McDonalds 2014 Annual Report Download - page 19

McDonald’s Corporation 2014 Annual Report 13
STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE
The strength of the alignment among the Company, its franchisees
and suppliers (collectively referred to as the "System") has been
key to McDonald's long-term success. By leveraging our System,
we are able to identify, implement and scale ideas that meet
customers' changing needs and preferences. In addition, our
business model enables McDonald's to consistently deliver locally-
relevant restaurant experiences to customers and be an integral
part of the communities we serve.
McDonald's customer-focused Plan to Win ("Plan") provides a
common framework that aligns our global business and allows for
local adaptation through an emphasis on the Plan's five pillars -
People, Products, Place, Price and Promotion. In 2014, we
evolved our Plan framework, refocusing our planning and actions
on what matters most to our customers. The following four
strategic growth priorities support our global Plan:
Optimizing our menu so that we offer our customers more of
their favorite food and drinks;
Modernizing the customer experience so interactions with
the Brand are more memorable;
Broadening accessibility to deliver unparalleled convenience;
and
Taking meaningful actions to become an even more trusted
brand.
We believe that our strategic growth priorities align with our
customers' evolving needs and - combined with our competitive
advantages of convenience, scale, geographic diversification and
System alignment - will enhance our customers’ experience and
build shareholder value over the long-term.
To measure our performance as we strive to build the
business, we have the following long-term, average annual
constant currency financial targets:
Systemwide sales growth of 3% to 5%;
Operating income growth of 6% to 7%; and
ROIIC in the high teens.
In 2014, our results were disappointing as unforeseen events
and weak operating performance pressured results in each of our
geographic segments. Systemwide sales decreased 2%
(increased 1% in constant currencies), operating income
decreased 9% (8% in constant currencies), one-year ROIIC was
negative 21.9% and three-year ROIIC was 1.4% (see
reconciliation on page 27). Each metric fell below our long-term
financial targets, reflecting the impact of soft comparable sales
performance and cost pressures, negatively impacting all
segments. Given our heavily franchised business model, growing
comparable sales is vital to increasing the Company's operating
income and returns.
We experienced challenges growing sales and guest counts
in 2014, as comparable sales decreased 1.0%, reflecting negative
guest traffic in all segments. While some of the challenges were
anticipated, others were not, such as the impact of a supplier
issue in China, Japan and certain other markets (see explanation
under APMEA) and the volatile operating environment in Russia
and the Ukraine. Results were also impacted by under-
performance in key opportunity markets that are significant
contributors to consolidated results, most notably the U.S.
We anticipate many of these challenges will persist in 2015,
particularly in the first half of the year; however, we continue to
believe that our long-term financial targets remain achievable over
the long term, keeping us focused on making the best decisions
for the benefit of our shareholders and our System.
We are intensely focused on increasing customer relevance,
driving customer visits, and positioning the Company for future
growth. In 2014, we took a number of important steps to lay the
foundation for our turnaround. The following is a summary of our
sales performance and critical actions taken to advance our
longer-term strategies by major segment.
U.S.
In the U.S., comparable sales declined 2.1% and comparable
guest counts declined 4.1%. Guest visits were down as customer-
focused initiatives did not resonate strongly amid the increasingly
competitive marketplace and sluggish industry growth. To enhance
customer relevance and loyalty, the U.S. is focused on addressing
menu, service and value opportunities.
In 2014, we brought in new leadership to provide innovative
thinking and a fresh strategic perspective, and we announced
actions to create a flatter, more nimble U.S. organization that
places greater decision making and accountability closer to the
customer.
Menu strategies included a focus on continued growth at
breakfast, which remains our strongest daypart, and an ongoing
emphasis on core food and beverages. In addition, we executed
initiatives to build brand trust through strengthened marketing
efforts, including the launch of a national food quality campaign.
The U.S. focused on improving the service experience
through an increased emphasis on operations excellence and
investments made in establishing our digital platform, including
being the first in our industry to accept Apple Pay in the drive-thru.
We continued to invest in new and existing restaurants by opening
222 new restaurants and reimaging approximately 260 locations,
of which the majority added or enhanced drive-thru capacity.
Currently, about half of our restaurant interiors and exteriors reflect
our contemporary restaurant design.
We evolved our value platform to reposition entry-level
affordability for future growth by providing a means to transition
products to a higher price point when appropriate.
Europe
In Europe, comparable sales declined 0.6%, while comparable
guest counts declined 2.2%. Comparable sales reflected negative
performance in Germany and Russia, mostly offset by positive
performance in the UK. Low consumer confidence and other
external issues related to the operating environment in Russia and
Ukraine negatively impacted business performance.
In 2014, we pursued customer-focused initiatives to deliver
menu variety, a contemporary restaurant experience and value
enhancements. We further optimized our menu through premium
menu additions and expanded our McCafé platform with over
4,000 restaurants now serving blended ice beverages.
We remain committed to reinvesting in existing restaurants
through reimaging and technology initiatives to provide a relevant,
contemporary customer experience. Europe completed about 260
restaurant reimages during the year. By the end of 2014, nearly
100% of restaurant interiors and 85% of exteriors were
modernized. We continued to leverage technology, with over 2,000
self-order kiosks and mobile ordering and payment capability
available in certain markets.
We increased our accessibility and convenience through
daypart expansion, including breakfast and overnight, opening
approximately 320 new restaurants, and optimizing our drive-
thrus. As value is paramount to European customers, we
continued to evolve and emphasize value offerings at every price
tier.