McDonalds 2011 Annual Report Download - page 18

higher occupancy costs. Europe’s franchised margin percent
decreased in 2010 as positive comparable sales were more than
offset by higher occupancy expenses, the cost of strategic brand
and sales building initiatives and the refranchising strategy.
In APMEA, the franchised margin percent increase in 2011
was primarily due to a contractual escalation in the royalty rate
for Japan in addition to positive comparable sales in most mar-
kets, partly offset by a negative impact from the strengthening of
the Australian dollar. The 2010 decrease was primarily driven by
a negative impact from the strengthening of the Australian dollar.
The franchised margin percent in APMEA and Other Coun-
tries & Corporate is higher relative to the U.S. and Europe due to
a larger proportion of developmental licensed and/or affiliated
restaurants where the Company receives royalty income with no
corresponding occupancy costs.
• Company-operated margins
Company-operated margin dollars represent sales by Company-
operated restaurants less the operating costs of these
restaurants. Company-operated margin dollars increased $282
million or 9% (5% in constant currencies) in 2011 and increased
$366 million or 13% (12% in constant currencies) in 2010. The
constant currency growth in Company-operated margin dollars in
2011 was driven by positive comparable sales partially offset by
higher costs, primarily commodity costs, in all segments. Positive
comparable sales and lower commodity costs were the primary
drivers of the constant currency growth in Company-operated
margin dollars in 2010.
Company-operated margins
In millions 2011 2010 2009
U.S. $ 914 $ 902 $ 832
Europe 1,514 1,373 1,240
APMEA 876 764 624
Other Countries & Corporate 151 134 111
Total $3,455 $3,173 $2,807
Percent of sales
U.S. 20.6% 21.3% 19.4%
Europe 19.3 19.8 18.4
APMEA 17.3 17.8 16.8
Other Countries & Corporate 16.0 17.2 15.2
Total 18.9% 19.6% 18.2%
In the U.S., the Company-operated margin percent decreased
in 2011 due to higher commodity and occupancy costs, partially
offset by positive comparable sales. The margin percent
increased in 2010 due to lower commodity costs and positive
comparable sales, partly offset by higher labor costs. Refranchis-
ing also had a positive impact on the margin percent in 2010.
Europe’s Company-operated margin percent decreased in
2011 primarily due to higher commodity, labor, and occupancy
costs, partially offset by positive comparable sales. The margin
percent increased in 2010 primarily due to positive comparable
sales and lower commodity costs, partly offset by higher labor costs.
In APMEA, the Company-operated margin percent in 2011
reflected positive comparable sales, offset by higher commodity,
labor and occupancy costs. Acceleration of new restaurant open-
ings in China negatively impacted the margin percent. Similar to
other markets, new restaurants in China initially open with lower
margins that grow significantly over time. The APMEA margin
percent increased in 2010 due to positive comparable sales and
lower commodity costs, partly offset by higher occupancy & other
costs and increased labor costs.
Supplemental information regarding Company-
operated restaurants
We continually review our restaurant ownership mix with a goal of
improving local relevance, profits and returns. In most cases,
franchising is the best way to achieve these goals, but as pre-
viously stated, Company-operated restaurants are also important
to our success.
We report results for Company-operated restaurants based
on their sales, less costs directly incurred by that business includ-
ing occupancy costs. We report the results for franchised
restaurants based on franchised revenues, less associated occu-
pancy costs. For this reason and because we manage our
business based on geographic segments and not on the basis of
our ownership structure, we do not specifically allocate selling,
general & administrative expenses and other operating (income)
expenses to Company-operated or franchised restaurants. Other
operating items that relate to the Company-operated restaurants
generally include gains/losses on sales of restaurant businesses
and write-offs of equipment and leasehold improvements.
We believe the following information about Company-
operated restaurants in our most significant segments provides
an additional perspective on this business. Management respon-
sible for our Company-operated restaurants in these markets
analyzes the Company-operated business on this basis to assess
its performance. Management of the Company also considers
this information when evaluating restaurant ownership mix, sub-
ject to other relevant considerations.
The following table seeks to illustrate the two components of
our Company-operated margins. The first of these relates
exclusively to restaurant operations, which we refer to as “Store
operating margin.” The second relates to the value of our brand
and the real estate interest we retain for which we charge rent
and royalties. We refer to this component as “Brand/real estate
margin.” Both Company-operated and conventional franchised
restaurants are charged rent and royalties, although rent and
royalties for Company-operated restaurants are eliminated in
consolidation. Rent and royalties for both restaurant ownership
types are based on a percentage of sales, and the actual rent
percentage varies depending on the level of McDonald’s invest-
ment in the restaurant. Royalty rates may also vary by market.
As shown in the following table, in disaggregating the compo-
nents of our Company-operated margins, certain costs
with respect to Company-operated restaurants are reflected in
Brand/real estate margin. Those costs consist of rent payable by
McDonald’s to third parties on leased sites and depreciation for
buildings and leasehold improvements and constitute a portion of
occupancy & other operating expenses recorded in the Con-
solidated statement of income. Store operating margins reflect
rent and royalty expenses, and those amounts are accounted for
as income in calculating Brand/real estate margin.
While we believe that the following information provides a
perspective in evaluating our Company-operated business, it is
not intended as a measure of our operating performance or as an
alternative to operating income or restaurant margins as reported
by the Company in accordance with accounting principles
16 McDonald’s Corporation Annual Report 2011