McDonalds 2014 Annual Report Download - page 11

McDonald’s Corporation 2014 Annual Report 5
other operational problems or project a brand image inconsistent
with our values, particularly if our contractual and other rights and
remedies are limited, costly to exercise or subject to litigation. If
franchisees do not successfully operate restaurants in a manner
consistent with our required standards, the brand’s image and
reputation could be harmed, which in turn could hurt our business
and operating results.
Our ownership mix also affects our results and financial
condition. The decision to own restaurants or to operate under
franchise or license agreements is driven by many factors whose
interrelationship is complex and changing. Our ability to achieve
the benefits of our refranchising strategy, which involves a shift to
a greater percentage of franchised restaurants, will depend on
various factors, including our ability to identify franchisees that
meet our rigorous standards, the performance of our existing
franchisees and whether the resulting ownership mix supports our
financial objectives.
Changes in commodity and other operating costs could
adversely affect our results of operations.
The profitability of our Company-owned restaurants depends
in part on our ability to anticipate and react to changes in
commodity costs, including food, paper, supply, fuel, utilities,
distribution and other operating costs. Any volatility in certain
commodity prices could adversely affect our operating results by
impacting restaurant profitability. The commodity market for some
of the ingredients we use, such as beef and chicken, is particularly
volatile and is subject to significant price fluctuations due to
seasonal shifts, climate conditions, industry demand, international
commodity markets, food safety concerns, product recalls,
government regulation and other factors, all of which are beyond
our control and, in many instances, unpredictable. We can only
partially address future price risk through hedging and other
activities, and therefore increases in commodity costs could have
an adverse impact on our profitability.
The global scope of our operations subjects us to risks that
could negatively affect our business.
We face differing cultural, regulatory and economic
environments that exist within and among the more than 100
countries where McDonald’s restaurants operate, and our ability to
achieve our business objectives depends on our success in these
environments. Meeting customer expectations is complicated by
the risks inherent in our global operating environment, and our
global success is partially dependent on our System’s ability to
leverage operating successes across markets. Our initiatives may
not have broad appeal with our customer base and could drive
unanticipated changes in customer perceptions and guest counts.
Disruptions in our operations or price volatility in a market can
also result from governmental actions, such as price, foreign
exchange or import-export controls, increased tariffs, government-
mandated closure of our or our suppliers’ operations and asset
seizures. The cost and disruption of responding to governmental
investigations or actions, whether or not they have merit, may
impact our results. Our international success depends in part on
the effectiveness of our strategies and brand-building initiatives to
reduce our exposure to such governmental actions. Our results of
operations and financial condition are also affected by fluctuations
in currency exchange rates, which may adversely affect reported
earnings.
Additionally, we face challenges and uncertainties associated
with operating in developing markets, which may entail a relatively
higher risk of political instability, economic volatility, crime,
corruption and social and ethnic unrest. For example, our results
have been negatively impacted by the ongoing events in the
Ukraine and Russia. Such challenges are exacerbated in many
cases by a lack of an independent and experienced judiciary and
uncertainties in how local law is applied and enforced, including in
areas most relevant to commercial transactions and foreign
investment. If we are unable to effectively manage the risks
associated with our international operations, it could have a
material adverse effect on our business and financial condition.
Challenges with respect to talent management could harm
our business.
Our success depends in part on our System’s ability to recruit
and retain qualified personnel to manage our operations. For
instance, the trend toward higher wages and social expenses
could have a negative impact on the margins of our Company-
owned restaurants. Additionally, economic action, such as
boycotts, protests, work stoppages or campaigns by labor
organizations, could adversely affect us or the franchisees and
suppliers that are also part of the McDonald’s System and whose
performance has a material impact on our results.
We are also impacted by the costs and other effects of
compliance with U.S. and overseas regulations affecting our
workforce, which includes our staff and employees working in our
Company-owned restaurants. These regulations are increasingly
focused on wage and hour, healthcare, immigration, retirement
and other employee benefits and unlawful workplace
discrimination. Our potential exposure to reputational and other
harm regarding our workplace practices or conditions or those of
our independent franchisees or suppliers (or perceptions thereof)
could have a negative impact on our business.
Information technology system failures or interruptions or
breaches of our network security may interrupt our
operations.
We are increasingly reliant on our technological systems (e.g.,
point-of-sale and other in-store systems or platforms) to conduct
our business, and any failure of these systems could significantly
impact our operations. Despite our implementation of security
measures, our technology systems could become vulnerable to
damage, disability or failures due to theft, fire, power loss,
telecommunications failure or other catastrophic events. If these
systems were to fail, and we were unable to recover in a timely
way, we could experience an interruption in our operations. We
may also not fully realize the benefits of the significant
investments we are making to enhance the customer experience
through digital engagement and social media.
Furthermore, security breaches involving our systems or
those of third party providers may occur, such as unauthorized
access, denial of service, computer viruses and other disruptive
problems caused by hackers. Our information technology systems
contain personal, financial and other information that is entrusted
to us by our customers and employees as well as financial,
proprietary and other confidential information related to our
business. An actual or alleged security breach could result in
system disruptions, shutdowns, theft or unauthorized disclosure of
confidential information. The occurrence of any of these incidents
could result in adverse publicity, loss of consumer confidence,
reduced sales and profits, and criminal penalties or civil liabilities.
Increasing regulatory complexity may adversely affect
restaurant operations and our financial results.
Our regulatory environment worldwide exposes us to complex
compliance and similar risks that could affect our operations and
results in material ways. In many of our markets, including the
United States and countries in Europe, we are subject to
increasing regulation, which has increased our cost of doing
business. We are affected by the cost, compliance and other risks
associated with the often conflicting and highly prescriptive
regulations we face, including where inconsistent standards