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McDonald’s – How Golden are its Arches ?

This case study has been written exclusively for use on the course Strategic Financial Management FINA 1035 at Greenwich University Business School and its partner institutions. It is to be used exclusively for this purpose. No part may be copied, emailed or reproduced for any other purpose other than stated above. Some of the data in this case study is sourced from material issued by McDonald’s Corporation in its annual and financial reports and on its websites www.mcdonalds.com and www.aboutmcdonalds.com . All other sources are shown. Financial data are all in US $ unless stated. McDonald’s financial year end is 31 December. Author : Scott Duncan, MBA 1 August 2014

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McDonald’s – How Golden are its Arches ?  

Introduction The first seven months of 2014 contained a mixture of good and bad news for McDonald’s Chief Executive Officer (CEO), Don Thompson. He was into his second year as CEO after promotion from his previous role as Chief Operating Officer (COO) in October 2012 when McDonald’s CEO since November 2004 – Jim Skinner – retired. On the positive side :

- McDonald’s had weathered the world wide recession of the late 2000s in good shape with total revenues up from $22.7 billion in 2009 to $28.1 billion in 2013 and net income up from $4.5 billion in 2009 to $5.5 billion in 2013

- the total number of McDonald’s restaurants worldwide continued to grow year by year from over 32,400 in 2009 to over 35,400 in 2013. In 2013 alone, total restaurant numbers increased by almost 1000

- McDonald’s remained the world’s largest restaurant chain in terms of total sales achieving over $89 billion of system-wide sales across its managed and franchised outlets operating in 119 countries serving almost 70 million customers a day in 2013

- it was one of the world’s most recognised and valuable brands - many of its new product lines added to its menu during the late 2000s had been

successful including snack wraps (“McWraps”), smoothies, and the mega-popular “McCafé” beverage line. Further menu items were added in 2013 such as “Fish McBites” and “Mighty Wings” in USA restaurants

- the corporation had worked hard to address consumer concerns over the nutritional content of its products . As an example, the McWrap was seen as high-profile attempt to get the attention of customers who have turned to fresher, seemingly healthier offerings from competitors such as Subway – see Annex 1. McDonald’s USA also now published an annual progress report charting progress against its commitment to improve nutritional advice and choice to its customers.

On the negative side:

- many commentators pointed out that McDonald’s had a string of disappointing sales quarters and had experienced some ups and downs in 2013. A December 2013 article in Quick Service Restaurant (QSR) magazine headed “What’s Going on at McDonald’s” was typical of some of the concerns – see Annex 2.

- some analysts said that the number of new items introduced in 2013 to drive customer traffic complicated McDonald’s menu, confused consumers and slowed down service

- First Quarter 2014 results disappointed shareholders and financial markets with net income down by 5% versus the same period in 2013 to $1,205 million

- Second Quarter 2014 net income fell almost 1 percent versus the same quarter in 2013 to $1,387 million . This result also disappointed most commentators as “established restaurants in McDonald’s struggling U.S. division turned in a third straight quarterly sales decline and results from Europe also logged a surprise drop” according to Reuters – see Annex 3.

- in its largest market - U.S.A - First Quarter 2014 same-store sales 1 decreased by 1.7% and Second Quarter same-store sales by 1.5% versus the same quarters in 2013. By the end of June 2014, same-store sales at USA restaurants had fallen every month since November 2013 compared to the same month a year ago – see Annex 4.

                                                                                                               1  Same- store sales are sales from outlets opened for 13 months or more and exclude sales from new stores opened within a year      

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- 400 protesters rallied outside McDonald’s headquarters during its Annual General Meeting (AGM) in May calling for a higher minimum wage for fast-food workers. Although McDonald’s barred the media from attending its AGM , reports of McDonald’s response to the questions on wages and other issues raised by shareholders attending the meeting emerged shortly afterwards – for example the article in the Financial Times shown at Annex 5.

- for the 20th year in a row, McDonald's ranked last in customer satisfaction in a national survey of patrons of 12 major fast-food chains published in June 2014 by the American Customer Satisfaction Index. The survey results are shown at Annex 6 and commentary in “USA Today” at Annex 7.

- at the end of July , a quarter of McDonald's restaurants in China had been hit by a scandal which saw a major supplier allegedly using rotten meat and Russia's main consumer watchdog filed a lawsuit in Moscow against McDonald's urging the restaurant chain to withdraw certain products saying that its inspectors in the city of Novgorod, western Russia, had found violations of food standards by McDonald's. – see Annex 8 .

Thompson considered these and other issues that he and his management team faced in mid 2014. He began by recalling the history of McDonald’s and its phenomenal growth. History 2 McDonald's history began in the California town of San Bernardino in 1940 when Richard and Maurice (Dick and Mac) McDonald opened up “McDonald's BBQ Restaurant”. The restaurant had twenty-five menu items, mostly barbeque and was a drive-in with carhops. 3

In October 1948, after the McDonald brothers realised that most of their sales came from a few specific items including hamburgers, they closed down their successful carhop drive-in to establish a streamlined system with a simple menu of just 9 items including hamburgers, cheeseburgers, french fries, milk shakes, soft drinks and apple pie. The carhops were eliminated to make McDonald's a self-service operation. The brothers took great care in setting up their kitchen like an assembly line to ensure maximum efficiency. They followed the pioneering work of the “White Castle” chain who were the first to standardise hamburger production. The restaurant's name was changed to simply "McDonald's" and reopened on 12 December 1948.

In 1952 the brothers decided they needed an entirely new building in order to achieve two goals: further efficiency improvements and a more eye-catching appearance. Working with a local architect, they achieved the extra efficiencies needed by, among other things, drawing the actual measurements of every piece of equipment in chalk on a tennis court behind the McDonald house. The design achieved a high level of noticeability thanks to gleaming surfaces of red and white ceramic tile, stainless steel, brightly coloured sheet metal, and glass; pulsing red, white, yellow, and green neon; and two 25-foot yellow sheet-metal separate arches trimmed in neon, called "golden arches" even at the design stage. A third, smaller arch sign at the roadside hosted a pudgy character in a chef's hat, known as Speedee, striding across the top, trimmed in animated neon. The combination of low prices and fast service was soon successful and popular with McDonald’s customers. The service system – now called “Speedee” – also was easy to replicate and resulted in a food or beverage product that was consistent from one location to the next. The brothers began seeking franchisees and the first franchises opened in 1953 in                                                                                                                2  Sources : www.aboutmcdonalds.com , www.articlesbase.com and Wikipedia 3  A carhop is a waiter or waitress who brings fast food to people in their cars at drive-in restaurants. Usually carhops work on foot but sometimes use roller skates  

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Phoenix, Arizona and Downey, California. In 1954, Ray Kroc, a seller of Multimixer milkshake machines, learned that the McDonald brothers were using eight of his machines in San Bernardino and went there to take a look at their restaurant. Believing the McDonalds' formula was a ticket to success, Kroc suggested they franchise their restaurants throughout the USA and offered to take the major responsibility for setting up the new franchises. He returned to his home outside of Chicago as McDonald’s nationwide franchising agent with rights to set up “McDonald's” restaurants throughout the country. The brothers were to receive one-half of one percent of gross sales. Kroc's first McDonald's restaurant opened on 15 April 1955 in Des Plaines, Illinois, near Chicago and incorporated his company as McDonald's Systems, Inc. He later renamed the company McDonald's Corporation in 1960. Once the Des Plaines restaurant had become operational, Kroc sought franchisees for his McDonald's chain. The next few years saw tremendous growth and by 1959 Kroc had opened the 100th franchise in McDonald's history. In 1960, the McDonald's advertising campaign "Look for the Golden Arches" gave sales a big boost. Kroc believed that advertising was an investment that would pay back many times over. A year later, Kroc bought out the shares of the McDonald brothers for $2.7 million. Also in 1961, Kroc launched a training program, later called “Hamburger University”, at a new restaurant in Elk Grove Village, Illinois. There, franchisees and operators were trained in the scientific methods of running a successful McDonald’s. Successful trainees were awarded “Bachelor of Hamburgerology” degrees. Hamburger University also had a research and development laboratory to develop new cooking, freezing, storing and serving methods. Kroc also launched a drive to ensure quality, service, cleanliness and value – “QSCV” – were achieved consistently across the entire chain of franchised restaurants. In 1962, McDonald's modified the design of its separate arches and fused the two together to resemble the letter “M”. The Golden Arches logo that would later become identifiable across the world had been born. The now globally recognized golden arches logo came into existence as an official logo in 1969. McDonald's success in the 1960s was in large part due to the company's skillful marketing and flexible response to customer demand. In 1963, for example, the Filet-O-Fish sandwich was introduced in Cincinnati, Ohio, in a restaurant located in a neighborhood dominated by Roman Catholics who practiced abstinence (the avoidance of meat) on Fridays. It was the first new addition to the original menu and went national the following year. Also in 1963, the company sold its billionth hamburger , opened its 500th restaurant and introduced Ronald McDonald, a red-haired clown designed to appeal to children. In 1965 – its 10th anniversary year – McDonald’s stock was first offered to the public at $22.50 a share . Shares traded at $30 by the end of its first day. Overseas expansion outside the USA started in 1967 when the first McDonald’s opened in Canada and Puerto Rico. A year later in 1968, the Big Mac was developed by franchisee Jim Delligatti of Pittsburgh and added to national menu, the Hot Apple Pie was introduced and the 1000th McDonald's restaurant opened. The early 1970s, McDonald’s first appeared in several overseas markets :

- The first Asian McDonald's opened in Tokyo Japan , the first European outlet opened in Zaandam (near Amsterdam) in the Netherlands , and the first McDonald's in Germany (Munich) opened all during 1971 . The Munich restaurant was the first McDonald's to sell alcohol- beer.

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- The first Australian McDonald's opened in Sydney and the first McDonald's in France opened , both in 1972.

By the end of 1972, McDonald’s had opened over 2000 restaurants and achieved $1 billion in sales across its total network. The company pioneered breakfast fast food with the introduction of the Egg McMuffin – first developed by a franchisee - also in 1972 when market research indicated that a quick breakfast would be welcomed by consumers. Five years later, in 1977, McDonald's added a full breakfast line to the menu, and by 1987 one-fourth of all breakfasts eaten out in the United States came from McDonald's restaurants. Other major changes and milestones occurred in the 1970s including :

- the Quarter Pounder was added to the menu in 1973 - the UK’s first McDonald’s opened in Woolwich, southeast London in 1974. It was the

company's 3000th restaurant. - McDonald's opened its first drive-thru window in Sierra Vista, Arizona in 1975. This

service followed an earlier launch of the concept by one of its competitors - Wendy's. The goal was to provide service in 50 seconds or less. Drive-thru (or “McDrive” in some countries) sales eventually accounted for more than half of McDonald's systemwide sales

- the first McDonald's opened in Hong Kong in 1975 - the 5000th McDonald's restaurant opened in Kanagawa, Japan and Hamburger

University celebrated the graduation of its 15,000th student in 1978 - the Happy Meal, a combination meal for children featuring a toy, was first introduced

in the U.S., the first McDonald's in Southeast Asia opened in Singapore and the first McDonald's in South America opened in Brazil all during 1979.

In the late 1970s, competition from other hamburger chains such as Burger King and Wendy's began to intensify. Experts believed that the fast-food industry had become as big as it ever would, so the companies began to battle fiercely for market share. A period of aggressive advertising campaigns and price slashing in the early 1980s became known as the "burger wars". Burger King suggested to customers: "have it your way"; Wendy's offered itself as the "fresh alternative" and asked of other restaurants, "Where's the beef?" But McDonald's sales and market share continued to grow.

During the 1980s, McDonald's further diversified its menu to suit changing consumer tastes. The company introduced the McChicken in 1980. It proved to be a sales disappointment and was replaced with series of different chicken sandwiches a year later. Chicken McNuggets were invented by McDonald's first Executive Chef Rene Arend in 1979. They were so good that every franchise wanted them. However, there wasn't a system to supply enough chicken products. The supply problem was solved in 1983, when the McNuggets were made available nationwide. By the end of 1983, McDonald's was the second largest retailer of chicken in the world.

Ray Kroc died in January 1984. The 1980s were the fastest-paced decade yet. Efficiency, combined with an expanded menu, continued to draw customers. McDonald's, already entrenched in the suburbs, began to focus on urban centers and introduced new architectural styles. Although McDonald's restaurants no longer looked identical, the company made sure food quality and service remained consistent. In 1985, ready-to-eat salads were introduced to lure more health-conscious consumers.

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Despite further claims by some that the fast-food market was saturated, McDonald's continued to expand. The first generation raised on restaurant food had grown up. Eating out had become a habit rather than a break in the routine, and McDonald's relentless marketing continued to improve sales. McDonald's growth in the United States was mirrored by its stunning growth abroad and by April 1988, the 10,000th unit opened. In the same year McDonald's opened its first restaurant in a communist country, in Belgrade, Yugoslavia (now Serbia) followed by another in Budapest, Hungary. The first Soviet McDonald's opened, in Moscow on 31 January 1990. At the time it was the largest McDonald's in the world. To overcome Soviet supply problems, however, the company created its own supply chain, including farms, within the USSR. The restaurant proved extremely popular, with waiting lines of several hours common in its early days. In the same year, many other McDonald's restaurants also opened in Eastern Europe and the first McDonald's opened in mainland China in the city of Shenzhen, Guangdong province. By the early 1990s the company had established itself in 58 foreign countries and operated more than 3,600 restaurants outside the United States through wholly owned subsidiaries, joint ventures and franchise agreements. Its strongest foreign markets were Japan, Canada, Germany, Great Britain, Australia, and France and by 1991, 37 percent of systemwide sales came from restaurants outside the United States. Much of the growth of the 1990s also came outside the United States, with international units increasing from about 3,600 in 1991 to more than 11,000 by 1998. This expansion included :

- the first McDonald's opening in Africa, in Casablanca, Morocco in 1992 - a new region added to the empire when the first McDonald's in the Middle East opened in Tel Aviv, Israel in 1993 and in December 1993 , McDonald's opened its golden arches in Saudi Arabia for the first time. - the first Indian McDonald's opening in 1996 - the first Pakistani McDonald's opening in Lahore immediately followed by a branch in Karachi in 1998

As the company entered new markets, it showed increasing flexibility with respect to local food preferences and customs. In Israel, for example, the first kosher McDonald's opened in a Jerusalem suburb in 1995. In Arab countries the restaurant chain used "Halal" menus, which complied with Islamic laws for food preparation and in India it offered a Big Mac made with lamb called the Maharaja Mac. It also introduced some new menu items and services in the 1990s primarily :

- the fried apple pie was replaced with a baked apple pie in 1992 - a coffee house style stand-alone outlet called McCafé was launched in Melbourne,

Australia by McDonald’s licensee Ann Brown in 1993. By 2002 the McCafé chain had spread to 13 countries worldwide. The first one in America was launched in 2001. By 2003 it was the largest coffee shop brand in Australia and New Zealand.

- a soft serve ice cream base dessert called the McFlurry was invented by a Canadian franchisee in 1997.

The company reached the 20,000-restaurant mark in mid-1996 and the number of countries with McDonald's outlets nearly doubled from 59 in 1991 to 114 in late 1998. In February 1998 the company took a stake in another fast-food chain for the first time when it purchased a minority interest in the 16-unit, Colorado-based Chipotle Mexican Grill chain.

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McDonald's followed up this investment with several more moves beyond the burger business. In March 1999 the company bought Aroma Café, a UK chain of 23 upscale coffee and sandwich shops. In July of that year McDonald's added Donatos Pizza, a midwestern USA chain of 143 pizzerias based in Columbus, Ohio. In May 2000, McDonald's completed its largest acquisition yet, buying the bankrupt Boston Market chain for $173.5 million in cash and debt. At the time, there were more than 850 Boston Market outlets which specialised in home-style meals with rotisserie chicken the lead menu item. McDonald's rounded out its acquisition spree in early 2001 by buying a 33 percent stake in Pret A Manger, an upscale urban-based chain specialising in ready-to-eat sandwiches made on the premises. There were more than 110 Pret shops in the United Kingdom and several more in New York City. Also during 2001, McDonald's sold off Aroma Café and took its McDonald's Japan affiliate public, selling a minority stake through an initial public offering. During the late 1990s, McDonald's had to contest its public image as a purveyor of fatty, unhealthy food. Consumers began filing lawsuits contending that years of eating at McDonald's had made them overweight. McDonald's responded by introducing low-calorie menu items and switching to a more healthy cooking oil for its french fries. McDonald's franchises overseas also became a favourite target of people and groups expressing anti-American and/or anti-globalisation.  For example, in August 1999 a group of protesters destroyed a half-built McDonald's restaurant in Millau, France. They claimed the attack was in protest against U.S. trade protectionism. McDonald's was also one of three multinational corporations (along with Starbucks Corporation and Nike, Inc.) whose outlets in Seattle were attacked in late 1999 by some of the more aggressive protesters against a World Trade Organisation meeting taking place there. In the early 2000s, McDonald's pulled out of several countries, including Bolivia and two Middle Eastern nations in part because of the negative regard with which the brand was held there. In November 2004, Jim Skinner who had been McDonald’s COO was appointed as CEO and established the “Plan to Win” initiative. This involved renovating existing stores and adding new healthier items to the menu such as salads, the snack wrap and the rollout of the McCafé brand of gourmet coffee. The strategy set out to deliver “faster, friendlier service, tastier food, a more appealing ambiance, better value and sharper marketing.” The chain also expanded in new emerging markets like China. McDonald’s announced in 2007 that it would focus on its core brand and began divesting itself of other chains it had acquired during the 1990s and early 2000s. It had already sold Donatos Pizza in December 2003. The company sold its majority stake and fully divested from Chipotle Mexican Grill in October 2006 and recorded net proceeds of over $800 million as a result. On 27 August 2007, McDonald's sold Boston Market to Sun Capital Partners and received proceeds of approximately $250 million . In 2008, McDonald’s 33% shareholding in Pret a Manger was acquired by Private equity firm Bridgepoint when they bought a majority stake in the sandwich bar chain. McDonald’s received cash proceeds of $229 million as a result. In 2008, McDonald’s launched its new design for its packaging – the most comprehensive in the brand’s history – and in 2010 introduced the McCafé range of fruit smoothies and frappes.

