McDonalds 2009 Annual Report Download - page 11

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Overview
DESCRIPTION OF THE BUSINESS
The Company franchises and operates McDonald’s restaurants.
Of the 32,478 restaurants in 117 countries at year-end 2009,
26,216 were operated by franchisees (including 19,020 oper-
ated by conventional franchisees, 3,160 operated by
developmental licensees and 4,036 operated by foreign affiliated
markets (affiliates)—primarily in Japan) and 6,262 were operated
by the Company. Under our conventional franchise arrangement,
franchisees provide a portion of the capital required by initially
investing in the equipment, signs, seating and décor of their res-
taurant businesses, and by reinvesting in the business over time.
The Company owns the land and building or secures long-term
leases for both Company-operated and conventional franchised
restaurant sites. This maintains long-term occupancy rights, helps
control related costs and assists in alignment with franchisees. In
certain circumstances, the Company participates in reinvestment
for conventional franchised restaurants. Under our developmental
license arrangement, licensees provide capital for the entire
business, including the real estate interest, and the Company has
no capital invested. In addition, the Company has an equity
investment in a limited number of affiliates that invest in real
estate and operate or franchise restaurants within a market.
We view ourselves primarily as a franchisor and believe fran-
chising is important to delivering great, locally-relevant customer
experiences and driving profitability. However, directly operating
restaurants is paramount to being a credible franchisor and is
essential to providing Company personnel with restaurant oper-
ations experience. In our Company-operated restaurants, and in
collaboration with franchisees, we further develop and refine
operating standards, marketing concepts and product and pricing
strategies, so that only those that we believe are most beneficial
are introduced Systemwide. We continually review our mix of
Company-operated and franchised (conventional franchised,
developmental licensed and affiliated) restaurants to help max-
imize overall performance.
The Company’s revenues consist of sales by Company-
operated restaurants and fees from restaurants operated by
franchisees. Revenues from conventional franchised restaurants
include rent and royalties based on a percent of sales along with
minimum rent payments, and initial fees. Revenues from restau-
rants licensed to affiliates and developmental licensees include a
royalty based on a percent of sales, and may include initial fees.
Fees vary by type of site, amount of Company investment, if any,
and local business conditions. These fees, along with occupancy
and operating rights, are stipulated in franchise/license agree-
ments that generally have 20-year terms.
The business is managed as distinct geographic segments.
Significant reportable segments include the United States (U.S.),
Europe, and Asia/Pacific, Middle East and Africa (APMEA). In
addition, throughout this report we present “Other Countries &
Corporate” that includes operations in Canada and Latin America,
as well as Corporate activities. The U.S., Europe and APMEA
segments account for 35%, 41% and 19% of total revenues,
respectively. France, Germany and the United Kingdom (U.K.),
collectively, account for approximately 55% of Europe’s rev-
enues; and Australia, China and Japan (a 50%-owned affiliate
accounted for under the equity method), collectively, account for
over 50% of APMEA’s revenues. These six markets along with
the U.S. and Canada are referred to as “major markets” through-
out this report and comprise over 70% of total revenues.
The Company continues to focus its management and finan-
cial resources on the McDonald’s restaurant business as we
believe opportunities remain for long-term growth. Accordingly, in
2009, the Company sold its minority ownership interest in Red-
box Automated Retail, LLC (Redbox) for total consideration of
$140 million. In 2008, the Company sold its minority ownership
interest in U.K.-based Pret A Manger for cash proceeds of
$229 million. In connection with both sales, the Company recog-
nized nonoperating gains. During 2007, the Company sold its
investment in Boston Market. As a result of the disposal, Boston
Market’s results of operations and transaction gain are reflected
as discontinued operations. As of December 31, 2009, the
Company had disposed of all non-McDonald’s restaurant busi-
nesses.
In analyzing business trends, management considers a variety
of performance and financial measures, including comparable
sales and comparable guest count growth, Systemwide sales
growth, restaurant margins and returns.
• Constant currency results exclude the effects of foreign cur-
rency translation and are calculated by translating current year
results at prior year average exchange rates. Management
reviews and analyzes business results in constant currencies
and bases certain incentive compensation plans on these
results because they believe this better represents the
Company’s underlying business trends.
• Comparable sales and comparable guest counts are key per-
formance indicators used within the retail industry and are
indicative of acceptance of the Company’s initiatives as well as
local economic and consumer trends. Increases or decreases in
comparable sales and comparable guest counts represent the
percent change in sales and transactions, respectively, from the
same period in the prior year for all restaurants in operation at
least thirteen months, including those temporarily closed. Some
of the reasons restaurants may be temporarily closed include
reimaging or remodeling, rebuilding, road construction and
natural disasters. Comparable sales exclude the impact of cur-
rency translation. McDonald’s reports on a calendar basis and
therefore the comparability of the same month, quarter and year
with the corresponding period of the prior year will be impacted
by the mix of days. The number of weekdays and weekend days
in a given timeframe can have a positive or negative impact on
comparable sales and guest counts. The Company refers to
these impacts as calendar shift/trading day adjustments. In
addition, the timing of holidays can impact comparable sales
and guest counts. These impacts vary geographically due to
consumer spending patterns and have the greatest effect on
monthly comparable sales and guest counts while the annual
impacts are typically minimal. In 2008, there was an incremental
full day of sales and guest counts due to leap year.
• Systemwide sales include sales at all restaurants, whether
operated by the Company or by franchisees. While franchised
sales are not recorded as revenues by the Company, manage-
ment believes the information is important in understanding the
Company’s financial performance because these sales are the
McDonald’s Corporation Annual Report 2009 9