McDonalds 2015 Annual Report Download - page 3

McDonald's Corporation 2015 Annual Report 1
PART I
ITEM 1. Business
McDonald’s Corporation, the registrant, together with its sub-
sidiaries, is referred to herein as the “Company.”
a. General
Through June 30, 2015, the Company was managed as distinct
geographic segments, comprised of the U.S., Europe, Asia/Pacific,
Middle East and Africa ("APMEA") and Other Countries &
Corporate, which included Canada and Latin America. Beginning
July 1, 2015, McDonald’s started operating under a new
organizational structure that combines markets with similar
characteristics and opportunities for growth. Information about the
Company's new segments is provided in the Overview section of
Management's Discussion and Analysis of Financial Condition and
Results of Operations in Part II, Item 7, page 13 of this Form 10-K.
b. Financial information about segments
Segment data for the years ended December 31, 2015, 2014, and
2013 are included in Part II, Item 8, page 44 of this Form 10-K.
c. Narrative description of business
General
The Company operates and franchises McDonald’s restaurants,
which serve a locally-relevant menu of quality food and drinks sold
at various price points in more than 100 countries. McDonald’s
global system is comprised of both Company-owned and
franchised restaurants. McDonald’s franchised restaurants are
owned and operated under one of the following structures -
conventional franchise, developmental license or affiliate. The
optimal ownership structure for an individual restaurant, trading
area or market (country) is based on a variety of factors, including
the availability of individuals with the entrepreneurial experience
and financial resources, as well as the local legal and regulatory
environment in critical areas such as property ownership and
franchising. We continually review our mix of Company-owned and
franchised restaurants to help optimize overall performance, with a
goal to be 95% franchised over the long term. The business
relationship between McDonald’s and its independent franchisees
is of fundamental importance to overall performance and to the
McDonald’s Brand. This business relationship is supported by an
agreement that requires adherence to standards and policies
essential to protecting our brand.
The Company is primarily a franchisor, with more than 80% of
McDonald's restaurants owned and operated by independent
franchisees. Franchising enables an individual to own a restaurant
business and maintain control over staffing, purchasing, marketing
and pricing decisions, while also benefiting from the strength of
McDonald’s global brand, operating system and financial
resources. One of the strengths of this model is that the expertise
gained from operating Company-owned restaurants allows
McDonald’s to improve the operations and success of all
restaurants while innovations from franchisees can be tested and,
when viable, efficiently implemented across relevant restaurants.
Directly operating McDonald’s restaurants contributes
significantly to our ability to act as a credible franchisor. Having
Company-owned restaurants provides Company personnel with a
venue for restaurant operations training experience. In addition, in
our Company-owned and operated restaurants, and in
collaboration with franchisees, we are able to further develop and
refine operating standards, marketing concepts and product and
pricing strategies that will ultimately benefit relevant McDonald’s
restaurants.
Under a conventional franchise arrangement, the Company
owns the land and building or secures a long-term lease for the
restaurant location and the franchisee pays for equipment, signs,
seating and décor. The Company believes that ownership of real
estate, combined with the co-investment by franchisees, enables
us to achieve restaurant performance levels that are among the
highest in the industry.
Franchisees are also responsible for reinvesting capital in
their businesses over time. In addition, to accelerate
implementation of certain initiatives, the Company frequently co-
invests with franchisees to fund improvements to their restaurants
or their operating systems. These investments, developed with
input from McDonald’s with the aim of improving local business
performance, increase the value of our Brand through the
development of modernized, more attractive and higher revenue
generating restaurants.
The Company’s typical franchise term is 20 years. The
Company requires franchisees to meet rigorous standards and
generally does not work with passive investors. The business
relationship with franchisees is designed to assure consistency
and high quality at all McDonald’s restaurants. Conventional
franchisees contribute to the Company’s revenue through the
payment of rent and royalties based upon a percent of sales, with
specified minimum rent payments, along with initial fees paid upon
the opening of a new restaurant or grant of a new franchise. This
structure enables McDonald’s to generate significant levels of
cash flow.
Under a developmental license arrangement, licensees
provide capital for the entire business, including the real estate
interest. The Company does not invest any capital under a
developmental license arrangement. The Company receives a
royalty based upon a percent of sales as well as initial fees upon
the opening of a new restaurant or grant of a new license. We use
the developmental license ownership structure in over 70
countries with a total of approximately 5,500 restaurants. The
largest developmental licensee operates approximately 2,100
restaurants in 19 countries in Latin America and the Caribbean.
Finally, the Company also has an equity investment in a
limited number of foreign affiliated markets, referred to as
“affiliates.” In these markets, the Company receives a royalty
based on a percent of sales and records its share of net results in
Equity in earnings of unconsolidated affiliates. The largest of these
affiliates is Japan, where there are nearly 3,000 restaurants.
Supply Chain and Quality Assurance
The Company and its franchisees purchase food, packaging,
equipment and other goods from numerous independent
suppliers. The Company has established and enforces high quality
standards and product specifications. The Company has quality
centers around the world designed to ensure that its high
standards are consistently met. The quality assurance process not
only involves ongoing product reviews, but also on-site supplier
visits. A Food Safety Advisory Council, composed of the
Company’s technical, safety and supply chain specialists, as well
as suppliers and outside academia, provides strategic global
leadership for all aspects of food safety. In addition, the Company
works closely with suppliers to encourage innovation, assure best
practices and drive continuous improvement. Leveraging scale,
supply chain infrastructure and risk management strategies, the
Company also collaborates with suppliers toward a goal of
achieving competitive, predictable food and paper costs over the
long term.
Independently owned and operated distribution centers,
approved by the Company, distribute products and supplies to
McDonald’s restaurants. In addition, restaurant personnel are
trained in the proper storage, handling and preparation of
products.