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The Fast Food Industry Fast food is the term given to food that is prepared and served very quickly. Typically, the term refers to food that is ready-made, on display and available for immediate consumption and sold in a restaurant or store in a pre-packaged form to be eaten on the premises or for take-out/take-away. The customer normally selects the food at the counter or brings the pre-prepared food on display to the counter, pays there and eats the product as finger food without using traditional cutlery. Common menu items at fast food outlets include fish and chips, sandwiches, pitas, hamburgers, fried chicken, french fries, onion rings, chicken nuggets, tacos, pizza, hot dogs and ice cream. Many fast food restaurants also offer "slower" foods like chilli, mashed potatoes and salads. Outlets may be fast food restaurants (also known as “quick service” restaurants), stands or kiosks which may provide no shelter or seating. Fast food restaurant chains have standardised foodstuffs shipped to each restaurant from central locations. Although fast food is often considered to have been first popularised in the 1950s in the United States - the term "fast food" was recognized in Webster’s dictionary by in 1951- its origins go back further in time. 4 The concept of ready-cooked food for sale is closely connected with urban development. In the Roman empire around the Mediterranean, cities had street stands that sold bread, sausages and wine and much of the empire’s urban population living in apartment blocks depended on food vendors for most of their meals. In the Middle Ages, large towns and major urban areas such as London and Paris supported numerous vendors that sold dishes such as pies, pasties, flans, waffles, wafers, pancakes and cooked meats. As in earlier Roman cities, many of these establishments catered to those who did not have the means or kitchen facilities to cook their own food including travellers. In post World War 2 USA, modern day fast food outlets became popular with consumers for several reasons:

- they delivered food to consumers at a very low cost through economies of scale in purchasing and producing food

- fast  food  was  attractive  to  someone  in  a  hurry  or  away  from  home - they  provided  a  break  from  the  routine  of  home  cooking - chains like McDonald's rapidly gained a reputation for their cleanliness and a child-

friendly atmosphere for families - they were more attractive than previous generation “greasy spoon” diners where the

quality of the food was often questionable and service lacking and full service restaurants that were expensive and impractical for families with children.

In other parts of the world, American and American-style fast food outlets have proved to be popular for their quality, customer service and novelty, even though they are often the targets of anger towards American foreign policy or globalization more generally. Many consumers nonetheless see them as symbols of the wealth, progress, and well-ordered openness of Western society and therefore become trendy attractions in many cities around the world, particularly among younger people with more varied tastes.

McDonald’s is a major competitor in the modern fast food market. Rather than only focussing on global fast food demand, however, McDonald’s defines its primary competition as all those companies in the “Informal Eating Out” segment of the food service market including : 5

- fast food (or quick-service) eating establishments •

                                                                                                               4  Source : Wikipedia 5  Source : McDonald’s 2013 annual return to US Security and Exchange Commission (SEC)

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- street stalls or kiosks • - cafés • - 100% home delivery/takeaway providers • - specialist coffee shops • - self-service cafeterias • - juice/smoothie bars •

+ casual dining full-service restaurants that serve moderately-priced food at a table in a casual atmosphere ( for example TGI Friday’s). Note : * = This group of 7 outlet types is often called “Limited service” restaurants . They do not offer a waiter/waitress service from a table. The Informal Eating Out segment excludes establishments that primarily serve alcohol and full-service restaurants other than casual dining. McDonald’s annual report adds that its restaurants compete with international, national, regional and local retailers of food products on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry. The broader “food service” or “catering” industry defines those businesses, institutions, and companies responsible for any meal prepared outside the home. This industry includes fast food restaurants, “full service” restaurants (which offer waiter/waitress service whilst seated at a table), school and hospital cafeterias, catering operations, hotel restaurants , motorway and railway eating places and pubs/bars that sell food. Food service to consumers excluding non institutional consumers such as those in schools or hospitals can be summarized as follows :

The global “Informal Eating Out” and restaurant industry market sizes and McDonald’s shares from 2008 to 2012 is estimated to have been as follows : 6                                                                                                                6  Source : McDonald’s annual returns to US SEC from 2009 to 2013 based on data from Euromonitor International  

Consumer  Foodservice  

Cafés/  Bars  

Full-­Service  Restaurants  

Fast  Food  100%  Home  Delivery/  Takeaway  

Self-­Service  Cafeterias  

Street  Stalls/  Kiosks  

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Informal Eating Out and Total Restaurant Industry - Global Market 2008 2009 2010 2011 2012 Informal Eating Out:

a) No. of Outlets - million

5.9 6.3 6.5 7.0 8.0

b) Annual Sales – $ billion

875 868 933 1050 1200

Memo: McDonald’s Systemwide Sales – $ billion 7

70.7 72.4 77.4 85.9 88.3

McDonald’s Systemwide Sales as Share of IEO market

8.1% 8.3% 8.3% 8.2% 7.7% 8

Total No. of McDonald’s Restaurants 9

31,967 32,478 32,737 33,510 34,480

Total Restaurant Industry: 10

a) No. of Outlets - million

12.6 13.1 13.7 14.8 16.0

b) Annual Sales – $ billion

1850 1790 1860 2110 2300

Memo: McDonald’s Systemwide Sales as Share of Total Restaurant Industry

3.8% 4.0% 4.2% 4.1% 3.8%

                                                                                                               7  McDonald’s “systemwide sales” are its global sales to consumers from all McDonald’s restaurants including from franchise restaurants . 8  McDonald’s 7.7% share of IEO market in 2012 assumes market size of $1150 billion - rounded up by Euromonitor to $1200 billion 9  McDonald’s restaurant numbers are at year end 10  The “Total Restaurant industry” includes full service restaurants

 

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The growth in McDonald’s systemwide sales from 2008 to 2013 subdivided by McDonald’s geographical reporting regions is shown at Annex 9.    According to Euromonitor . McDonald’s was ranked first in terms of share of the global consumer foodservice market by value in 2012, with double the market share of Yum! Brands 11 and almost 5 times the share achieved by Subway – see Annex 10. Global and Regional Market Sizes and Growth Prospects According to Euromonitor, the global fast food market was valued at about $600 billion in 2012. North America was the largest continental market for fast food in 2012 with a market size of around $220 billion, followed by Asia Pacific with a market size of about $200 billion followed by Western Europe with a market size of about $75 billion - see Annex 11.

Accompanying the United Nations’ forecast growth in the world's population from 7.2 billion in 2013 to 8.2 billion by about 2025, global fast food sales are predicted to increase by over $120 billion between 2012 and 2017, with growth heavily concentrated in Asia Pacific (44%), North America (29%), and Latin America (14%) – see Annex 11. Most of the growth in Asia Pacific is forecast to come from China.The number of outlets is forecast to continue to increase to serve the growing global population. a) USA Market The USA has the largest restaurant and fast food market in the world . Restaurant industry sales have grown since 1970 and are forecast to reach $683 billion in 2014 as follows : 12

 1970 1980 1990 2000 2010 2014 $43 bn. $120 bn. $239 bn. $379 bn. $587 bn. $ 683 bn.

The growth from 2009 to 2014 is shown at Annex 12. The total restaurant sales forecast for 2014 – up 3.6% from 2013- is subdivided as follows:

($ billion)

Eating Places $455.9

Bars and Taverns 20.0

Managed Services 47.1

Lodging Place Restaurants 34.8

Retail, Vending, Recreation, Mobile 66.4

Total Commercial 624.3

Non Commercial Restaurant Services 56.6

Military Restaurant Sales 2.5

Total US Restaurant Industry $683.4

                                                                                                               11 Yum! Brands is the parent corporation of Pizza Hut, Kentucky Fried Chicken and Taco Bell 12  Source : USA National Restaurant Association 2014 Pocket Fact Book and forecast May 2014  

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“Eating places” include tableservice restaurants and quick service restaurants, cafeterias and buffets, social caterers, and snack and non alcoholic beverage bars. Within this total $456 billion forecast for “Eating Places”, fast-food (or quick service) restaurant sales are expected to reach about $194 billion in 2014 - up 3 % from $188 billion in 2013 and from $180 billion in 2012. The total "limited-service" sector which includes fast food, snack bars, cafeterias and buffets is projected to achieve sales of about $235 billion in 2014 – up 4.4 % from $225 billion in 2013. 13

Based on these estimates, McDonald’s US system wide sales of $35.6 billion in 2012 were equivalent to a market share of 19.8% of the US fast food market in 2012 and its system wide sales of $35.8 billion in 2013 to a US fast food market share of 19.0%. The growth in McDonald’s total sales in the USA from 2009 to 2013 are shown at Annex 12.

McDonald’s currently dominates the USA fast food market with sales in 2012 almost 3 times that of its nearest competitor – Subway – and over 4 times the sales of its nearest burger based competitors Wendy’s and Burger King – see Annex 13.

The fastest growing segment of the Limited Service market, however, is the “Fast Casual” restaurant category positioned somewhere between fast food restaurants and casual dining restaurants and defined as limited-service restaurants where :

- the food is innovative, suited to sophisticated tastes and is prepared to order with fresh (or perceived as fresh) ingredients

- the interior is more upscale than a typical fast food establishment - the average check ( or “bill”) of between $7 and $10 is about 50% higher than at a

typical quick service restaurant of less than $7.

According to consultancy NPD Group, guest check sizes at fast casual restaurants were $7.40 on average in 2013 - higher than the average quick service restaurant visit check of $5.30, but still much lower than the average full service restaurant visit check of $13.66. 14 The Fast Casual sub segment was estimated to be valued at about $31 billion in 2013 – 14% of the total limited service market of $225 billion and is forecast to achieve sales growth rates of about 10% a year for each of the next 4 years - much faster rate than the overall limited service segment sales grow rates of about 4 % a year. 15 A June 2014 article in Forbes magazine summarises the prospects for the Fast Casual chains – see Annex 14. McDonald’s sold its shareholding in one of the major chains in this fast casual sub segment - Chipotle’s Mexican Grill – in 2006.

Other trends forecast for 2014 in the USA fast food market are summarised at Annex 15.

The top challenges expected by Limited Service Operators in the US market in 2014 are summarized at Annex 16.

b) Asia Pacific Market

China has the largest consumer food service market in the Asia Pacific region with total sales of around $450 billion in 2012 – up from about $250 billion in 2007 and forecast to grow by

                                                                                                               13  Estimate based on data from National Restaurant Association and www.finance.yahoo.com “The Exchange” 12 July 2013  14  Source : NPD Group 5 February 2014 15  Source : Technomic 18 July 2013

 

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about $165 billion from 2012 to 2017, $24 billion of which will come from chains. The market is dominated by independent operators - see Annex 17. The fast food segment is forecast to grow by about $40 billion between 2012 and 2017 with about 75% of the growth again coming from independents. At the end of 2013, McDonald’s had 2194 restaurants in China including Hong Kong – an 80% increase from 2008. In 2012, McDonald’s sales in China totalled about $2.5 billion –30% of the $8.5 billion sales estimated to have been achieved by Yum! Brands in that same year in China. At the end of 2012 and early in 2013 , however, Yum! Brand’s Kentucky Fried Chicken (KFC) faced a steady stream of food quality scandals, the worst of which involved high levels of antibiotics in its chicken supply and resulted in a sharp decline in sales. The KFC brand has also struggled to maintain its positioning in recent years, as extreme localisation has caused some erosion to its Western allure. The Japanese food service market also is large and was estimated to be valued at $361 billion in 2012 – up 1.8% from 2011. 16 The segmentation of the market is shown at Annex 18 . McDonald’s competes in the “Other restaurants” sub segment valued at $16.2 billion in 2012 and forecast to grow by about 1% per annum to 2017. With systemwide sales totalling $6.5 billion in 2012, McDonald’s achieved a 40% share of this “Other restaurant” category. In 2013, the corporation reported sales declines - continuing the downward trend of the previous 5 years - and halving of its operating profit - see Annex 18. McDonald’s Japan is a joint venture company jointly owned by McDonald’s Corporation and a local Japanese partner – each having a 50% share of the equity.

India also has a large food service market with total sales of around $90 billion in 2012 – up from about $55 billion in 2007. The fast food segment is forecast to grow by about $2.5 billion between 2012 and 2017 with most of the growth forecast to come from independent operators – see Annex 19.

Growth prospects for other key markets in South East Asia are shown at Annex 20.

According to Euromonitor. McDonald’s steadily lost market share in the all-important Asia Pacific region in the period to 2012.

c) European Market

According to Euromonitor :

- the western European markets with the highest growth prospects by value are France, forecast to grow by over $5 billion between 2012 – 2017, Turkey forecast to grow by about $2.5 billion and Italy forecast to grow by over $1 billion between 2012-2017 . See Annex 21.

- Market sizes in 2012 were :

- Germany valued at €11 billion - France valued at €10 billion - UK valued at £13 billion

- McDonald’s, increased its share of the Western European fast food market from 24% to 27% between 2007 and 2012

- In Russia , fast food was the fastest growing channel in current value terms within Russian consumer foodservice in 2012. In the aftermath of the financial crisis. fast food posted 19%

                                                                                                               16  Sources : “Japan Food Service” published by US Department of Agriculture December 2013 and forecast growth to 2017 by Euromonitor International December 2013

 

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current value growth to reach RUB293 billion in 2012 and is forecast to grow by 8% Compound Annual Growth Rate (CAGR) in constant value terms from 2012 to 2017.

McDonald’s Marketing Product Menu Over the years, McDonald’s has increased the breadth of its menu and now offers an extensive range in most of its restaurants. In its US restaurants , for example, customers typically are offered a choice of hamburgers, cheeseburgers, chicken burgers and McNuggets , Filet-O-Fish, wraps with various fillings (McWraps), salads, breakfast items such as Egg McMuffin, French fries, a choice of coffees ( under the McCafé brand), milk shakes, smoothies, frappés , desserts including a baked apple pie and McFlurries and soft drinks including tea, mineral water, orange juice and carbonated drinks eg Coca Cola. The total number of menu items offered across its US outlets was 331 in 2013 – up 28% from 2010 . See Annex 22 for details. Some menu items , however , have been developed and tailored to suit local geographical or religious needs and are offered only in these local markets. In India, for example, McDonald’s offers vegetarian options to suit the large population of vegetarians and a Big Mac made with lamb called the Maharaja Mac. In Japan, McDonald’s offer a Teriyaki Burger. Following pressure from various consumer and government bodies , McDonald’s now provides information on the calories in its products at its restaurants . It has taken other initiatives as part of its commitment to improve nutritional advice and choice to its customers for example :

- since March 2012, McDonald’s Happy Meals have automatically included apple slices

- its menu now includes more recommended food groups, such as vegetables and whole grain

- in September 2013, McDonald’s partnered with the alliance for a Healthier Generation on a Clinton Global Initiative commitment to increase customers’ access to vegetables and fruit and to help families and children to make informed choices in keeping with a balanced lifestyle in 20 major markets around the world.

McDonald’s USA now publishes an annual “Nutritional Journey” report that describes its progress in achieving its nutritional goals and targets. In terms of customer services, it has been recently reported that 15 McDonald’s restaurants in Hong Kong now offer the chance to get married in their fast food outlet, muscling in on the more traditional territory of churches, register offices and town halls. There is even a website advertising the numerous available packages. 17

McDonald’s now has McCafés in many countries around the world . Some are dedicated stand-alone outlets and others are separate counter areas in existing restaurants. The McCafé format which offers offer high-margin speciality coffee and espresso-based drinks eg lattes, plus smoothies, frappés and desserts, has played an integral role in helping McDonald’s compete for specialist coffee shop demand which is forecast to grow globally – see Annex

                                                                                                               17  Source : The Guardian 14 July 2014  

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23. In some markets eg UK, there are no separate McCafé counters or outlets and the McCafé branded range of products are sold over the normal McDonald’s counters. McDonald’s has announced that it plans to open a further 150 McCafés in Europe during 2014. Whilst some of McDonald’s menu items have been developed by franchisees as discussed earlier, McDonald’s have a team of chefs who undertake product development. McDonald’s first Executive Chef - Rene Arend - was hand-picked by Ray Kroc in the late 1970s and helped create the McRib Sandwich and the Chicken McNuggets. The current product development team is headed by Dan Coudreaut who is McDonald’s Executive Chef and Vice President, Culinary Innovation. Chef Dan joined McDonald’s in August of 2004 after graduating top of his class from the Culinary Institute of America and gaining extensive in prestigious restaurants in the USA. In a recent interview , Coudreaut describes his role “My key responsibility is to help the creative team of chefs create and develop new menus for McDonald’s US restaurants. We brainstorm and test hundreds of menu items each month at our test kitchen. It’s fun, it’s very free flowing, and it’s all about innovation, creativity and teamwork. I’m charged with making sure the products we have are on trend: bold, flavourful and exciting. In my kitchen, no idea is a bad idea. There’s nothing stopping us from trying any ingredient from papaya to pretzels”. Commenting on the lead time to take a menu item to get from the test kitchen into the restaurants he said “The menu process can be very long, but it depends on the product. The Snack Wrap was fairly fast, because we used ingredients already in the restaurant. The introduction was pretty streamlined , it took about a year from idea to restaurant implementation, and was a big success”. Advertising McDonald's advertises extensively and regularly. In addition to its use of television (its primary form of advertising), radio, and newspaper adverts, the company makes significant use of billboards and signage and co-sponsors sporting events ranging the Olympic Games to the 2014 football world cup in Brazil. In late 2012, McDonald's signed a multi-year deal to become the official restaurant sponsor of the National Football League (American football). According to Ad Age, McDonald’s advertising expenditure in the USA market and worldwide was as follows in 2011 and 2012 ($ millions) :

2011 2012 USA Market:

Total Ad Spending (measured media plus unmeasured)

1367 1424

Measured-Media Ad Spending

965 957

Worldwide measured-media ad spending

2656 2693

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According to Statistica, McDonald’s total advertising spend in the USA market in earlier years was $1.2 billion in 2009, $1.3 billion in 2010 and $1.43 billion in its last financial year 2013. Definitions of “measured” and “unmeasured” advertising are shown in note 18 below. 18 McDonald’s $2.7 billion spend in 2012 made the corporation the 9th largest advertiser in the world according to Ad Age. In common with most fast food restaurant, McDonald’s aim some of their advertising directly at children and students. From 2003 to 2012. McDonald’s remained the top advertiser to children under 12 in the USA –see Annex 24.    Promotions Like  its  advertising,  McDonald's also aims many of its promotions at children for example its Happy Meals, which include a toy often tied in with a newly released family film. Ronald McDonald, a clown-like advertising mascot introduced in 1963 also was designed to appeal to young children. Additionally, from 1996 to 2006, Disney was an exclusive partner with McDonald's, linking their products together. They announced the end of this deal in May 2006, with some reports saying that Disney was worried about childhood obesity. Global Customer and Restaurant Numbers and Average Sales per Customer 2008 – 2013 McDonald’s has enjoyed a major growth in customer numbers, restaurant numbers and maintained sales value per customer in real terms from 2008 to 2013 as follows – selected years only 19 2008 2010 2011 2013 Average no. of customer per day (million)

58 64 68 70

Average sales per customer

$3.33 $3.31 $3.46 $3.48

Total restaurants 31,967 32,737 33,510 35,429 The average number of customers per day have grown from 47 million in 2003 to 70 million in 2013 – an almost 50% increase over the 10 year period. The change in restaurant numbers from 2008 to 2013 is shown by region at Annex 25 and by major country at Annex 26. According to Bloomberg, Subway overtook McDonald’s in 2011 as the world’s largest fast food chain in terms of number of outlets and by mid 2013 had over 40,000 restaurants. Yum! Brands also expanded to over 40,000 outlets during 2013.

