McDonalds 2011 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 33,510 restaurants in 119 countries at year-end 2011,
27,075 were franchised or licensed (including 19,527 franchised
to conventional franchisees, 3,929 licensed to developmental
licensees and 3,619 licensed to foreign affiliates (affiliates)—
primarily Japan) and 6,435 were operated by the Company.
Under our conventional franchise arrangement, franchisees pro-
vide a portion of the capital required by initially investing in the
equipment, signs, seating and décor of their restaurant business,
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 and/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 in the restaurants. We continually review, and as
appropriate adjust, our mix of Company-operated and franchised
(conventional franchised, developmental licensed and foreign
affiliated) restaurants to help optimize 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 generally include initial
fees. Fees vary by type of site, amount of Company investment, if
any, and local business conditions. These fees, along with occu-
pancy and operating rights, are stipulated in franchise/license
agreements 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 32%, 40% and 22% of total revenues,
respectively. The United Kingdom (U.K.), France and Germany,
collectively, account for over 50% of Europe’s revenues; and
China, Australia and Japan (a 50%-owned affiliate accounted for
under the equity method), collectively, account for over 55% of
APMEA’s revenues. These six markets along with the U.S. and
Canada are referred to as “major markets” throughout this report
and comprise approximately 70% of total revenues.
In analyzing business trends, management considers a variety
of performance and financial measures, including comparable
sales and comparable guest count growth, Systemwide sales
growth 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 we believe this better represents the Compa-
ny’s underlying business trends.
• Comparable sales and comparable guest counts are key perform-
ance indicators used within the retail industry and are indicative
of acceptance of the Company’s initiatives as well as local eco-
nomic 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, whether operated
by the Company or franchisees, 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 currency translation.
Growth in comparable sales is driven by guest counts and aver-
age check, which is affected by changes in pricing and product
mix. Generally, the goal is to achieve a balanced contribution from
both guest counts and average check.
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.
• Systemwide sales include sales at all restaurants. While fran-
chised sales are not recorded as revenues by the Company,
management believes the information is important in under-
standing the Company’s financial performance because these
sales are the basis on which the Company calculates and
records franchised revenues and are indicative of the financial
health of the franchisee base.
• Return on incremental invested capital (ROIIC) is a measure
reviewed by management over one-year and three-year time
periods to evaluate the overall profitability of the business
units, the effectiveness of capital deployed and the future allo-
cation of capital. The return is calculated by dividing the
change in operating income plus depreciation and amortization
(numerator) by the adjusted cash used for investing activities
McDonald’s Corporation Annual Report 2011 9