Management commentary on business performance and prospect
MCD has advantages in its scale, brand, and family fun elements.
In 2010, three areas to focus on
- Menu
- Service
- Reimaging
Service
- Expanding demand in beverages and desserts
- Value at all price tiers
- Extended hours and better service
- Service times are better since rolling out McCafe, aided by POS
Global up-to-date brand on the move
- Updating interiors and exteriors of the restaurants
- Of 2.4bn capex plan, 50% is reimaging (reimaging 2,000 restaurants in 2010)
- New restaurants - 1,000 in 2010
U.S.
U.S. was 45% of consolidated sales in 2009
- 2009 comp sales up 2.6%
- Operating income increased 6%
- QSR market share of 14.5%
- In January launched McSnack wrap – snack version of Big Mac. Fits well into growing snack daypart.
- Breakfast dollar menu, voted in by franchisees, gives MCD a national voice on breakfast
McCafe coffee has worked well
- Coffee sales increased 25% in 2009
- 3m cups per day
- More than 5% of total U.S. restaurant sales
- Rolling out frappes and fruit smoothies
- Frappes rolling out nationwide this spring
- Smoothies nationwide in the summer
Tech
- Free WiFi makes MCD the largest venue for free WiFi in the country
- POS cash registers
- Drive thru displays
Reimaging is key
- 50% of U.S. base have interior remodeled image
- Even fewer have exteriors that are enhanced
- 2010, more than 400-500 reimages in the U.S., 150 new sites
- Sales increases for remodels in U.S. have been 6-7% higher than for those that were not remodeled
Europe
Europe was 38% of consolidated operating income in 2009
- 5.2% comp store sales
- 8% operating income
- 4.3% in Jan, 5.4% in Feb
- 2009 informal eating out category market share grew
- 3 tier menu platform
- Low price
- Core
- Premium
- Value at every level
- Enhancing fourth tier
- Expanded “p’tit plaisirs” in France and fourth tier in UK
- Snack Deluxe lineup in Germany
- In Germany, expanded breakfast lineup and it is yielding solid results
- Media support in UK helped highest breakfast sales ever
- Espressos are very important in European markets
- All 1,600 restaurants in Europe have premium coffee available
- Either via counter or McCafe
- McCafe has been expanded across Europe
- 1300 McCafe’s in Europe by end 2010
- 260 new restaurant openings in Europe in 2010
Reimaging program is critical
- By end of 2011, more than 85% of European interiors will be reimaged
- Major remodels increase sales 6%
APMEA
APMEA was 14% of 2009 consolidated operating income
- Comparable store sales up 3.4%
- Operating income up 23%
- Given economic climate, working to make sure menu and value initiatives are compelling
- Australia seeing much success with Angus burger
- Jan comp sales +4.3%, Feb 10.5% in Australia
- MCD breakfast available in 19 countries in APMEA
- 13% of sales in restaurants where breakfast is offered
- Breakfast is 25% of restaurant sales in U.S.
- Closing 430 lower performing restaurants in Japan
- Australia has reimaged nearly all free standing restaurants
Conclusion:
MCD continues to keep the brand compelling to customers. Companies combined operating margin grew 900 bps since 2005. U.S. and Europe grew by 500 bps over the same period.
- Goal is to continue to improve operating margin
- Track record of comp sales growth (82 consecutive quarters)
- G&A control, disciplined operations, supply chain efficiencies
- Strong owner operator and franchisee base
- Locally relevant brand
- Last few years saw more than 1,000 refranchised
- Worldwide system is 81% franchised
2009 consolidated Return on Invested Capital stood at 20.9%
- U.S. 24.6%
- Europe 20.7%
- APMEA 21.3%
Predictable cash flow and strong balance sheet allow a strong return of cash to shareholders
16.6bn returned to shareholders from 2007-2009 through repurchases and dividends.
- $2.20 per share annualized dividend is more than triple the 2005 amount
- First priority is to reinvest in the business. Above that, MCD will continue to repurchase and pay dividends
Important Q&A points:
Q: Average Check?
A: Average check for 2010 YTD has been stable compared to prior year. Dollar menu hit a little but then we expect that average check comes back
Q: Can you explain the discrepancy between operating margins in developed markets – U.S. vs Europe?
A: Operating costs in Europe are higher. Rent, occupancy, labor are the main differences
Q: U.S. Comps ex weather have picked up? change in consumer behavior in US?
A: not really, more breakfast activity but nothing significant in terms of rate of growth
Q: How much of beverage guidance is smoothies and frappes?
A: Haven’t broken down the guidance of 125 by product. Expect them both to be big drivers. Dollar menu breakfast was about regaining traction and bringing customers in (TC’s).
Q: How important is couponing?
A: In some markets customers are conditioned to use coupons but we find that every day predictable value is a more successful tactic but in markets where it is prevalent we will do it
Q: What % of total revenue is drive thru?
A: 66% of sales in US. Only 66% of restaurants in Europe have drive through, and of those that have it, 45% of those restaurants’ sales are drive-thru. There is an opportunity to expand drive through in Europe and APMEA.
Q: Where do you expect an upturn in consumer spending?
A: Hoping it’s everywhere. Asia is where we’re seeing consumer confidence at lower levels (China and Japan). In Europe, Germany is the most price sensitive consumer, confidence levels really affect traffic.
Q: Competitive environment, race to bottom, in 2010?
A: We put the dollar menu up back in 2003. Didn’t have to react to deteriorating economy because we had an every-day affordability strategy. Did evolve it to bring breakfast in. Virtually all of the restaurants had breakfast value strategies in place but we needed a unified voice at breakfast.
Don’t see dollar menu dramatically expanding or shrinking.
Q: Taking price in 2010?
A: commodity costs in 2010 are going to be pretty benign. Consumer prices are holding fairly well. Don’t see a tremendous opportunity to take price. Typical year of 2/3%, this year will be something less than that. In this cost environment that won’t hurt us. We’ll be ready to take price when the opportunity arises.
Howard Penney
Managing Director