                                                                                                               18  Total U.S. ad spending is measured-media ad spending (from WPP’s Kantar Media) plus unmeasured spending (estimated by Ad Age). Measured spending includes TV, newspaper, magazine, radio, outdoor and internet (display advertising but excluding paid search, video and other forms of internet advertising). Unmeasured spending figures are Ad Age DataCenter estimates including direct marketing, promotion, internet paid search, internet video, social media and other forms of spending not included in measured media. Source : Ad Age 2014 Market Facts 19  Source : McDonald’s annual reports

 

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Operations McDonald’s restaurants produce and serve food and beverages based on an updated form of the production-line systems first developed in the 1950s. Achieving consistency in taste, service standards, hygiene and quality has remained a fundamental part of its system wide operating system since Ray Kroc first introduced his famous drive for quality, service, cleanliness and value (QSCV) at McDonald’s restaurants over 60 years ago. The QSCV slogan remains a driving force at McDonald’s to this day. It has been reported that McDonald’s carried out its world-first trial of plates, cutlery and tableservice in an outlet in Warilla, New South Wales, Australia in 2013. 20 Franchising 21 Franchising is the core of McDonald’s expansion strategy in developed markets. Its franchising system is unique in that the company owns, or secures long-term leases for, both the building and the land upon which franchised units are located. This helps McDonald’s maintain long- term occupancy rights, mitigate related costs and maintain appropriate control over its network. Finding and acquiring suitable sites has been a key competence at McDonald’s over many years and most of its restaurants in city centres are in prime sites with high pedestrian flows. Conventional franchise arrangements generally include a lease and a license and provide for payment of initial fees, as well as continuing rent and royalties to the Company based upon a percent of sales with minimum rent payments that parallel the Company’s underlying leases and escalations (on properties that are leased). Under this arrangement, franchisees are granted the right to operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of 20 years. These franchisees pay related occupancy costs including property taxes, insurance and maintenance. Affiliates and developmental licensees operating under license agreements pay a royalty to the Company based upon a percent of sales, and may pay initial fees. Franchising practices are generally consistent throughout the world. Over 70% of franchised restaurants operate under conventional franchise arrangements. Details of McDonald’s franchise income from 2011 to 2013 is shown at Annex 27. Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. While the Company has no capital invested, it receives a royalty based on a percent of sales, as well as initial fees. The largest of these developmental license arrangements operates nearly 2,100 restaurants across 19 countries in Latin America and the Caribbean. The Company has an equity investment in a limited number of foreign affiliated markets, referred to as "affiliates." The largest of these affiliates is Japan, where there are nearly 3,200 restaurants. The Company receives a royalty based on a percent of sales in these markets and records its share of net results in Equity in earnings of unconsolidated affiliates. Since 2008, McDonald’s has been implementing a refranchising strategy that focuses on optimising profits. At the end of 2013, 81% of system-wide outlets were franchise-operated, up from 78% in 2006 – see Annex 28. Despite moving towards a heavily franchised model,                                                                                                                20  Source : Euromonitor Oct 2013 21  Sources : Euromonitor report October 2013 and McDonald’s 2013 annual report

 

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McDonald’s says it will never adopt a 100%-franchised model like rival Subway. Company-operated outlets are an integral part of its business, used for developing operating standards, marketing concepts, products, and pricing. McDonald’s also relies more heavily on company-operated outlets in emerging markets. For example, in China only six outlets were franchised as of 2011. The company, however, entered into a developmental licence agreement with Kunming North Star Group in August 2011, which should result in a more rapid increase in franchise outlets in the market. Ever since Hambuger University was created, training of franchisees there and at regional or national centres has been a fundamental ingredient of McDonald’s success. McDonald’s says to its potential franchisees “Our franchising system is built on the premise that McDonald’s can be successful only if our Owner/Operators are successful. We believe in a partnering relationship with our Owner/Operators, Suppliers and Employees. This relationship begins with world class training. Our training program is the best in the industry. You will become an operational expert focused on providing an outstanding experience for our customers every day.” The training consists of an extensive 9-18 month programme conducted by McDonald’s training professionals at a local McDonald’s restaurant or in their training centres. McDonald’s has an Operations Manual of over 700 pages . It contains precise instructions on how a McDonald’s restaurant should operate including how each item of kitchen equipment should be used, how each item on the menu should look and how “crew members” should greet customers. Operators who disobey these rules can lose their franchises. 22 In 2013, McDonald’s had to contend with vociferous complaints from some franchisees in the USA regarding its franchise fees – see Annex 29. Supplier Network 23 McDonald’s relies heavily on a network of suppliers for both food and packaging. Supplies and services are distributed to McDonald’s restaurants by independently owned and operated distribution centres. Suppliers often vary by country; for example, Groupe Holder, owner of fast food bakery retailer Paul, is the key supplier of sweet bakery goods to McCafé in France, whereas FSB Foods supplies McDonald’s with bread products for all of its Brazilian stores. McDonald’s outlets use a standardised set of procedures to ensure the taste and quality of products remain consistent worldwide. US suppliers operate over 40 distribution centres and provide a diverse range of products and services, including baked goods, produce, training, development, chemical products and temp services. While McDonald’s has relationships with countless suppliers all over the world, the company notably maintains close, and long-standing, ties with its largest suppliers in major markets. Many of those suppliers grew with the company, and much of their current success is directly tied to their mutually beneficial relationship with McDonald’s. An example of one such long standing and mutually beneficial tie is McDonald’s relationship with Coca Cola which started in 1955 –see Annex 30. Acknowledging the fact that consumers have become more concerned about the provenance of food, in 2012 McDonald’s launched its “Meet our Suppliers” campaign to promote its                                                                                                                22  Source : Pages 69 and 70 of “Fast Food Nation”– The Dark Side of the American meal by Eric Schlosser published in 2001 23  Source : Euromonitor October 2013

 

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suppliers and make its supply chain more transparent. The company also has published “Supplier Stories” on its website with videos that show suppliers’ backgrounds and facilities. These personal stories are designed to create an emotional bond with suppliers, helping increase consumers’ trust in McDonald’s’ food. Where McDonald’s cannot find an adequate supplier network, it builds one. Before expanding to India, McDonald’s worked for seven years to build a supplier network and engineer a cold storage and distribution chain from scratch. The company trained local farmers to grow crops to its quality standards, pioneered new farming techniques tailored to local conditions and worked with distributors to develop new cold storage technology. This capability gives McDonald’s access to markets unreachable by competitors. To achieve consistent and high quality standards at all its restaurants, McDonald's has an extensive range of quality systems in place ranging from its food suppliers right though to restaurant preparation and service of food. The quality control services are a range of in-house systems and supplier led systems. Human Resources Management Structure McDonald’s President and Chief Executive Officer since July 2012 is Donald Thompson. He is 50 , has been with the company for 23 years and previously was McDonald’s Chief Operating Officer from January 2010 . He worked closely with his predecessor Jim Skinner to direct Plan to Win, including leading the expansion toward gourmet coffee. Before that he managed the chain’s US operations for four years. McDonald’s restaurant operations are managed and reported in its accounts as distinct geographic segments primarily the United States , Europe, and Asia/Pacific, Middle East and Africa ("APMEA"). Canada and Latin America , are managed separately and reported by McDonald’s in “Other Countries”. The U.S., Europe and APMEA segments accounted for 31%, 40% and 23% of total revenues, respectively in 2013. The United Kingdom ,France, Russia and Germany, collectively, accounted for 67% of Europe’s revenues; and China, Australia and Japan (a 50%-owned affiliate accounted for under the equity method), collectively, accounted for 54% of APMEA’s revenues. These seven markets along with the U.S. and Canada are referred to by McDonald’s as its “major markets” and comprise 75% of total revenues. McDonald’s corporate headquarters are in Oak Brook, Illinois, USA. Its European Headquarters covering 38 countries and managing over 7,600 restaurants are in Geneva, Switzerland. The move to Switzerland in 2009 attracted some adverse comments in the UK – see Annex 31. The Asia, Pacific, Middle East and Africa region covers 37 countries, managed almost 10,000 franchised and managed outlets at the end of 2013 and has its office in Singapore. McDonald’s senior management team – its Executive Officers – in 2013 is shown at Annex 32 . In March 2014, however, McDonald’s announced that its global Chief Operating Officer Tim Fenton, 56, had decided to retire effective 1 October 2014 . This resulted in a re-organisation of senior management responsibilities – see Annex 33. McDonald’s also experienced a series of unexpected retirements, resignations and departures

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in its senior executive team over the last few years : 24 - its President and COO, Michael Roberts resigned unexpectedly in August 2006 - his successor, Ralph Alvarez abruptly announced his retirement aged 55 in December

2009 citing health reasons - Jan Fields , McDonald’s USA President left abruptly in October 2012.

Board of Directors The Non – Executive chairman of McDonald’s Board of Directors is Andrew J. McKenna who has held that role since 2004. Other members of the board are shown at Annex 34. McKenna has been described in an article in Chicago Business as follows : 25 “He's the best I've ever seen at understanding the role of the board vis-à-vis the role of management,” says John Rogers Jr., chairman and CEO of Chicago's Ariel investments who's also on the board of McDonald's. Mr. McKenna's style earned him the nickname “St. Andrew of the Boardroom,” but his corporate governance cred isn't spotless. His paper company, Schwarz Supply Source Inc.(of which he is chairman) is a smallish McDonald's supplier, making him something less than totally independent. And he doesn't work cheap. He collected $1 million in cash and stock for his services at the fast-food giant last year. He's worth it, however. Mr. McKenna has most of what shareholders need in a chairman: an outsider's perspective, experience handling crises, ability to mobilize directors on tough decisions and an understanding of the chairman's oversight role. Besides, corporate governance experts agree it's better to separate the chairman's job from the CEO post.” McKenna’s remuneration in 2013 was over $1 million including $900,000 in stock options. Employees The number of employees worldwide, including company-operated restaurant employees, was approximately 440,000 as of year-end 2013. In total, 1.9 million people work for McDonald’s and its franchisees in 2014. 26 Restaurant employees – called Crew Members – are trained on the job and at local training centres by experienced crew trainers. McDonald’s has extensive and accredited training programmes to develop employees. Restaurant managers are trained at Hamburger University in the USA and its regional equivalents. Many crew members work part –time. McDonald’s UK received adverse publicity in August 2013, however, when The Guardian newspaper revealed that 90% of McDonalds UK workforce are on zero hour contracts, making it possibly the largest such private sector employer in the UK. Full time crew member benefits in the UK include 28 days paid holiday per annum, free private health care after three years service, membership of a stakeholder pension scheme, restaurant performance related bonuses and annual pay reviews. 27

                                                                                                               24  Sources : New York Times 23 August 2006 and Wall Street Journal 2 Dec. 2009  25  Source : chicagobusiness.com 26 March 2012 26  Sources : McDonald’s 2013 annual report and www.aboutmcdonalds.com  27  www.mcdonalds.co.uk “Recruitment and Training at McDonald’s”  

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Values McDonald’s values statement is shown at Annex 35. Financial Analysis A summary of McDonald’s financial highlights from 2008 to 2013 is shown below: 28    

                                                                                                                     28  Source : McDonald’s 2013 annual report  

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Details are shown in annexes as follows : - income statements from 2008 to 2013 at Annexes 36 and 37 - revenue, sales and customer visits from 2011 to 2013 at Annexes 38 and 39 - analysis by operating region at Annexes 40 and 41 - balance sheets from 2010 to 2013 at Annexes 42 and 43 - cash flow statements from 2008 to 2013 at Annexes 44 and 45 - capital expenditure from 2011 to 2013 at Annex 46.

McDonald’s First Quarter 2014 financial results are shown at Annexes 47 to 49, Second Quarter 2014 income statement at Annex 50 and First Half 2014 sales by region at Annex 51. McDonald’s share price dropped by $1.93 (or 1.98%) to $95.62 on the release of the disappointing second quarter 2014 results. Share Price McDonald’s share price closed at $95.82 on 29 July 2014. Details of McDonald’s share price changes in the 2 years to 29 July 2014 are shown at Annex 52. In May 2014, McDonald’s announced plans to return up to $20 billion in cash to investors through dividends and share buybacks by 2016 –see Annex 53. Strategy McDonald’s 2013 annual report describes its strategic direction as follows : “The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's 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. We continue to focus on our three global growth priorities of optimizing our menu, modernizing the customer experience, and broadening accessibility to Brand McDonald's within the framework of our Plan. Our initiatives support these priorities, and are executed with a focus on the Plan's five pillars - People, Products, Place, Price and Promotion - to enhance our customers' experience and build shareholder value over the long term. We believe these priorities align with our customers' evolving needs, and - combined with our competitive advantages of convenience, menu variety, geographic diversification and System alignment - will drive long-term sustainable growth. 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%; - ROIIC in the high teens.” 29

Thompson and his senior team have incentives of share options and bonuses in their contracts to achieve these and other targets. The 2013 annual report also describes McDonald’s outlook and priorities for 2014 – see Annex 54.

                                                                                                               29  ROIIC = Return on incremental invested capital  

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Key Issue – McDonald’s Future Is McDonald’s well placed to deal with the challenges and with the competition it faces now and in the future? What is the future likely to hold for The McDonald’s Corporation ? Continued growth and financial success and if so why and how? How golden are its Golden Arches ? Are the strategies currently being pursued likely to be successful ? If so why ? If you think not, what strategy or strategies would you recommend instead and if so why ?

 

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Annex 1

Why the McWrap Is So Important to McDonald's

 On 3 July 2013 , Bloomberg Business Week reported : "It’s a reality of the fast-food business that what can be ordered in a few words, served up in seconds, and consumed in minutes is often the product of years of research and testing. Consider McDonald’s Premium McWrap, launched on April 1 after a première worthy of a summer blockbuster. The McWrap is a 10-inch, white-flour tortilla wrapped around 3 ounces of chicken (grilled or “crispy”), lettuce, spring greens, sliced cucumbers, tomatoes, and cheddar jack cheese. On top is ranch, sweet chili, or creamy garlic dressing. You could easily make it at home without a recipe in about five minutes, varying it with whatever hasn’t rotted at the bottom of the veggie drawer. At McDonald’s, it took almost two years to perfect. Despite its simplicity, the McWrap is one of the most important additions to McDonald’s U.S. menu in years. It’s made to order. It has cucumbers, a new vegetable for McDonald’s. The McWrap is also a salvo in the Fresh Wars: a high-profile attempt to get the attention of customers who have turned to fresher, seemingly healthier offerings from competitors such as Five Guys, Chipotle and Subway. In late March, just days before the introduction of the McWrap, Advertising Age obtained an internal McDonald’s memo discussing the chain’s struggle to attract customers between the ages of 18 and 32. Noting that McDonald’s didn’t even rank in the millennial generation’s top 10 favourite restaurant chains, the memo went on to say, “McWrap offers us the perfect food offering to address the needs of this very important customer to McDonald’s.” The memo called the McWrap a “Subway buster.” When asked to elaborate, Elizabeth Campbell, senior director of marketing in the U.S., will only say, “We don’t think we have a problem with millennials, but we want to remain relevant to all of our customers.” Source : Bloomberg Business Week 3 July 2013

