring out how much money it’s going to cost you in settlements or lawsuits, as opposed to changing machines, or policies within a company.
2. Large companies really exist for shareholders, and some of those shareholders are founders, CFO’s and CEOs of the company, franchisees and even employees.  
3.  Remember the word ‘Personality’ from recent episodes?  Many large companies either don’t have personalities, except for their advertising, or they have bad personalities, although people still purchase from them in record numbers. (however, the most recent quarter of this year, McDonald’s sales are plummeting, hence the new (CosMc’s popping up around the US)
4. Even if the original numbers stuck in the Liebeck case, two days of coffee sales is a slap on the wrist to a large corporation like McDonald’s.  It’s kind of like a speeding ticket.  $100 for speeding 10 miles over the speed limit in some jurisdictions isn’t going to change the behavior of a driver.  A $2500.00 ticket for speeding might. However, McDonald’s ended up settling the case for around $500,000.00 and today, most people have forgotten about the bad press, because over time, these things fade away. 

In closing this episode, let me reiterate one reason why I have, over the years, specialized in small business bookkeeping, and tried to stay away from larger business clients. Do you think that McDonald’s would have lost coffee sales if they lowered the temperature by 30 or 40 degrees?  Would the profits have gone down? 

Running a business isn’t ALL about profits, is it?  Profits and good – who doesn’t want to make money to be able to afford to do nice things outside of work, but can’t we learn as human beings to do it the right way?  Treat customers the way you’d like to be treated, do things the right way, and the profits will come by themselves. 

Just some thoughts here to celebrate the 30th anniversary of the Liebeck/McDonald’s case.

As a footnote, in 2023, Mable Childress sued a San Francisco McDonald’s after suffering burns from their coffee. The employees, within minutes, “Spoke to her and offered assistance”.    

Another case – take a look at the Ford Pinto Case (you can do an internet search for that).  It’s similar. If you’d like me to do an episode on that case, let me know in an email or a ‘fan mail’, or I can include that case in a Substack newsletter!

Again, email me if you’d like to read about a similar story that happened to me when I was on vacation – I’ll include that in a newsletter.  

Until next time, I’m (a recharged) Paul Rosenblum