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Annex 2 Page 1 of 3

What’s Going On at McDonald’s? In December 2013, an article in Quick Service Restaurant magazine reported : “The last decade in quick service was a transformative one. Fast-casual restaurants moved from novel ideas in urban markets to competitive powerhouses with seemingly no ceiling. Health and nutrition became critical filters through which brands vetted their new menu items. And the Great Recession reset growth strategies, with limited-service players shifting their focus to more efficient, streamlined, and calculated expansion. If there was one sure bet in the last decade, it was McDonald’s. Year after year, the burger behemoth defied economic odds and kept ahead of consumer demand, surviving the recession with innovative product offerings and forward-thinking business acumen. U.S. sales grew from roughly $22 billion in 2004 to almost $36 billion in 2012 as the corporate team adjusted the company’s focus from rapid expansion to a maximized McDonald’s experience. But something happened in 2012. Or rather, two very distinct things happened in 2012: CEO Jim Skinner, the architect of McDonald’s early-2000s turnaround, retired in June of that year, replaced by the company’s chief operating officer and long-time brand veteran, Don Thompson. Then, in October 2012, the brand witnessed its first global monthly sales drop since 2003, a 1.8 percent month-over-month tumble that very likely cost McDonald’s USA president Jan Fields her job. Fast forward to 2013. Fresh off the sting of the October 2012 sales fall and with uncertainty surrounding the “Thompson era,” McDonald’s pinballed through an up-and-down year that included a spate of new menu offerings, moves toward evolving the company’s value and service platforms, and evidence that the competitive landscape may finally be catching up to the biggest quick-service brand in the world. “I’d say it’s sort of trying to get back on track,” says Andrew Barish, senior restaurant analyst at Jefferies & Company, a global securities and investment banking firm. “Not that the train jumped the tracks or anything. It’s just kind of starting to get a little wobbly. All of the initiatives of that past decade have kind of run their course, if you will, whether it’s beverages or better-for-you [items] or all of the product quality upgrades or McCafé, coffee, and the store remodels. “Part of the company’s challenge right now,” Barish adds, “is just a reflection of the success really going back to when the turnaround started for Brand McDonald’s in 2002 and 2003.” That turnaround was the highly praised Plan to Win, a Skinner-led strategy that included five core tenets, or “the Five P’s”: People, Products, Place, Price, and Promotion. Starting in 2003, McDonald’s set about divesting itself of the ancillary brands accumulated during the late-’90s boom (brands that included Chipotle, Donatos Pizza, and Boston Market), slowing down unit expansion, and doubling down on menu innovation and store upgrades. Despite the recession that crippled much of the foodservice industry, McDonald’s chugged along under the Plan to Win banner, churning out success after menu success, including snack wraps, smoothies, and the mega-popular McCafé beverage line. By 2012, however, things slowed; more consumers were paying attention to premium menu options and the nutritious makeup of fast food, and some critics and McDonald’s franchisees were complaining about the sheer size of the McDonald’s menu. Further, aside from Chicken McBites, the Extra Value Menu, and a Happy Meal refresh that cut the kids-meal fries portion size and added apples as the default side, McDonald’s menu innovation in the year and a half leading up to 2013 failed to drum up much widespread attention. “There is no doubt in anyone’s mind that in and around the period of time that Jim Skinner (Continued)

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Annex 2 Page 2 of 3 retired and handed off to Don Thompson, that for a variety of reasons, there was a new-product and concept-development hole, a blockage,” says John Gordon, principal with Pacific Management Consulting Group. Gordon believes the blockage could be attributed to a number of factors, including company politics and franchisee-franchisor relations, famously a roller coaster for McDonald’s, which is approximately 85 percent franchised in the U.S. If blockage was the case in 2012, then 2013 was nothing short of a surge in menu development news coming out of corporate headquarters. The cornerstone of McDonald’s strategic shift in 2013 was a new attitude toward its menu platforms, one that Elizabeth Campbell, McDonald’s USA’s senior director of menu innovation, says stemmed from the company’s intense evaluation of customer preferences. “What the consumers have been telling us that they want is they want us to stay true to who we are as a brand by providing them with good food—real, fresh food, food that they enjoy,” Campbell says. “They’ve also been telling us that they would like to have bold flavors that can go across either their beverages or their food, and that we can provide them with products they can eat any time of the day. So it really boils down to bold flavors and real, fresh food—that’s what they’re looking for from us.” A host of new products answered that call in 2013, starting with the January launch of the Fish McBites limited-time offering and rolling into April’s Premium McWrap and Egg White Delight, June’s new Quarter Pounder lineup, and September’s Mighty Wings LTO. A new smoothie, Blueberry Pomegranate, also made its way to the menu, as did a Pumpkin Spice Latte LTO in September. “We have seen a better year of new-product news,” Barish says. “Whether or not it’s moved the needle is up for debate, but when you have your four product categories with breakfast, chicken, beef, and beverages, you saw the Egg Whites in the breakfast daypart, you saw the new Quarter Pounder builds in hamburger beef, you saw Premium Chicken McWraps in the chicken category, and you saw some twists on beverages. So they’re trying to refill that pipeline.” The Premium McWrap, which has three iterations—Chicken & Bacon, Chicken & Ranch, and Sweet Chili Chicken—may hold the most significance to McDonald’s 2013 brand evolution, as the product involves a more complex build and more ingredients than most other items on the menu, going so far as to add cucumbers to McDonald’s mix for the first time. The McWrap also signals McDonald’s attempt to grab more market share from the Millennial demographic and to provide an alternative to sandwich chains like Subway. But what the Premium McWrap also represents is one end of a so-called “barbell strategy” that many traditional quick-service brands are adopting to compete in today’s marketplace, one in which companies offer both discounted and premium items. So far, McDonald’s has struggled to secure a reliable premium menu offering; Angus burgers were cut from the menu in May after underperforming, and Campbell says the McWrap line is a platform the company hopes to build upon. McDonald’s is also tinkering with the other end of the barbell strategy. The Dollar Menu has driven traffic since it debuted in 2002 as a means to rejuvenate lagging business, but the Extra Value Menu, which launched in 2012 as way to gain more market share over the long term and encourage guests to trade up from the $1 price point, has not been as successful. McDonald’s tested a new value menu, Dollar Menu & More, this year that featured items at $1, $2, and $5 price points, and at press the new menu was rumoured to be near a national roll out. Elizabeth Friend, a global foodservice analyst with market intelligence firm Euromonitor, says McDonald’s is attempting to drive traffic through value items while establishing an updated brand position and opportunity for higher check averages with the premium menu (Continued)

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Annex 2 Page 3 of 3 items. But she says the company’s main challenge is remaining profitable while relying so heavily on discounted products—something even more difficult today as the Affordable Care Act applies pressure on businesses and popular opinion pushes for better employee wages across the industry. “If anything has become clear in the last six months, it’s that this move toward trying to make everything premium, trying to be like the fast casuals, trying to be everything to everybody, is great in terms of branding, but when it comes down to it, I think customers made it clear that what they really want from McDonald’s is the Dollar Menu,” Friend says. “They really want the value, and they really want that everyday convenient value item.”

 

Source : QSR Magazine, December 2013

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Annex 3

McDonald's Second Quarter 2014 Profit Falls on Weak U.S. and European Sales

On 22 July 2014 Reuters reported : “Second Quarter 2014 profit at McDonald's Corporation fell more than expected after established restaurants in its struggling U.S. division turned in a third straight quarterly sales decline and results from Europe also logged a surprise drop. Weakness in the world's biggest hamburger chain's two top markets, coupled with its warning of a global fall in same-restaurant sales for July, also helped send McDonald's shares down 1.1 percent in early trading on Tuesday. McDonald's gets about 30 percent of its revenue from the United States, where sales at restaurants open at least 13 months fell 1.5 percent in the second quarter. Traffic remained depressed amid tough competition from a range of rivals, which include Wendy's Co, Burger King Worldwide Inc and privately held Chick-fil-A. Analysts had expected McDonald's U.S. comparable sales to fall just 0.3 percent, according to research firm Consensus Metrix. McDonald's results stood in sharp contrast to Chipotle Mexican Grill Inc, which on Monday reported a 17.3 percent jump in same-restaurant sales at its predominantly U.S. burrito restaurants. McDonald's said ongoing weakness in Germany was partly to blame for the 1 percent same-restaurant sales decline in Europe, which just beats the United States as the fast-food chain's top revenue market. Analysts had expected a gain of 0.7 percent, according to Consensus Metrix. The Asia-Pacific, Middle East and Africa (APMEA) region rose 1.1 percent. The results got a boost from China, which just recovered from food safety and bird flu scares but now is embroiled in a new controversy over a major supplier's meat handling methods. Still, the region's results were light compared with analysts' call for a rise of 1.5 percent. Second quarter net income fell almost 1 percent to $1.39 billion, or $1.40 per share, missing analysts' average profit estimate by 4 cents per share, according to Thomson Reuters. McDonald's shares were trading at $96.07 in late morning trading. The stock traded at all-time highs above $100 in May.” Source : Reuters , 22 July 2014

29  

Annex 4

 

McDonald’s Q2 2014 results also state that US same store sales in June 2014 decreased by 3.5 % versus June 2013.

 

30  

Annex 5  Minimum Wage Gets Minimal Attention at McDonald’s AGM      On 22 May 2014, the Financial Times reported : “Even as 400 protesters rallied outside McDonald’s headquarters for a higher minimum wage for fast-food workers, the chain’s pay policies generated little noise inside its annual shareholder meeting on Thursday. A day earlier, more than 100 people were arrested for trespassing after up to 1,500 protesters descended on McDonald’s suburban Chicago headquarters, calling for a $15-an-hour minimum wage and a union for fast-food workers. The rallies follow recent minimum wage protests across the country amid a growing national debate over income inequality, which President Barack Obama has called “the defining issue of our time”. But the company that has become the main target of those wishing to raise the minimum wage was asked just one question on the subject, couched in a theme that has come to dominate its recent shareholder meetings: McDonald’s contribution to childhood obesity.While the company spends billions on marketing “to hook more kids on junk food and increase executive compensation, many of your employees can barely make ends meet on poverty wages”, said Sriram Madhusoodanan, of Corporate Accountability International, a public health and human rights watchdog. Don Thompson, chief executive, offered data McDonald’s often provides to paint itself as a stepping stone to higher-paid jobs. Nearly 60 per cent of its employees are under the age of 24 in company owned-US restaurants and nearly 70 per cent are part-time workers, “many of whom are just starting out”.McDonald’s owns over 1,400 restaurants in the US, while about 12,000 are operated by franchisees.“Offering opportunity is a part of the McDonald’s heritage,” he said. Critics – including employees attending rallies against the company – contend that workers would like to work more hours, but are limited because the company does not want to offer the benefits full-time employment requires. According to a 2013 study by the pro-labour National Employment Law Project, US government programmes subsidise the incomes of about 700,000 McDonald’s employees. Addressing the protests, Mr Thompson said: “We respect the fact that they want to challenge us relative to wages,” but added: “We continue to believe that we pay fair and competitive wages and we provide opportunities and we provide training for those entering the workforce.” Mr Thompson denied charges by several shareholders that McDonald’s targets children with unhealthy food, and challenged comparisons of Ronald McDonald to Joe Camel, the cartoon cigarette mascot. “I sometimes hear . . . that we are predatory – as a parent, I wouldn’t do that,” he said. “We are people, we do have values at McDonald’s and all of us are parents.” He noted that his children were in the audience and that they ate McDonald’s and were healthy. Answering pre-screened questions, Mr Thompson fielded concerns that the meeting was held too early, praise from a man who started as an hourly worker and would soon become a franchisee, a request to expand the biscuits and gravy breakfast offering nationwide, and a question about whether bingo could be reinstated at the South Holland, Illinois branch. A child also praised the company for offering entry-level jobs, and told Mr Thompson that he wanted his job one day. McDonald’s barred media from attending the annual meeting, it said, “based on direct feedback from reporters and steadily declining media attention”. Source : Financial Times

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Annex 6  American Customer Satisfaction Index for Limited-Service Restaurants – June 2014

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 versus 2013 -

% Change All Others 78 80 79 80 83 76 81 82 82 84 2.4 Pizza Hut (Yum! Brands)

71 76 72 76 74 78 81 78 80 82 2.5

Papa John's

78 79 77 76 75 80 79 83 82 82 0.0

Limited-Service Restaurants

76 77 77 78 78 75 79 80 80 80 0.0

Little Caesar

74 77 75 75 75 78 80 82 82 80 -2.4

Domino's Pizza

71 75 75 75 77 77 77 77 81 80 -1.2

Wendy’s 75 76 78 73 76 77 77 78 79 78 -1.3 Subway NM NM NM NM NM NM NM 82 83 78 -6.0 Burger King

71 70 69 71 69 74 75 75 76 76 0.0

Starbucks NM 77 78 77 76 78 80 76 80 76 -5.0 Dunkin' Donuts

NM NM NM NM NM NM NM 79 80 75 -6.3

KFC (Yum! Brands)

69 70 71 70 69 75 75 75 81 74 -8.6

Taco Bell (Yum! Brands)

72 70 69 70 73 74 76 77 74 72 -2.7

McDonald's 62 63 64 69 70 67 72 73 73 71 -2.7 Notes : 1) Limited Service Restaurant are establishments whose patrons generally order or select items and pay before eating. Food and drink may be consumed on premises, taken out, or delivered to customers' locations. 2) The "All Others" score represents the remainder of the total industry market share, less the market shares of the ACSI-measured companies. It is an aggregate of a representative number of customer interviews from each of potentially hundreds of smaller companies within the industry Source : American Customer Satisfaction Index

 

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Annex 7  Not-so-Happy Meal: McDonald's Satisfaction Lags On 19 June 2014 USA Today reported : “McDonald's just can't climb out of the customer-satisfaction cellar. For the 20th year in a row, McDonald's ranks dead last in customer satisfaction in a national survey of patrons of 12 major fast-food chains by the American Customer Satisfaction Index. Papa John's and Pizza Hut tied for first place — where Papa John's has ranked for three consecutive years. Two other pizza chains, Domino's and Little Caesars, tied for third place. But after three years of better numbers, McDonald's customer satisfaction fell 2.7% from a year ago. The good news: McDonald's satisfaction is up nearly 13% from when the annual survey began 20 years ago. "McDonald's has gone from being way lower than the nearest competitor to within striking distance of the rest of the industry," says Forrest Morgeson, director of research at ACSI. "The bottom is not where you want to be, but at least they're getting closer to the thick of things." The survey of 4,572 customers, chosen at random and contacted via phone and e-mail, was done Jan. 13 to March 11. McDonald's says it takes the results seriously. "We always listen to our customers and appreciate hearing feedback from them ... as it helps us improve and evolve," said spokeswoman Lisa McComb in a statement. Why can't McDonald's break out? "With size comes a much more diverse group of customers," says Morgeson. "As your customers get more diverse, it gets more difficult to satisfy them all." Another reason: McDonald's biggest fans typically are kids, not the adults ages 18 and up in the survey, notes Morgeson. "Remember, it's often the kids who insist on going to McDonald's." Several other familiar chains took hits in the survey: • Subway. Satisfaction rankings slipped 6% to tie for fifth place with Wendy's. Consumers showed concern about pricing, says Morgeson. Subway declined to comment. • Starbucks. Satisfaction rankings fell 5% to a tie for seventh with Burger King. Customers are pleased with Starbucks' quality, but concerned about pricing, says Morgeson. "Serving our customers is our top priority, and we are always striving to exceed their expectations," said spokeswoman Linda Mills in a statement. • KFC. It took the biggest year-over-year fall in the 2014 survey — down 8.6%. Customers are disappointed in both quality and pricing. "When you drop that much, you have to pay attention," says Morgeson. KFC says it is. In April, it rolled out a new customer-service platform to gather more "meaningful and actionable feedback," said Jason Marker, general manager of KFC U.S., in a statement. “

Source : USA Today 19 June 2014

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Annex 8

1) A Quarter of McDonald's in China Affected by 'Rotten Meat' Scandal On 22 July 2014 , The Daily Telegraph reported : “A quarter of McDonald's restaurants in China have been hit by a scandal which saw a major supplier allegedly using rotten meat. Roughly 500 outlets across eastern China, in Jiangsu, Anhui and Zhejiang provinces and in the cities of Shanghai and Fuzhou, have been serving "a limited menu" for the past two days since the scandal broke, said Regina Hui, a McDonald's spokesman. "I can tell you what products we have been running out of," she said. "Pork, beef, chicken and lettuce." She added that the company has now changed suppliers and is hoping that the situation will improve from Wednesday. The scandal has also hit, to a lesser extent, Starbucks, Burger King, Papa John's and Yum Brands, the owners of KFC and Pizza Hut. All of the companies have apologised and said they have cut ties with Shanghai Husi, the meat processor responsible. On Sunday, an investigative report on Dragon TV, a local Shanghai station, showed workers in a factory run by Shanghai Husi, a unit of the American food supplier OSI Group, allegedly changing the expiry dates on old meat”. Source : telegraph.co.uk 22 July 2014

2) McDonald's in Russian Court Case over Standards

On 26 July 2014, the BBC reported : “Russia's main consumer watchdog has filed a lawsuit in Moscow against McDonald's, urging the restaurant chain to withdraw certain products. Rospotrebnadzor said its inspectors in the city of Novgorod, western Russia, had found violations of food standards by McDonald's. The US fast-food chain could not immediately be reached for comment. Cheeseburgers and Filet-o-Fish are among the foods named in the complaint. Russia is a major market for the firm. In early April McDonald's suspended work at its three Crimean restaurants, following Russia's annexation of the Ukrainian Black Sea peninsula. McDonald's operates about 400 restaurants in Russia. The first one opened in Moscow in 1990, and the burgers quickly became very popular among Russians. The court case comes at a low point in Russian-US relations, after Washington imposed sanctions on some top Russian officials and firms allegedly linked to the pro-Russian uprising in eastern Ukraine. Rospotrebnadzor's complaint alleges contamination of a McDonald's product tested in Novgorod and misleading nutritional information, Russian media report.” Source : bbc.co.uk/news 26 July 201

34  

Annex 9 McDonald’s Systemwide Sales by Geographical Region from 2008 to 2013

Dollars in millions 2008 2009 2010 2011 2012 2013 U.S. $29,987 $31,032 $32,395 $34,172 $35,593 $35,856 Europe 21,706 21,294 21,981 25,095 24,707 25,875 APMEA 12,555 13,585 15,670 18,102 19,073 18,184 Others 6,445 6,476 7,334 8,572 8,917 9,211 Total $70,693 $72,387 $77,380 $85,941 $88,290 $89,126

Notes : 1)APMEA is Asia Pacific, Middle East and Africa 2) “Others” are countries in Latin America + Canada Source : McDonald’s annual reports

35  

Annex 10  

Global Consumer Foodservice Shares and Rankings of Top Operators

Company 2008 2009 2010 2011 2012 % value share 2012

McDonald’s 1 1 1 1 1 3.4

Yum! Brands Inc 2 2 2 2 2 1.7

Doctor’s Associates Inc 6 5 3 3 3 0.7

Seven & I Holdings Co Ltd 5 4 4 4 4 0.7

Burger King Holdings Inc 3 3 5 5 5 0.6

Starbucks Corp 4 6 6 6 6 0.6

Wendy’s Co, The 7 7 0.4

Dunkin’ Brands Group Inc 10 8 8 8 8 0.3

Darden Restaurants Inc 8 10 9 9 9 0.3

Domino’s Pizza Inc 11 11 11 11 10 0.3

   Notes :

1) Yum! Brands is the parent company of Pizza Hut, Kentucky Fried Chicken and Taco Bell

2) Doctor’s Associates is the parent company of Subway

 Source : Euromonitor      

36  

Annex 11      

             

  Note : North America includes Canada which had fast food sales of around C$22 billion in 2012 per Euromonitor and is forecast to achieve a 1% Compound Annual Growth Rate (CAGR) to 2017              :                     Source : Euromonitor October 2013

37  

  Annex 12 USA Market - Total Restaurant Sales and McDonald’s Systemwide Sales (in billion U.S. dollars)

2009 2010 2011 2012 2013 2014

Total Restaurant Industry Sales

569.6 586.8 611.6 638.6 659.3 683.4

Memo :

McDonald’s Systemwide US sales

31.0 32.4 34.1 35.6 35.8

McDonald’s Market Share of Total US Restaurant Sales - %

5.5 5.5   5.6   5.6   5.4  

Source : Statistica.com June 2014

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Annex 13 Top 25 Quick Service and Fast Casual Restaurants in the USA - 2012

Rank

Company Name

2012 U.S. Systemwide Sales (Millions)

2012 U.S. Average Sales per Unit(000)

Number of Franchised Units in 2012

Number of Company Units in 2012

Total Units in 2012

Total Change in Units

from 2011

1 McDonald's $35,600.0 $2,600.0 12,605 1,552 14,157 59 2 Subway $12,100.0 $481.0 25,549 0 25,549 956

3 Starbucks $10,600.0 $1,223.0 4,262 6,866 11,128 341

4 Wendy's $8,600.0 $1,483.8 4,528 1,289 5,817 -34 5 Burger King $8,587.0 $1,195.0 7,000 183 7,183 -21 6 Taco Bell $7,478.0 $1,363.0 4,218 1,044 5,262 25

7 Dunkin' Donuts $6,264.2 $857.4 7,278 28 7,306 291

8 Pizza Hut $5,666.0 $883.0 5,757 452 6,209 156 9 Chick-fil-A $4,621.1 $3,157.9 1,391 292 1,683 77 10 KFC $4,459.0 $957.0 4,319 237 4,556 -162 11 Panera Bread $3,861.0 $2,427.2 843 809 1,652 111

12 Sonic Drive-In $3,790.7 $1,074.0 3,147 409 3,556 -5

13 Domino's Pizza $3,500.0 $710.2 4,540 388 4,928 21

14 Jack in the Box $3,084.9 $1,379.0 1,703 547 2,250 29

15 Arby's $2,992.0 $993.2 2,343 1,011 3,354 -83

16 Chipotle Mexican Grill

$2,731.2 $2,113.0 0 1,410 1,410 180

17 Papa John's $2,402.4 $829.0 2,483 648 3,131 130 18 Dairy Queen $2,300.0 $545.0 4,459 3 4,462 -23

19 Popeyes Louisiana Kitchen

$2,253.0 $1,242.0 1,634 45 1,679 69

20 Hardee's $1,900.0 $1,145.0 1,233 470 1,703 8

21 Panda Express $1,797.4 $1,237.0 47 1,486 1,533 119

22 Little Caesars $1,684.0 $465.0 3,175 550 3,725 207 23 Whataburger $1,476.8 $1,996.0 119 621 740 12 24 Carl's Jr. $1,400.0 $1,470.0 697 427 1,124 8 25 Jimmy John's $1,262.8 $878.8 1,534 26 1,560 229   Memo: Total Sales Of Top 50 $156.9 billion

Source : QSR Magazine August 2013

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Annex 14 Page 1 of 3 How The Fast Casual Segment Is Gaining Market Share In The Restaurant Industry On 23 June 2014 , the Forbes magazine Trefis Team reported : “Over the last decade, fast food restaurants or more technically, Quick Service Restaurants have grown at a much faster pace than any other restaurant segment in the industry. Best described by concepts such as McDonald’s, KFC and Burger King, they are characterized by fast food cuisines with average quality of food, minimal to no table service, limited menus and price of meals ranging from $3 to $6 per person. QSRs are typically part of a restaurant chain or franchise operations, with drive-thru outlets for most of these chains. On the other hand, fast casual restaurant is a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared and high quality food than traditional QSRs, all in an upscaled and inviting ambiance. However, they also have minimum table service but the typical cost per meal ranges from $8 to $15. Fast casual restaurants most often do not have drive-thru outlets. Brands such as Chipotle Mexican Grill, Panera Bread, Qdoba Mexican Grill and Baja Fresh are considered the top restaurants in this category. In modern QSRs, fast food is highly processed and prepared in bulk using standardized cooking procedures. McDonald’s has been leading the fast food restaurant category in terms of system-wide sales and total number of restaurants worldwide followed by Subway and Starbucks. In the fiscal year 2013, system-wide sales for the fast food giant rose 2% to reach nearly $28 billion and its total store count reached nearly 35,000 with 7,000 company operated restaurants. However, fast casual restaurants such as Chipotle Mexican Grill have started eating into the market share of these leading QSR chains for the last couple of years. According to Technomic’s 2014 Top 500 chain restaurant report, sales for fast casual chains grew by 11% and store count by 8% in 2013. Although Chipotle generated $3.2 billion in revenues in 2013, which in comparison to McDonald’s seems to be a much smaller figure, the revenue growth has been consistently at around 20% for Chipotle for 5 years now. The Quick service restaurants consider the growing fast casual segment a major threat due to following reasons: 1) Shift in Customer Traffic Big QSR brands such as McDonald’s, Subway and Starbucks have been facing a huge threat by the leading fast casual restaurants, as the traffic growth in the latter segment surpassed that of every other segment for the fifth consecutive year. According to the NPD group, the fast casual segment saw an 8% rise in the guest count in the 12 month period ended in November last year, whereas traffic count was flat for quick service restaurants. This consumer shift is primarily due to the fact that people with higher disposable income are inclined more towards quality and hygienic food, unlike less nutritioned junk food in most of the quick service outlets. Average customer count per company-operated restaurant annually at McDonald’s, the leading brand in QSR segment, has been diminishing by 1.3% for two consecutive years, whereas for a successful fast casual restaurant such as Chipotle, the average guest count has been rising by 5% and 2.3% in the last two years. ( Continued)

40  

 Annex 14 Page 2 of 3    Average Number of Visits per Restaurant per Year (000) 2009 2010 2011 2012 2013 2014 2015 Chipotle

161 164 172 181 184 193 200

McDonald’s Company Restaurants

674 714 741 730 721 732 741

Note : Data for McDonald’s is for number of customers However, McDonald’s shifted to healthier menu items with its new wraps but the products didn’t take off as per the company’s expectations. The company has been refocusing on its burgers and other value products, instead of providing wide variety of healthier eating options, causing health conscious customers to shift to fast casual brands with an added luxury of proper dining in an upscaled decor. 2) Higher Average Customer Spend Per Visit In leading fast food restaurants, price of meals ranges from $3 to $6 on an average, whereas in any casual dining restaurant, price of meals is no less than $13. Lying between the two segments is the fast casual segment where typical cost per meal ranges from $8 to $15. According to the NPD group, the fast-casual segment’s average ticket was $7.40 for the 12-month period ended last November, higher than the $5.30 for QSRs and well below casual dining’s average of $13.66. This range difference is due to the additional costs of high quality organic ingredients and flavors in the dishes and other conveniences such as non-plastic proper dining utensils and plates in a soothing ambiance. Average spend per customer per visit at a McDonald’s company-operated store has been rising for the last three years but at a very slow pace as the growth rate has dropped significantly. In 2013, the figure reached $3.88, up by mere 0.6% over the prior year. Average Spend Per Customer - $ 2009 2010 2011 2012 2013 2014 2015 Chipotle

10.50 11.0 11.40 11.50 11.56 12.0 12.30

McDonald’s Company Restaurants

3.66 3.56 3.84 3.86 3.88 3.92 3.95

Note : According to food services consultancy NPD, the average guest check size at US quick service restaurants was $5.30 in 2013 . At fast casual restaurants the average check size was $7.40 and the average full service restaurant check size was $13.66 in the same year. Source : NPD Group 5 February 2014 (Continued)

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Annex 14 Page 3 of 3 For Chipotle, the average customer spend per visit per restaurant in 2013 stood at $11.56, one of the highest in the fast casual segment, with a growth rate of 1% over the prior year. The average ticket per restaurant has been rising consistently for leading fast casual brands, due to commodity price fluctuations being passed on to the customers. The sector still maintains its traffic count indicating that people prefer quality and hygiene over a rise in item prices. During the great recession of 2008, fast casual segment saw a rise in sales from the 18-34 age group demographic. Customers with low discretionary meal spending tend to use it on healthier dining. Some of the leading fast food brands have taken initiatives which aim at adopting the traits of some of the successful fast casual upstarts, to defend their market share. From upgrading menu items to creating on-the-go options, from remodeling the stores to creating innovation hubs, top QSRs are doing everything to maintain their customer count and improving sales. McDonald’s have already planned system-wide customization of its outlets and its initiative to revamp its menu is already reaping profits. Trefis Analysis has already considered both the factors and expects the average spend per visit for McDonald’s to cross $4 in 2017 and to reach $4.15 in 2020. Chipotle is forecast to achieve an average customer spend of $13 in 2017 and $14 in 2020. Next few quarters would be very crucial for top fast food chains like McDonald’s, KFC and Subway, where the industry would be reacting to increasing commodity prices on one hand and changing consumer preferences on the other.”    Source : www.forbes.com Trefis Team 23 June 2014

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Annex 15

Page 1 of 3

 

Key US Fast Food Trends for 2014

A January 2014 article in QSR magazine reported :

“Experts agree that of the many trends expected to affect the US restaurant industry this year, these eight will leave the biggest impact on quick service :

1. Ingredient transparency People increasingly want to know about the ingredients and their origins in food. While that has been the case for a few years, 2014 should see the trend garner more mainstream attention. “Customers are more interested in what they’re eating and where it comes from,” says Annika Stensson, the NRA’s senior manager of research communications. “They want to know it’s being grown responsibly.” Many look for the origins of food, including the top two: locally sourced meats and seafood and locally grown produce. Other trends in the forecast involve sustainability and farm-branded items. Chipotle may be the model for discussing the provenance of its ingredients and providing local produce when possible, but there are many others taking similar steps. “Customers’ definition of value is fresh ingredients, quality food, and good-tasting food at reasonable prices. But fresh ingredients is No. 1” says Bonnie Riggs , restaurant analyst at consultancy NPD Group. “Customers want to see that the ingredients and the food are not just holding somewhere.” People are willing to pay a premium for better ingredients, which are increasingly available, says Andrew Freeman, who leads San Francisco hospitality-consulting firm Andrew Freeman & Co. 2. Bold flavours Some experts say Asian flavours will be the top new taste trend this year. Others point to cuisine based on Latin and South American cooking. There are also expectations that Mediterranean or regional American fare will be trendsetters. While there are good cases to be made for each, it seems the big trend behind all of them is Americans’ growing desire for new, exciting, and bold flavors, no matter their cultural origin. “Young people have grown up with various ethnic styles, but everyone is looking for new things.” 3. Stabilized food costs Climbing commodity costs shouldn’t hurt restaurants in 2014 as much as they did last year. SpenDifference, a purchasing cooperative for mid-sized chain restaurants, estimates food costs will rise 2 percent this year, a slight reduction from 2013. David Kincheloe, president of Denver-based National Restaurant Consultants, says that while many food costs are stabilizing, it will take a while for beef prices to stop hitting record highs. Beef prices continue to increase due to drought conditions the past two years that caused higher grain prices and forced ranchers to send their herds to market early, he says. Last fall, however, corn began a steep downward trend due to a record harvest. It will take a year to 18 months for beef prices to react to the lower grain prices, Kincheloe (Continued)

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Annex 15

Page 2 of 3

says. Corn prices should fall 20 percent this year, SpenDifference estimates, providing price relief for poultry and pork that require shorter growing times than beef. That should result in chefs looking for more creative uses for chicken and pork. 4. Tea as a drink and ingredient Tea’s time has come. With coffee firmly ensconced as America’s top hot-brewed beverage, some experts believe tea is on the cusp of being the next great drink and flavoring additive. “Tea is a naturally healthy beverage with none of the calories of fruit juices,” says Kazia Jankowski, a culinary consultant who helped create the annual trends list for Denver’s Sterling Rice Group, a brand strategy and communications firm. Jankowski expects tea will be an ingredient in more food items through various forms of cooking, such as tea-poached salmon or tea-smoked chicken. “I can see some of the leading fast casuals taking liberties with tea to bring a depth of flavor,” she says. But tea beverages will get most of the attention, says Michael Whiteman president of New York food and restaurant consulting company Baum + Whiteman, pointing to Starbucks’s acquisition of Teavana last year. 5. Mobile technology as the new norm Mobile technology, both for customers and for operators, will continue to open new doors in the quick-service industry. “Mobile is clearly at the top of our trend list and at the top of our research and development,” says Jon Lawrence, director of product marketing, hospitality, for NCR Corp., a global provider in consumer transaction technology. “We’re sort of at or approaching that line, where what was once new and exciting is now expected.” Increasingly, restaurants are giving consumers the ability to interact with the eateries, as well as order meals and pay via their smartphones. Starbucks, a leader in using mobile technology among limited-service companies, reported last year that its American mobile payments passed 10 percent of in-store purchases. Mobile devices also allow owners and managers to perform oversight functions and connect with employees without being tied to computers at their desks. The continuing adoption of smartphone technology could mean big changes for restaurants’ marketing and advertising, too. “More traditional things people have done in the past, like coupons and mainstream advertising, are going to be in dramatic decline,” Kincheloe says. “All that money will be focused into social media and developing a true relationship with guests.” 6. Better-for-you foods go mainstream Better-for-you menu options will continue to permeate the limited-service industry, and more brands will invest in health tweaks as the trend goes mainstream. “Health is an overriding issue for many trends,” Jankowski says. “Foods that play to an audience looking for natural, healthy options are going to do well.” She adds that the better-for-you movement will grow not just through healthy meals like salads, but also through ingredient tweaks that help improve the nutrition profile of existing items. For example, (Continued)

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Page 3 of 3

ingredients such as lemons can be used to brighten dishes instead of salt, she says. Of course, there is green to be made in serving greens, and the salad-centric niche in limited-service restaurants is growing, from sweetgreen on the East Coast to Tender Greens out west. “As better-for-you restaurant chains gain increasing traction,” Whiteman says, “it will become clear that their food concepts are no longer confined to health nuts.” Many quick-service restaurants already serve at least some healthy menu items and will continue adding more. 7. Flexibility in food and hours Snacks were big last year, and that should continue in 2014. But there’s an even a bigger trend now into which snacks fit: flexibility. Customers want breakfast, lunch, and dinner at various times in the day, experts say, and they’re also looking for smaller portions to tide them over until their larger meals. “It’s just an evolution of customization, and consumers want what they want when they want it,” Chapman says. “People get frustrated that they go into a restaurant shortly after 10 a.m. and they can’t get an egg muffin because the menu is now lunch.” McDonald’s is experimenting serving a few menu items from each daypart after midnight. Some restaurants are selling burgers all day. Others are offering items such as yogurt parfaits—originally meant for the morning daypart—anytime. Flexibility gives operators an ability to offer items that appeal to a wider range of consumers, such as those seeking gluten-free options. It could also help them participate in the better-for-you trend; NPD Group found this consumer trend to lead to an improved diet. 8. Sour and tart tastes Just as Americans’ taste for hot and spicy items continues to get hotter and spicier, their taste for sour and tart foods will continue along the same path. That means more pickled and fermented ingredients, Technomic’s Chapman says. “Consumers’ tastes are evolving, and they want more depth of flavor, kind of adding a sour note or a pickled tang,” she says. These ingredients have already found a place at prominent quick-serve brands. Panda Express uses gochujang, a fermented Korean condiment; LYFE Kitchen features a kimchi broth with its grilled barramundi; and Boloco offers pickled onions as a build-your-own burrito ingredient.” Source : QSR magazine special report by Barney Wolf January 2014

45  

Annex 16

Source : NRA 2014 Restaurant Industry Forecast for US market

Projected 2014 Limited-Service Sales Growth

Nominal Sales Growth Real (Inflation-adjusted) Sales Growth

Source: National Restaurant Association

Limited-Service Restaurants

4.4%

2.1%

5.0%

2.7%2.5%

0.1%

Cafeterias, Grill-Buffets, and Buffets

Snack and Nonalcoholic Beverage Bars

Better Than 2013 About the Same as 2013 Down From 2013

Source: National Restaurant Association, Restaurant Trends Survey, 2013

Quickservice Fast Casual

Limited-Service Sales in 2014 Limited-Service Profitability in 2014

Limited-Service Operators’ Outlook for Sales and Profitability in 2014

29%

62%

9%

40%

5%

55%

22%

38% 40%

50%

34%

16%

Quickservice Fast Casual

Limited-Service Operators Expect Legislative & Regulatory Issues to Pose Challenges in 2014Top challenges expected by limited-service operators in 2014

Fast Quickservice Casual

Health Care Reform 42% 9%

The Economy 17% 14%

Government 8% 16%

Building & Maintaining Sales Volume 5% 18%

Recruiting & Retaining Employees 6% 14%

Food Costs 5% 9%

Labor Costs 6% 5%

Minimum Wage Increase 5% 4%

Competition 0% 5%

Profitability 5% 0%

Source: National Restaurant Association, Restaurant Trends Survey, 2013

LIMITED-SERVICE TRENDS

TECHNOLOGY TRENDS

Smart(phone) Restaurant ActivitiesConsumers who say they would be likely to use a smartphone or tablet for restaurant-related activities

All Age Age Age Age Age adults 18-34 35-44 45-54 55-64 65+

Look up locations or directions 67% 88% 78% 63% 60% 31% 80%

Order takeout or delivery 52% 74% 62% 45% 39% 20% 67%

Use rewards or special deals 50% 70% 58% 47% 38% 21% 65%

Make a reservation 46% 59% 60% 38% 40% 22% 56%

Look up nutrition information 42% 55% 46% 38% 35% 23% 54%

Pay for your meal 24% 43% 22% 16% 16% 9% 32%

Source: National Restaurant Association, Technology Innovations Consumer Survey, 2013

Children under 18 in household

46  

Annex 17

 

   

 

 

   

Source : Euromonitor October 2013

© Euromonitor International PASSPORT 30 CONSUMER FOODSERVICE: MCDONALD’S CORP

! Despite slowing growth and various food safety scandals that have dampened performance, China remains the unequivocal growth centre of global foodservice. The market will add US$165 billion in value over 2012-2017, US$24 billion of which will come from chains. However, the market remains largely dominated by independent operators, and expansion into new lower-tier markets could lend access to untapped demand.

! McDonald’s’ largest challenge continues to be catching up with local leader Yum! Brands, while resisting the pitfalls that have lately hampered the competitor’s business.

McDonald’s must improve its China position, above all else… CATEGORY AND GEOGRAPHIC OPPORTUNITIES

© Euromonitor International PASSPORT 30 CONSUMER FOODSERVICE: MCDONALD’S CORP

! Despite slowing growth and various food safety scandals that have dampened performance, China remains the unequivocal growth centre of global foodservice. The market will add US$165 billion in value over 2012-2017, US$24 billion of which will come from chains. However, the market remains largely dominated by independent operators, and expansion into new lower-tier markets could lend access to untapped demand.

! McDonald’s’ largest challenge continues to be catching up with local leader Yum! Brands, while resisting the pitfalls that have lately hampered the competitor’s business.

McDonald’s must improve its China position, above all else… CATEGORY AND GEOGRAPHIC OPPORTUNITIES

47  

Annex 18 1) Japanese Food Service Market

The Japanese food service market is subdivided into

- restaurants (valued at $154 billion in 2012) - prepared meals taken away from retail stores such as 7-11 (valued at $74 billion) - drinking establishments ( $58 billion) - meals at institutions ($42 billion) - hotels ($31 billion) and transportation related food service ($3 billion).

Total value - $361 billion in 2012 The total restaurant segment valued at $154 billion is subdivided into

- general restaurants including family style restaurant, Japanese, western and Chinese style restaurants valued at $109 billion in 2012

- sushi shops ( $15.8 billion) - noodle shops ( $13.3 billion) - other restaurant types - hamburger chains, fried chicken restaurants, pizza shops,

donuts and ice cream shops, beef bowl and curry and rice restaurants. This “Other restaurants” sub segment was valued at $16.2 billion in 2012 and is forecast to grow by about 1% per annum to 2017.

Source : US Department of Agriculture report December 2013

2) McDonald's Japan 2013 Profit Halves as Sales Slide

On 6 February 2014 , Reuters reported : “McDonald's Holdings Co (Japan) said on Thursday its operating profit sank 53 percent in 2013 while it forecast sales this year would fall for a sixth consecutive year. The Japan arm of McDonald's Corp said operating profit for 2013 totalled 11.52 billion yen ($113.83 million) as revenue fell 11.6 percent to 260.44 billion yen. Sales fell 6.2 percent on a same-store basis, marking the biggest fall since 2002, when they dropped 11.8 percent, an official said. As part of strategic review of its network of restaurants, McDonald's Japan said it will close 74 outlets this year. It had 3,164 outlets as of end-December. For the year to Dec. 31, 2014, it forecast a 1.5 percent rise in operating profit to 11.7 billion yen, although revenues are seen falling 4.0 percent to 250 billion yen, for a sixth year in a row of declines.” Source : www.reuters.com

48  

Annex 19

Source : Euromonitor October 2013

© Euromonitor International PASSPORT 32 CONSUMER FOODSERVICE: MCDONALD’S CORP

India is also a priority, and McDonald’s has gained a firm foothold… CATEGORY AND GEOGRAPHIC OPPORTUNITIES

! India has become a central focus for McDonald’s and its competitors due to the market’s large youth population and still low penetration of major chains, even in comparison to other emerging markets. Half of the Indian population is 25 or younger, offering major opportunities for long-term growth in fast food and cafés/bars. The two formats are particularly appealing to Indian teens and young adults, who value their hygienic, affordable food, social atmosphere and “cool” branding.

! McDonald’s has fared better in India due to an early entrance, localised menu, and a 2-tiered pricing strategy, but competitors are rapidly gaining ground.

© Euromonitor International PASSPORT 32 CONSUMER FOODSERVICE: MCDONALD’S CORP

India is also a priority, and McDonald’s has gained a firm foothold… CATEGORY AND GEOGRAPHIC OPPORTUNITIES

! India has become a central focus for McDonald’s and its competitors due to the market’s large youth population and still low penetration of major chains, even in comparison to other emerging markets. Half of the Indian population is 25 or younger, offering major opportunities for long-term growth in fast food and cafés/bars. The two formats are particularly appealing to Indian teens and young adults, who value their hygienic, affordable food, social atmosphere and “cool” branding.

! McDonald’s has fared better in India due to an early entrance, localised menu, and a 2-tiered pricing strategy, but competitors are rapidly gaining ground.

49  

Annex 20

Source : Euromonitor

© Euromonitor International PASSPORT 34 CONSUMER FOODSERVICE: MCDONALD’S CORP

! Many of the markets in Southeast Asia have characteristics that are conducive to foodservice growth, such as high per capita spending on foodservice and large populations dominated by young people. Malaysia, Vietnam, and Indonesia all have median population ages of less than 30 years, and the median age in the Philippines is just 23. These young consumers are highly social and more open-minded towards new dining experiences, and can be won over with attractive outlets, affordable menus and convenience-based services such as delivery, drive-through and extended hours.

! McDonald’s has been focusing on the latter, in particular, adding such services to a greater number of outlets in the hopes of appealing to busy, young professionals. The company also announced in mid-2013 that it signed a deal with its first Vietnamese franchise partner, marking its first entrance into the market.

Elsewhere, Southeast Asia is a prime target in aggregate… CATEGORY AND GEOGRAPHIC OPPORTUNITIES

50  

Annex 21

Source : Euromonitor

© Euromonitor International PASSPORT 38 CONSUMER FOODSERVICE: MCDONALD’S CORP

! 25% of McDonald’s Corp’s global sales are currently attributed to Western Europe, and the market has proven to be continually challenging for operators due to low consumer confidence and ongoing economic weakness. McDonald’s continues to outperform the market, growing its share of fast food from 24% to 27% over 2007-2012, but ongoing weakness in the region will mean McDonald’s will have to work hard for every dollar of sales growth over the long term.

! This has necessitated a 2-pronged strategy in difficult markets: Boost traffic first; and encourage trading up to higher-margin items second. In France for example, McDonald’s launched a Petit Prix value menu in 2012 to drive traffic, then followed with a !2 Quarter Pounder to increase margins.

! More generally, McDonald’s is focusing region-wide on the breakfast daypart, everyday value core items, speciality beverages, and extended hours. McDonald’s is also working to continue its reimaging programme, targeting 100% of Europe interiors by 2015. These remodels will include the addition of more efficient order- taking systems through self-order kiosks, hand-held devices and double-laned drive-throughs.

Western Europe stutters and stalls, but McDonald’s outperforms CATEGORY AND GEOGRAPHIC OPPORTUNITIES

51  

Annex 22 Increase in the Number of Items on McDonald’s and Major Competitors’ Menus in the USA 2010 to 2013 Number of Menu Items per Restaurant

Source : Fast Food Facts 2013 ( published by Yale Rudd Center for Food Policy & Obesity in November 2013 )

52  

Annex 23

Source : Euromonitor October 2013

© Euromonitor International PASSPORT 26 CONSUMER FOODSERVICE: MCDONALD’S CORP

! High-margin speciality coffee- and espresso-based drinks are a major part of McDonald’s’ continuing growth strategy. Through its McCafé outlets, the company competes in specialist coffee shops in many markets, either through dedicated outlets or defined areas in existing stores. The McCafé format has played an integral role in helping McDonald’s compete for specialist coffee shop demand, the fastest-growing global category.

! While still a much smaller market worldwide than fast food, specialist coffee shops has much higher growth prospects in % CAGR terms. Latin America and Eastern Europe will both see growth of nearly 8% over 2012-2017, with the former adding up to an actual value gain of nearly US$800 million. This growth will come primarily from Mexico, where McCafé has a small but growing presence.

! It should also be noted that McCafé’s growth prospects are much larger than they appear. In the US, the UK and others, McCafé drinks are sold through regular McDonald’s outlets rather than through dedicated restaurants, helping to drive sales growth for the McDonald’s brands in some of its largest markets.

Prospects are strong in global specialists coffee shops MARKET ASSESSMENT

53  

Annex 24 Trends in Exposure to TV Advertising in USA by Restaurant and by Age Group

 

Source  :  Fast  Food  Facts  2013  taken  from  Nielsen  2008-­‐12  

54  

Annex 25

McDonald’s Total Restaurant Numbers from 2008 to 2013 by Operating Region

 

 

 

 

Source : McDonald’s annual reports

 

McDonald’s Corporation 2013 Annual Report | 19

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statements on a recurring basis (i.e., at least annually). TheCompany adopted the required provisions related to debt andderivatives as of January 1, 2008 and adopted the remainingrequired provisions for non-financial assets and liabilities as ofJanuary 1, 2009. The effect of adoption was not significant ineither period.

• Variable interest entities and consolidationIn June 2009, the FASB issued amendments to the guidance onvariable interest entities and consolidation, codified primarily inthe Consolidation Topic of the FASB ASC. This guidance modi-fies the method for determining whether an entity is a variableinterest entity as well as the methods permitted for determiningthe primary beneficiary of a variable interest entity. In addition,this guidance requires ongoing reassessments of whether acompany is the primary beneficiary of a variable interest entityand enhanced disclosures related to a company’s involvementwith a variable interest entity. The Company adopted this guid-ance as of January 1, 2010.

On an ongoing basis, the Company evaluates its businessrelationships such as those with franchisees, joint venture part-ners, developmental licensees, suppliers, and advertisingcooperatives to identify potential variable interest entities. Gen-erally, these businesses qualify for a scope exception under theconsolidation guidance. The Company has concluded that con-solidation of any such entities is not appropriate for the periodspresented. As a result, the adoption did not have any impact onthe Company’s consolidated financial statements.

Cash FlowsThe Company generates significant cash from its operations andhas substantial credit availability and capacity to fund operatingand discretionary spending such as capital expenditures, debtrepayments, dividends and share repurchases.

Cash provided by operations totaled $6.3 billion andexceeded capital expenditures by $4.2 billion in 2010, while cashprovided by operations totaled $5.8 billion and exceeded capitalexpenditures by $3.8 billion in 2009. In 2010, cash provided byoperations increased $591 million or 10% compared with 2009primarily due to increased operating results. In 2009, cash pro-vided by operations decreased $166 million or 3% comparedwith 2008 despite increased operating results, primarily due tohigher income tax payments, higher noncash income items andthe receipt of $143 million in 2008 related to the completion ofan IRS examination.

Cash used for investing activities totaled $2.1 billion in 2010,an increase of $401 million compared with 2009. This reflectshigher capital expenditures and lower proceeds from sales ofinvestments and restaurant businesses. Cash used for investingactivities totaled $1.7 billion in 2009, an increase of $31 millioncompared with 2008. This reflects lower proceeds from sales ofinvestments, restaurant businesses and property, offset by lowercapital expenditures, primarily in the U.S.

Cash used for financing activities totaled $3.7 billion in 2010,a decrease of $692 million compared with 2009, primarily due tohigher net debt issuances, higher proceeds from stock optionexercises and lower treasury stock purchases, partly offset by anincrease in the common stock dividend. Cash used for financingactivities totaled $4.4 billion in 2009, an increase of $307 millioncompared with 2008, primarily due to lower net debt issuances,an increase in the common stock dividend and lower proceedsfrom stock option exercises, partly offset by lower treasury stockpurchases.

As a result of the above activity, the Company’s cash andequivalents balance increased $591 million in 2010 to $2.4 bil-lion, compared with a decrease of $267 million in 2009. Inaddition to cash and equivalents on hand and cash provided byoperations, the Company can meet short-term funding needsthrough its continued access to commercial paper borrowingsand line of credit agreements.

RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES

In 2010, the Company opened 957 traditional restaurants and35 satellite restaurants (small, limited-menu restaurants for whichthe land and building are generally leased), and closed 406 tradi-tional restaurants and 327 satellite restaurants. Of theseclosures, there were over 400 in McDonald’s Japan due to thestrategic review of the market’s restaurant portfolio. In 2009, theCompany opened 824 traditional restaurants and 44 satelliterestaurants and closed 215 traditional restaurants and 142 satel-lite restaurants. The majority of restaurant openings and closingsoccurred in the major markets in both years. The Company closesrestaurants for a variety of reasons, such as existing sales andprofit performance or loss of real estate tenure.

Systemwide restaurants at year end(1)

2010 2009 2008U.S. 14,027 13,980 13,918Europe 6,969 6,785 6,628APMEA 8,424 8,488 8,255Other Countries & Corporate 3,317 3,225 3,166Total 32,737 32,478 31,967

(1) Includes satellite units at December 31, 2010, 2009 and 2008 as follows: U.S. –1,112, 1,155, 1,169; Europe–239, 241, 226; APMEA (primarily Japan)–1,010,1,263, 1,379; Other Countries & Corporate–470, 464, 447.

Approximately 65% of Company-operated restaurants andabout 80% of franchised restaurants were located in the majormarkets at the end of 2010. About 80% of the restaurants atyear-end 2010 were franchised.

Capital expenditures increased $183 million or 9% in 2010primarily due to higher investment in new restaurants. Capitalexpenditures decreased $184 million or 9% in 2009 primarilydue to fewer restaurant openings, lower reinvestment in existingrestaurants in the U.S. and the impact of foreign currency trans-lation. In both years, capital expenditures reflected the Company’scommitment to grow sales at existing restaurants, includingreinvestment initiatives such as reimaging in many marketsaround the world.

Capital expenditures invested in major markets, excludingJapan, represented over 65% of the total in 2010, 2009 and2008. Japan is accounted for under the equity method, andaccordingly its capital expenditures are not included in con-solidated amounts.

Capital expenditures

In millions 2010 2009 2008New restaurants $ 968 $ 809 $ 897Existing restaurants 1,089 1,070 1,152Other(1) 78 73 87

Total capitalexpenditures $ 2,135 $ 1,952 $ 2,136

Total assets $31,975 $30,225 $28,462(1) Primarily corporate equipment and other office-related expenditures.

20 McDonald’s Corporation Annual Report 2010

55  

Annex 26 Growth in McDonald’s Restaurant Numbers by Major Country 2008 2013 USA a) 13,918 14,278 Europe :

France 1134 1298 Germany 1333 1468

Italy 380 480 Netherlands 219 236

Poland 221 326 Russia 211 413 Spain 397 461

Switzerland 147 157 UK 1190 1222

Total Europe incl.Others 6628 7602 Asia/Pacific, Middle East and Africa

Australia 782 920 China 1012 1957

Hong Kong 209 237 India 160 339

Indonesia 108 149 Israel 142 179 Japan 3755 3164

Malaysia 185 259 New Zealand 143 162

Philippines 287 408 Saudi Arabia 110 162

Singapore 109 126 South Africa 125 197 South Korea 234 344

Taiwan 349 409 Thailand 115 193

Turkey 116 231 United Arab Emirates 59 119

Total APMEA incl. Others 8255 9918 Canada 1414 1427 Latin America

Argentina 186 218 Brazil 562 812

Mexico 379 397 Venezuela 135 139

Total Latin America incl.Others

1752 2204

a) Includes Cuba and Guam but excludes Canada

56  

Annex 27    

McDonald’s Franchising Revenues 2011 to 2013

 

 

Source : McDonald’s 2013 annual report

McDonald’s Corporation 2013 Annual Report | 37

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57  

Annex 28

Growth in McDonald’s Restaurant Numbers by Ownership Type

                         2013        2012      2011        2010      2009        2008  

 

All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and foreign affiliates and developmental licensees under license agreements. The following table shows restaurant information by ownership type:

In 2013, the Company opened 1,393 traditional restaurants and 45 satellite restaurants (small, limited-menu restaurants for which the land and building are generally leased), and closed 295 traditional restaurants and 194 satellite restaurants. In 2012, the Company opened 1,404 traditional restaurants and 35 satellite restaurants and closed 269 traditional restaurants and 200 satellite restaurants. The majority of restaurant openings and closings occurred in the major markets in both years. The Company closes restaurants for a variety of reasons, such as existing sales and profit performance or loss of real estate tenure.

Source : McDonald’s 2013 and earlier annual reports

McDonald’s Corporation 2013 Annual Report | 9

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McDonald’s Corporation 2013 Annual Report | 31

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58  

Annex 29 Page 1 of 3 McDonald’s Franchisees Rebel as Chain Raises Store Fees On 6 Aug 6, 2013 Bloomberg reported : “McDonald’s Corporation already struggling to sell burgers in the U.S., now must contend with a brewing franchisee revolt. Store operators say the company, looking to improve its bottom line, is increasingly charging them too much to operate their restaurants -- including rent, remodeling and fees for training and software. The rising costs are making franchisees, who operate almost 90 percent of the chain’s more than 14,100 U.S. locations, less likely to open new restaurants and refurbish them, potentially constraining sales. McDonald’s is “doing everything they can to shift costs to operators,” said Kathryn Slater-Carter, who in June joined other franchisees in Stockton, California, to brainstorm ways of getting the chain to lessen the cost burden. “Putting too much focus on Wall Street is not a good thing in the long run. ‘‘It is not as profitable a business as it used to be,’’ said Slater-Carter, who owns two McDonald’s stores and backs California legislation that would require good faith and fair dealing between parties in a franchise contract. It would also allow franchisees to associate freely with fellow store owners. Asked if McDonald’s is shifting costs to franchisees, Heather Oldani, a spokeswoman, said in an e-mail: ‘‘We are continuing to work together with McDonald’s owner/operators and our supplier partners to ensure that our restaurants are providing a great experience to our customers, which involves investments in training and technology.” ‘Productive’ Meetings Lee Heriaud, who chairs the National Leadership Council, a group of franchisees that meet regularly with company executives to discuss ideas and concerns, attended the Stockton meeting and others. In an e-mailed statement provided by Oldani, he said “owner/operators’ feedback and perspectives have been shared with McDonald’s and owner/operator leadership in the spirit of open dialogue.” The meetings were “productive,” he said. Cooperation between McDonald’s and its store owners is deteriorating, according to an April 11 letter from a franchisee to other store owners reviewed by Bloomberg News. “Many of you have said that you don’t feel that the top management understands the economic pressures that we face,” the letter said. “The tone has become much more controlling and less inclusive.” This isn’t the first time the world’s largest restaurant company has found itself at odds with the people who own and operate its stores. McDonald’s in the mid-90s alienated U.S. franchisees when it expanded too quickly and new stores began cannibalizing other locations, said Dick Adams, a former McDonald’s store owner and restaurant consultant in San Diego. Slowed Expansion Under pressure from franchisees, the company slowed the expansion. It opened 1,130 net new domestic restaurants in 1995; by 1998, it had cut that number to 92. “There was a time at McDonald’s when the franchisee morale was extremely low and everyone was extremely upset,” Adams said. “We’re getting there again.” Today’s tensions between Oak Brook, Illinois-based McDonald’s and store operators (Continued)

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Annex 29 Page 2 of 3 coincide with the company’s struggles to grow after consumer confidence fell in July after increasing for the past three months and with the unemployment rate stalled at 7.4 percent or higher. On July 22, the shares fell 2.7 percent, the most in nine months, when McDonald’s reported second-quarter profit and revenue that trailed analysts’ estimates. Chief Executive Officer Don Thompson said economic weakness would hurt results for the rest of the year. McDonald’s fell 0.6 percent to $98.69 at the close in New York. The shares have increased 12 percent this year, trailing the 19 percent gain for the S&P’s 500 Restaurants Index. Franchisee Income The Big Mac seller, which owns or leases most of its U.S. stores, has been generating more income from franchisees. Revenue from franchised stores, which includes rent and royalties, increased 8 percent on average during the past five years, while total revenue rose 4 percent. Some franchisees are paying as much as 12 percent of store sales in rent, according to notes of an April 23 meeting attended by store operators. Instead, they want the company to return to a historic rate of about 8.5 percent, the document shows. U.S. McDonald’s restaurants average about $2.5 million in annual sales, according to Chicago-based researcher Technomic Inc. That means franchisees who have recently renewed leases are paying an average of $300,000 a year, up from $212,500 at the 8.5 percent rate. Local Markets “Across the country, the rent owner/operators pay for their McDonald’s restaurants is determined by local market real estate costs, as well as the cost of doing business in a particular market,” Ofelia Casillas, a McDonald’s spokeswoman, said in an e-mailed statement. “The range for rent has historically varied based on these and other regular business variables.” At the April meeting at a community center in Paramount, California, a group of franchisees spent five hours discussing ways to get the company to reduce rents and other costs. Another cadre of McDonald’s store owners met in Stockton in June to discuss similar issues. The group in Paramount suggested reducing rents, royalty rates and creating a regional real-estate team of store owners to help set lease rates. Rent is “the firmest of fixed expenses,” said John Gordon, principal at San Diego-based Pacific Management Consulting Group and a consultant to restaurant franchisees. “You pay that before you remodel, you pay that before you take owner salary out.” Alienating Customers As a result, some run-down stores aren’t getting fixed up, which in turn is alienating customers, he said. “People don’t want to be in an old space, even if they’re going through the drive-thru,” Gordon said. “You get better employees, you just get a better vibe if it’s a newer store.” As it is, remodeling a McDonald’s store costs at least $800,000, according to Slater-Carter. That’s more than twice as much as at Burger King which after franchisees revolted cut the expense for its remodeling program by half to about $300,000, on average. Wendy’s is also paring its upgrade costs and has said it will get to $375,000 for its least-expensive model. Oldani, the McDonald’s spokeswoman, said that it costs about $600,000, on average, to remodel a McDonald’s restaurant and $1 million to build a new store. McDonald’s recently told franchisee Slater-Carter she must pay $80 a year to switch to the company’s e-mail system and she’s now forking over an extra $10,400 per store annually for new software, Wi-Fi and employee training costs -- all fees that McDonald’s has tacked on in (Continued)

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Annex 29 Page 3 of 3 the last five years. She won’t know until 2016, when her lease must be renewed, how much extra she may be paying in rent. “What I see going wrong is the corporation itself is forgetting that its fiscal strength rides on the fiscal strength and the creativity of the operators, and it’s just going for such centralized control,” said Slater-Carter, whose family has owned McDonald’s franchises since 1971.” Source : Bloomberg 6 August 2013  

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Annex 30  Coke and McDonald’s, Growing Together Since 1955 On 15 May 2014 , The New York Times reported: “It was early 1955 when Ray Kroc, an ambitious milkshake equipment salesman who had bought the right to expand McDonald’s throughout the country, was opening his first restaurant, in Des Plaines, Ill. In search of a beverage supplier, Mr. Kroc called Coca-Cola to ask about selling its sodas and reached an executive named Waddy Pratt, who ran Coke’s fountain division. “On a Saturday morning sometime after that, Waddy goes to Des Plaines to check out this guy who claims his restaurant is going to take America by storm,” said Dick Starmann, a confidant of Mr. Kroc’s, recalling a story both men had told him many times. “He pulls up to a red-and-white-tiled shop on Lee Avenue with a yellow neon sign over it, where a guy with a hose was washing down the parking lot.” Mr. Pratt was looking for Ray Kroc, “and the guy says, ‘You’re talking to him,’ ” Mr. Starmann said in an interview. A few hours later, Mr. Pratt and Mr. Kroc shook hands. To this day, executives from both companies say, that handshake seals the primary relationship between Coke and the giant fast-food chain. “Those two companies helped each other grow and expand around the globe,” Mr. Starmann said. “Neither one would be what they are today without the other.” McDonald’s is Coke’s largest restaurant customer, and the two companies maintain a unique, symbiotic relationship. As McDonald’s expanded globally, it often used Coca-Cola’s offices as a base of operations to get up and running. In 1993, Coke executives suggested that McDonald’s bundle its soda with a burger and fries during the “Jurassic Park” promotion, creating the Extra Value Meal. And recently, Coke helped McDonald’s develop its new line of smoothies. Over the years, the companies created a system for the delivery and production of Coke’s sodas at McDonald’s restaurants. At other restaurants, Coke syrup is delivered in plastic bags. But for McDonald’s, Coke delivers its syrup in stainless steel tanks that ensure its freshness, creating what many believe is the best Coca-Cola available. Coke sales teams are prohibited from selling syrup to other restaurants for less than what McDonald’s pays, even if that means losing business to Pepsi-Cola. The companies declined to comment on their relationship. “When you’d ask Coca-Cola in what countries it had the biggest sales, it would say something like the United States, Japan, Germany and McDonald’s — and in that order,” Mr. Starmann said. “It was kind of funny but it was true.” McDonald’s is so important to Coke that it is the only customer with its own division. Coca-Cola’s McDonald’s division is run by Javier C. Goizueta, the son of Coke’s former chief executive, Roberto C. Goizueta. When the elder Mr. Goizueta died in 1997, flags at McDonald’s throughout the world flew at half-staff.” Source : New York Times, Business Day , 15 May 2014  

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 Annex 31

McDonald's to Move European Head Office to Switzerland

In July 2009 , The Guardian reported : “McDonald's is shifting its European headquarters to Geneva, in a snub to the European Union, to benefit from Switzerland's advantageous intellectual property tax laws. The US fast-food chain is joining other foreign companies that have moved their European headquarters to a more favourable tax regime. US corporations that have based themselves in Switzerland include Kraft, Procter & Gamble, Colgate-Palmolive, Yahoo! and Google. McDonald's said its new European head office would be opened in Geneva before the end of the year. It will bring together all senior management, who are spread across four regional centres: London, Paris, Munich and Vienna. The company's European president ….who until now has split his time between London and Paris, will be among the executives making the move to Geneva. The four regional centres will remain open and the UK's business will continue to be run from London . A spokeswoman for McDonald's said the move "will enable us to conduct the strategic management of key international intellectual property rights, which includes the licensing of those rights to McDonald's franchisees in Europe, from Switzerland". She said the decision was "a long time in the planning" and was first announced internally in August 2008, denying that it was related to new UK tax rules that took effect at the start of the month. The recent changes to the taxation of foreign profits relate to intellectual property rights such as patents, copyrights and trademarks. They have already prompted the publishing and conference group Informa to relocate its tax domicile out of the UK to Switzerland to escape "double taxation" – once abroad and again in Britain. Under the new UK tax rules, the earnings companies receive from their overseas subsidiaries relating to "real" economic activity involving trade in goods and services will not be taxed by the UK authorities. But income derived from intellectual property rights does not fall into this category and will be taxed by HM Revenue & Customs, even if it has already been taxed overseas. Other companies have recently moved from Britain to lower tax regimes such as Ireland, Luxembourg and the Netherlands.” An article in swissinfo.ch at the same time added : “The American burger giant is the most prominent in a line of companies to move away from London after Britain announced it would introduce more stringent taxes for profits earned on intellectual property rights abroad. Intellectual property is becoming a more important factor for company profits each year, according to corporate tax expert Thierry Boitelle from Swiss law firm Altenburger. McDonald's, for example, earns a large slice of its revenues from the royalties of restaurant franchises based around the world. "These are intangible assets that are easier to relocate than factories," he told swissinfo.ch. "These are increasingly high-value assets that do not require a large workforce to manage. Many companies are looking to switch to areas with the best tax benefits." Sources : theguardian.com,13 July 2009 and swissinfo.ch 13 July 2013

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Annex 32  

McDonald’s Executive Officers in 2013

Jose Armario, 54, is Corporate Executive Vice President— Global Supply Chain, Development and Franchising, a position he has held since October 2011. Mr. Armario has been with the Company for 17 years. Peter J. Bensen, 51, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since January 2008. Mr. Bensen has been with the Company for 17 years. Stephen J. Easterbrook, 46, is Corporate Executive Vice President and Global Chief Brand Officer, a position he has held since June 2013. Except for the period he was with PizzaExpress and Wagamama from September 2011 to May 2013, Mr. Easterbrook has been with the Company for 20 years. Timothy J. Fenton, 56, is Chief Operating Officer, a position he has held since July 2012. Mr. Fenton has been with the Company for 40 years. Richard Floersch, 56, is Corporate Executive Vice President and Chief Human Resources Officer. Mr. Floersch joined the Company in November 2003. Douglas M. Goare, 61, is President, McDonald’s Europe, a position he has held since October 2011. Mr. Goare has been with the Company for 35 years. David L. Hoffmann, 46, is President of Asia/Pacific, Middle East and Africa, a position he has held since July 2012. Mr. Hoffmann has been with the Company for 17 years. Kenneth M. Koziol, 54, became Corporate Executive Vice President—Chief Restaurant Officer in February 2013. Mr. Koziol has been with the Company for 25 years. Kevin M. Ozan, 50, is Corporate Senior Vice President– Controller, a position he has held since February 2008. Mr. Ozan has been with the Company for 16 years. Gloria Santona, 63, is Corporate Executive Vice President, General Counsel and Secretary, a position she has held since July 2003. Ms. Santona has been with the Company for 36 years. Jeffrey P. Stratton, 58, is President, McDonald's USA, a position he has held since December 2012. Mr. Stratton has been with the Company for 40 years. ( Stratton replaced Jan Fields who left abruptly in November2012 after a series of disappointing sales figures in US restaurants). Donald Thompson, 50, is President and Chief Executive Officer, a position he has held since July 2012. Mr. Thompson has been with the Company for 23 years.  

Source : McDonald’s 2013 Annual Report

64  

Annex 33  

McDonald’s Global Chief Operating Officer to Retire in October 2014 McDonald’s issued a statement in March 2014 saying “President and Chief Executive Officer Don Thompson today announced that Chief Operating Officer Tim Fenton, 56, has decided to retire from McDonald's Corp., effective October 1, 2014. He will continue to serve as COO during a brief transition period, and thereafter, as a Special Advisor to Thompson focused on global franchising, restaurant portfolio optimization and other strategic business initiatives. Upon notification of Fenton's retirement, the Board of Directors approved several reporting structure changes designed to continue driving McDonald's business for the long-term. McDonald's Area of the World presidents, responsible for the operations of McDonald's 35,000 restaurants worldwide, will now report directly to Thompson. The company will not replace the COO role, but will broaden responsibilities for two senior leaders. Pete Bensen, 51, Executive Vice President and Chief Financial Officer, will assume oversight for Worldwide Supply Chain, Development and Franchising functions. Steve Easterbrook, 46, Executive Vice President and Global Chief Brand Officer, will assume oversight for the Restaurant Solutions Group; Corporate Strategy; and the Global CSR, Sustainability and Philanthropy department. The Board has elected Bensen and Easterbrook Senior Executive Vice Presidents”. Source : McDonald’s Corp announcement 20 March 2014

65  

Annex 34  McDonald’s Board of Directors in 2013 Susan E. Arnold Operating Executive, Global Consumer & Retail Group The Carlyle Group Robert A. Eckert Chairman Emeritus of the Board Mattel, Inc. Enrique Hernandez, Jr. President and Chief Executive Officer Inter-Con Security Systems, Inc. Jeanne P. Jackson President, Product and Merchandising NIKE, Inc. Richard H. Lenny Operating Partner Friedman, Fleischer & Lowe, LLC Walter E. Massey President School of the Art Institute of Chicago Andrew J. McKenna Chairman of the Board McDonald’s Corporation Chairman Schwarz Supply Source Cary D. McMillan Chief Executive Officer True Partners Consulting LLC Sheila A. Penrose Non-executive Chairman Jones Lang LaSalle Incorporated John W. Rogers, Jr. Founder, Chairman and Chief Executive Officer Ariel Investments, LLC Roger W. Stone Chairman and Chief Executive Officer KapStone Paper and Packaging Corporation Donald Thompson President and Chief Executive Officer McDonald’s Corporation Miles D. White Chairman and Chief Executive Officer Abbott Laboratories

 Source : 2013 Annual Report

66  

Annex 35 McDonald’s Values

“We place the customer experience at the core of all we do. Our customers are the reason for our existence. We demonstrate our appreciation by providing them with high quality food and superior service in a clean, welcoming environment, at a great value. Our goal is quality, service, cleanliness and value (QSC&V) for each and every customer, each and every time.

We are committed to our people. We provide opportunity, nurture talent, develop leaders and reward achievement. We believe that a team of well-trained individuals with diverse backgrounds and experiences, working together in an environment that fosters respect and drives high levels of engagement, is essential to our continued success.

We believe in the McDonald’s System. McDonald’s business model, depicted by our “three-legged stool” of owner/operators, suppliers, and company employees, is our foundation, and balancing the interests of all three groups is key.

We operate our business ethically. Sound ethics is good business. At McDonald’s, we hold ourselves and conduct our business to high standards of fairness, honesty, and integrity. We are individually accountable and collectively responsible.

We give back to our communities. We take seriously the responsibilities that come with being a leader. We help our customers build better communities, support Ronald McDonald House Charities, and leverage our size, scope and resources to help make the world a better place.

We grow our business profitably. McDonald’s is a publicly traded company. As such, we work to provide sustained profitable growth for our shareholders. This requires a continuous focus on our customers and the health of our system.

We strive continually to improve. We are a learning organization that aims to anticipate and respond to changing customer, employee and system needs through constant evolution and innovation.”

Source : www.aboutmcdonalds.com

67  

Annex 36

McDonald’s Income Statement 2011-2013

 

 

Note : The annual report states that “A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 65% of the Company's operating income outside the U.S.”

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68  

Annex 37

McDonald’s Income Statement 2008-2010

Consolidated Statement of IncomeIn millions, except per share data Years ended December 31, 2010 2009 2008REVENUESSales by Company-operated restaurants $16,233.3 $15,458.5 $16,560.9Revenues from franchised restaurants 7,841.3 7,286.2 6,961.5

Total revenues 24,074.6 22,744.7 23,522.4OPERATING COSTS AND EXPENSESCompany-operated restaurant expenses

Food & paper 5,300.1 5,178.0 5,586.1Payroll & employee benefits 4,121.4 3,965.6 4,300.1Occupancy & other operating expenses 3,638.0 3,507.6 3,766.7

Franchised restaurants–occupancy expenses 1,377.8 1,301.7 1,230.3Selling, general & administrative expenses 2,333.3 2,234.2 2,355.5Impairment and other charges (credits), net 29.1 (61.1) 6.0Other operating (income) expense, net (198.2) (222.3) (165.2)

Total operating costs and expenses 16,601.5 15,903.7 17,079.5Operating income 7,473.1 6,841.0 6,442.9Interest expense–net of capitalized interest of $12.0, $11.7 and $12.3 450.9 473.2 522.6Nonoperating (income) expense, net 21.9 (24.3) (77.6)Gain on sale of investment (94.9) (160.1)Income before provision for income taxes 7,000.3 6,487.0 6,158.0Provision for income taxes 2,054.0 1,936.0 1,844.8Net income $ 4,946.3 $ 4,551.0 $ 4,313.2Earnings per common share–basic $ 4.64 $ 4.17 $ 3.83Earnings per common share–diluted $ 4.58 $ 4.11 $ 3.76Dividends declared per common share $ 2.26 $ 2.05 $ 1.625Weighted-average shares outstanding–basic 1,066.0 1,092.2 1,126.6Weighted-average shares outstanding–diluted 1,080.3 1,107.4 1,146.0

See Notes to consolidated financial statements.

26 McDonald’s Corporation Annual Report 2010

69  

Annex 38

McDonald’s Revenues by Region 2011- 2013

 

Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The following table presents franchised sales and the related increases/(decreases):

McDonald’s Corporation 2013 Annual Report | 15

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Q,&.$%&?@9@6&.$%&'3/,4$+1%8&5/3-+,&2%34%,.&8%43%/1%8&+,&GH!A&87%&.(&$+-$%3&8%23%4+/.+(,&3%)/.%8&.(&3%+5/-+,-&/,8&*%/Z&4(52/3/0)%&1/)%1@&#$%&'3/,4$+1%8&5/3-+,&2%34%,.&*/1&')/.&+,&GH!G&/1&2(1+.+U%&4(52/3/0)%&1/)%1&2%3'(35/,4%&*/1&(''1%.&0:&$+-$%3&8%23%4+/.+(,&3%)/.%8&.(&3%+5/-+,-@&

Q,&F73(2%6&.$%&'3/,4$+1%8&5/3-+,&2%34%,.&8%43%/1%8&+,&GH!A&87%&.(&$+-$%3&3%,.&%Y2%,1%&+,&5/,:&5/3Z%.1&/,8&*%/Z&

70  

Annex 39  

McDonald’s Sales and Guest Counts by Region 2011 to 2013

The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):

 

Note : Comparable sales are sales at restaurants opened for 13 months or more and exclude sales at new restaurants opened within the last year

16 | McDonald’s Corporation 2013 Annual Report!"!!!!"#$%&'()*+!,%-.%-'/0%&!!"#$%&''()*%+,-./0

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71  

Annex 40  

McDonalds Financial Summary by Region 2011 to 2013

 Note  :  The Company manages its business as distinct geographic segments. All intercompany revenues and expenses are eliminated in computing revenues and operating income. Corporate general and administrative expenses are included in Other Countries & Corporate and consist of home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training. Corporate assets include corporate cash and equivalents, asset portions of financial instruments and home office facilities.  

72  

Annex 41

McDonalds Financial Summary by Region 2008 to 2010

 

The following table presents a reconciliation of the beginningand ending amounts of unrecognized tax benefits:

In millions 2010 2009Balance at January 1 $492.0 $272.5Decreases for positions taken in prior years (27.1) (16.4)Increases for positions taken in prior years 53.3 21.8Increases for positions related to the currentyearIncreases with deferred tax offset 16.3 83.9Other increases 85.7 178.0

Settlements with taxing authorities (17.4) (20.8)Lapsing of statutes of limitations (30.2) (27.0)Balance at December 31(1)(2) $572.6 $492.0(1) This balance is before consideration of the deferred tax accounting offsets

(2) Of the 2010 balance, $435.9 is included in long-term liabilities, $115.2 is included inincome taxes payable, and $21.5 is included in deferred income taxes on the Con-solidated balance sheet. Of the 2009 balance, $285.6 is included in long-termliabilities and $206.4 is included in deferred income taxes on the Consolidated bal-ance sheet.

In 2010, the Internal Revenue Service (IRS) concluded itsfield examination of the Company’s U.S. federal income taxreturns for 2007 and 2008. As part of this exam, the Companyhas resolved proposed adjustments related to transfer pricingmatters that were previously received from the IRS. The taxprovision impact associated with the completion of this fieldexamination was not significant. The Company continues to dis-agree with the IRS’ proposed adjustments related to certainforeign tax credits of about $400 million, excluding interest andpotential penalties. The Company continues to believe that theseadjustments are not justified, and intends to pursue all availableremedies. While the Company cannot predict with certainty thetiming of resolution, we do not believe that it is reasonably possi-ble that these issues will be settled in the next twelve months.The Company does not believe the resolution will have a materialimpact on its results of operations or cash flows. Excluding theseadjustments, it is reasonably possible that the total amount ofunrecognized tax benefits could decrease within the next 12months by $25 million to $40 million. This decrease would resultfrom the expiration of the statute of limitations and the com-pletion of tax audits in multiple tax jurisdictions.

The Company is generally no longer subject to U.S. federal,state and local, or non-U.S. income tax examinations by taxauthorities for years prior to 2004.

The continuing practice of the Company is to recognize inter-est and penalties related to income tax matters in the provisionfor income taxes. The Company had $44.4 million and $18.7 mil-lion accrued for interest and penalties at December 31, 2010and 2009, respectively. The Company recognized interest andpenalties related to tax matters of $29.0 million in 2010,$1.5 million in 2009, and $13.7 million in 2008.

Deferred U.S. income taxes have not been recorded fortemporary differences related to investments in certain foreignsubsidiaries and corporate joint ventures. These temporarydifferences were approximately $11.0 billion at December 31,2010 and consisted primarily of undistributed earnings consid-ered permanently invested in operations outside the U.S.Determination of the deferred income tax liability on theseunremitted earnings is not practicable because such liability, ifany, is dependent on circumstances existing if and whenremittance occurs.

Segment and Geographic Information

The Company operates in the global restaurant industry andmanages its business as distinct geographic segments. All inter-company revenues and expenses are eliminated in computingrevenues and operating income. Corporate general & admin-istrative expenses are included in Other Countries & Corporateand consist of home office support costs in areas such as facili-ties, finance, human resources, information technology, legal,marketing, restaurant operations, supply chain and training.Corporate assets include corporate cash and equivalents, assetportions of financial instruments and home office facilities.

In millions 2010 2009 2008U.S. $ 8,111.6 $ 7,943.8 $ 8,078.3Europe 9,569.2 9,273.8 9,922.9APMEA 5,065.5 4,337.0 4,230.8Other Countries &Corporate 1,328.3 1,190.1 1,290.4Total revenues $24,074.6 $22,744.7 $23,522.4

U.S. $ 3,446.5 $ 3,231.7 $ 3,059.7Europe 2,796.8 2,588.1 2,608.0APMEA 1,199.9(1) 989.5 818.8Other Countries &Corporate 29.9(2) 31.7(3) (43.6)Total operating income $ 7,473.1 $ 6,841.0 $ 6,442.9

U.S. $10,467.7 $10,429.3 $10,356.7Europe 11,360.7 11,494.4 10,532.7APMEA 5,374.0 4,409.0 4,074.6Other Countries &Corporate 4,772.8 3,892.2 3,497.5Total assets $31,975.2 $30,224.9 $28,461.5

U.S. $ 530.5 $ 659.4 $ 837.4Europe 978.5 859.3 864.1APMEA 493.1 354.6 360.6Other Countries &Corporate 133.4 78.8 73.6Total capital expenditures $ 2,135.5 $ 1,952.1 $ 2,135.7

U.S. $ 433.0 $ 423.8 $ 400.9Europe 500.5 483.2 506.3APMEA 232.4 202.9 193.4Other Countries &Corporate 110.3 106.3 107.2Total depreciation andamortization $ 1,276.2 $ 1,216.2 $ 1,207.8

(1) Includes expense due to Impairment and other charges (credits), net of $39.3 millionrelated to the Company’s share of restaurant closing costs in McDonald’s Japan (a50%-owned affiliate).

(2) Includes income due to Impairment and other charges (credits), net of $21.0 millionrelated to the resolution of certain liabilities retained in connection with the 2007Latin America developmental license transaction.

(3) Includes income due to Impairment and other charges (credits), net of $65.2 millionprimarily related to the resolution of certain liabilities retained in connection with the2007 Latin America developmental license transaction.

Total long-lived assets, primarily property and equipment,were (in millions) – Consolidated: 2010–$26,700.9; 2009–$25,896.1; 2008–$24,385.8;. U.S. based: 2010–$10,430.2;2009–$10,376.4; 2008–$10,389.7.

38 McDonald’s Corporation Annual Report 2010

73  

Annex 42

McDonald’s Balance Sheets 2012 - 2013

 

 

28 | McDonald’s Corporation 2013 Annual Report!"!!!!"#$%&'()*+!,%-.%-'/0%&!!"#$%&''()*%+,-./0

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74  

Annex 43

McDonald’s Balance Sheets 2010- 2011

Consolidated Balance SheetIn millions, except per share data December 31, 2011 2010ASSETSCurrent assetsCash and equivalents $ 2,335.7 $ 2,387.0Accounts and notes receivable 1,334.7 1,179.1Inventories, at cost, not in excess of market 116.8 109.9Prepaid expenses and other current assets 615.8 692.5

Total current assets 4,403.0 4,368.5Other assetsInvestments in and advances to affiliates 1,427.0 1,335.3Goodwill 2,653.2 2,586.1Miscellaneous 1,672.2 1,624.7

Total other assets 5,752.4 5,546.1Property and equipmentProperty and equipment, at cost 35,737.6 34,482.4Accumulated depreciation and amortization (12,903.1) (12,421.8)

Net property and equipment 22,834.5 22,060.6Total assets $ 32,989.9 $ 31,975.2LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesAccounts payable $ 961.3 $ 943.9Income taxes 262.2 111.3Other taxes 338.1 275.6Accrued interest 218.2 200.7Accrued payroll and other liabilities 1,362.8 1,384.9Current maturities of long-term debt 366.6 8.3

Total current liabilities 3,509.2 2,924.7Long-term debt 12,133.8 11,497.0Other long-term liabilities 1,612.6 1,586.9Deferred income taxes 1,344.1 1,332.4Shareholders’ equityPreferred stock, no par value; authorized – 165.0 million shares; issued – noneCommon stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares 16.6 16.6Additional paid-in capital 5,487.3 5,196.4Retained earnings 36,707.5 33,811.7Accumulated other comprehensive income 449.7 752.9Common stock in treasury, at cost; 639.2 and 607.0 million shares (28,270.9) (25,143.4)

Total shareholders’ equity 14,390.2 14,634.2Total liabilities and shareholders’ equity $ 32,989.9 $ 31,975.2

See Notes to consolidated financial statements.

26 McDonald’s Corporation Annual Report 2011

75  

Annex 44

McDonald’s Cash Flow Statements 2011– 2013

 

 

McDonald’s Corporation 2013 Annual Report | 29

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76  

Annex 45

McDonald’s Cash Flow Statements 2008– 2010

Consolidated Statement of Cash FlowsIn millions Years ended December 31, 2010 2009 2008Operating activitiesNet income $ 4,946.3 $ 4,551.0 $ 4,313.2Adjustments to reconcile to cash provided by operations

Charges and credits:Depreciation and amortization 1,276.2 1,216.2 1,207.8Deferred income taxes (75.7) 203.0 101.5Impairment and other charges (credits), net 29.1 (61.1) 6.0Gain on sale of investment (94.9) (160.1)Share-based compensation 83.1 112.9 112.5Other 211.6 (347.1) 90.5

Changes in working capital items:Accounts receivable (50.1) (42.0) 16.1Inventories, prepaid expenses and other current assets (50.8) 1.0 (11.0)Accounts payable (39.8) (2.2) (40.1)Income taxes 54.9 212.1 195.7Other accrued liabilities (43.2) 2.1 85.1

Cash provided by operations 6,341.6 5,751.0 5,917.2Investing activitiesProperty and equipment expenditures (2,135.5) (1,952.1) (2,135.7)Purchases of restaurant businesses (183.4) (145.7) (147.0)Sales of restaurant businesses and property 377.9 406.0 478.8Proceeds on sale of investment 144.9 229.4Other (115.0) (108.4) (50.2)

Cash used for investing activities (2,056.0) (1,655.3) (1,624.7)Financing activitiesNet short-term borrowings 3.1 (285.4) 266.7Long-term financing issuances 1,931.8 1,169.3 3,477.5Long-term financing repayments (1,147.5) (664.6) (2,698.5)Treasury stock purchases (2,698.5) (2,797.4) (3,919.3)Common stock dividends (2,408.1) (2,235.5) (1,823.4)Proceeds from stock option exercises 463.1 332.1 548.2Excess tax benefit on share-based compensation 128.7 73.6 124.1Other (1.3) (13.1) (89.8)

Cash used for financing activities (3,728.7) (4,421.0) (4,114.5)Effect of exchange rates on cash and equivalents 34.1 57.9 (95.9)

Cash and equivalents increase (decrease) 591.0 (267.4) 82.1Cash and equivalents at beginning of year 1,796.0 2,063.4 1,981.3Cash and equivalents at end of year $ 2,387.0 $ 1,796.0 $ 2,063.4Supplemental cash flow disclosuresInterest paid $ 457.9 $ 468.7 $ 507.8Income taxes paid 1,708.5 1,683.5 1,294.7

See Notes to consolidated financial statements.

28 McDonald’s Corporation Annual Report 2010

77  

Annex 46

McDonald’s Capital Expenditure 2011 – 2013

 

Source : McDonald’s 2013 annual report

 

 

     

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78  

Annex 47

McDonald’s First Quarter 2014 Income Statement

 

 

   

79  

Annex 48

McDonald’s First Quarter 2014 Balance Sheet

80  

Annex 49

McDonald’s First Quarter 2014 Cash Flow Statement

81  

Annex 50

McDonald’s Second Quarter 2014 Income Statement

Note : As of 30 July 2014, McDonald’s had not published its Q2 2014 balance sheet nor cash flow statement. These are expected to be filed with the SEC at the beginning of August 2014

82  

Annex 51

McDonald’s Second Quarter and First Half 2014 Sales by Region

Source : McDonald’s SEC filing 22 July 2014

83  

Annex 52

McDonald’s Share Price – 2 Years to 29 July 2014

Source : Yahoo Finance 30 July 2014

84  

Annex 53

McDonald’s Corp Sets Target of Returning up to $20 billion in Cash to Investors by 2016

On 28 May 2014, Bloomberg reported :

“McDonald’s Corporation today announced a target of returning as much as $20 billion in cash to investors through dividends and share buybacks by 2016, dashing optimism that the company would spend even more to boost its stagnant shares.

The plan represents as much as a 20 percent increase from the amount of cash returned in 2011 through 2013, the Oak Brook, Illinois-based company said today in a statement. McDonald’s also said it plans to sell 1,500 company-owned stores to franchisees by 2016, primarily in Europe, the Middle East, Africa and its Asia-Pacific region.

McDonald’s shares have languished as the company struggles to increase sales amid shaky consumer confidence and heightened competition from fast-food rivals. Chief Financial Officer Pete Bensen said in March that the company could be “more aggressive” in borrowing to fund buybacks and dividends.

“The magnitude here is not significant enough to really move the needle,” Peter Saleh, an analyst at Telsey Advisory Group in New York, said in an interview. While the $18 billion to $20 billion in shareholder returns is “in line” with expectations, “it doesn’t get anyone overly excited.”

McDonald’s shares fell 1 percent to $101.30 at the close in New York. The stock has gained 0.1 percent in the past 12 months, compared with a 15 percent increase in the Standard & Poor’s 500 Index.”

Source : Bloomberg, 28 May 2014

85  

Annex 54 Page 1 of 2 Outlook and Priorities for 2014 McDonald’s 2013 annual report describes the outlook and its priorities for 2014 as follows : “We are focused on delivering great-tasting, high-quality, affordable food and beverages and an exceptional experience for our customers. By leveraging our competitive advantages, we are well-positioned to pursue the long-term opportunities that exist in the over $1 trillion IEO segment. We do not expect significant changes in market dynamics in 2014 given modest growth projections for the IEO segment. We will remain focused on matters within our control, with the customer as our first priority. We plan to strengthen our relationship with the customer through better restaurant execution and by further leveraging consumer insights in our efforts to optimize current initiatives for greater relevance and broader consumer reach. We remain committed to adapting to keep pace with evolving customer needs and investing today to meet future demand. In addition, we are prioritizing our near-term efforts on improving performance in key opportunity markets that are significant contributors to consolidated results. These include Germany, Japan and the U.S., which have experienced weak or negative performance. We will continue to execute against our three global growth priorities to optimize our menu, modernize the customer experience and broaden accessibility to Brand McDonald’s. Our focus will be on our core classics, as well as menu items in the beef, chicken, breakfast and beverages categories, where we believe there is the most growth opportunity relative to other categories in the industry. In addition, we plan to introduce new ingredients and greater choice to broaden the appeal of our menu. We will enhance the customer experience by continuing to reimage our building interiors and exteriors, expand our service offerings and develop our digital strategies. At the same time, we remain committed to Quality, Service and Cleanliness, which is foundational to everything we do in the restaurants. To broaden our accessibility, we plan to expand through geographically diversified new restaurant development, extend hours in more restaurants, improve the efficiency of our drive-thrus and provide more delivery service and dessert kiosks. In addition, we will continue to evolve our value platform, offering more choices at every price tier. Furthermore, McDonald’s is committed to growing our business sustainably and making a positive difference in society. Our key areas of focus include improving customer perceptions of our food, sustainable sourcing, providing job opportunities and training for our people, developing environmentally efficient restaurants and having a positive impact in the communities we serve. U.S. In 2014, the U.S. will make adjustments designed to regain momentum, including providing greater customer relevance and better restaurant execution. Our 2014 menu strategies better balance affordability, core products, new choices and limited-time offers. We will also adjust the pace of product introductions to improve restaurant operations and marketing execution in order to provide a better customer experience. These initiatives are complemented by a consistent focus on core equities, such as breakfast. We will enhance the breakfast experience by emphasizing coffee through high-quality McCafé products paired with delicious foods – (Continued)

86  

Annex 54 Page 2 of 2 both existing and new. Bold new flavor extensions will be introduced to build upon our core and lay the groundwork for future innovations. We plan to open about 250 new restaurants and to continue our reimaging program by updating approximately 300 existing restaurants in 2014, a slightly slower pace as we prioritize other kitchen investments. Europe In Europe, we plan to optimize the menu through value menu enhancements, premium menu additions and limited-time offers, and will continue to expand the breakfast daypart by leveraging our strong foundation in coffee. In addition, following the U.K.’s successful rollout of McCafé smoothies and frappés, we anticipate about 4,500 restaurants in Europe will have the blended-ice platform by the end of 2014. To modernize the way we interact with our customers, we plan to leverage the use of technology, such as self-order kiosks and mobile and web ordering. We will focus on broadening accessibility by continuing to extend operating hours, optimizing drive-thrus, and expanding everyday value platforms. We plan to open over 300 new restaurants and reimage approximately 400 existing restaurants in 2014. APMEA In 2014, APMEA’s growth opportunities include menu variety, convenience, value evolution and restaurant expansion. We will balance core and limited-time offers and execute a series of exciting food events. APMEA will shift existing value platforms toward more compelling offers that resonate with customers and generate incremental visits, including “mid-tier” options to fill the gap between entry-level options and Extra Value Meals. Our efforts around reimaging will continue as we expect to modernize approximately 400 existing restaurants. Our plan is to open around 800 new restaurants, with about 300 expected in China. In addition, we will evolve our franchising strategy to include more conventional franchisees and developmental licensees, enabling an increased pace of development and enhanced profitability. Consolidated In making capital allocation decisions, our goal is to make investments that elevate the McDonald's experience and drive sustainable long-term growth in sales and market share. We focus on markets that generate strong returns or have opportunities for long-term growth. We remain committed to returning all of our free cash flow (cash from operations less capital expenditures) to shareholders over the long-term via dividends and share repurchases.”

Source : McDonald’s 2013 annual report