facebook
twitter
vk
instagram
linkedin
google+
tumblr
akademia
youtube
skype
mendeley
Wiki
Page translation
 

CHARACTERISTICS OF THE PRINCIPLE OF FRANCHISE ON THE EXAMPLE OF AN AMERICAN COMPANY

CHARACTERISTICS OF THE PRINCIPLE OF FRANCHISE ON THE EXAMPLE OF AN AMERICAN COMPANY
Mushkudiani Zurabi, ph.d. of

Akaki Tsereteli State University, Georgia

Conference participant

The Company franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve a broad menu (see Products) at various price points in more than 100 countries around the world.Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. Conventional franchisees contribute to the Company’s revenue stream through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees received upon the opening of a new restaurant or the granting of a new franchise term. The conventional franchise arrangement typically lasts 20 years, and franchising practices are generally consistent throughout the world. Over 70% of franchised restaurants operate under conventional franchise arrangements.

McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry.

In measuring the Company’s competitive position, management reviews data compiled by Euro monitor International, a leading source of market data with respect to the global restaurant industry. The Company’s primary competition, which management refers to as the informal eating out ("IEO") segment, includes the following restaurant categories defined by Euro monitor International: quick-service eating establishments, casual dining full-service restaurants, street stalls or kiosks, cafés,100% home delivery/takeaway providers, specialist coffee shops, self-service cafeterias and juice/smoothie bars. Market data related to cafés is separately available and now included in the IEO segment. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than casual dining.

Meeting customer expectations is complicated by the risks inherent in global operating environment. Challenging economic conditions continue to pressure operating and financial performance. In particular, in some of major markets, IEO segments may remain stagnant or experience modest growth, reflecting broad-based consumer caution, price sensitivity, and intensifying competitive activity by both traditional and non-traditional competitors. Further, certain menu, pricing and promotional decisions may continue to yield results below desired levels and could continue to negatively impact sales, guest counts and market share. As business model is built around growing comparable sales to realize margin leverage, given these conditions and persistent cost pressures, corporation expect our results for 2014 will remain challenged.

There is the added challenge of the cultural and regulatory differences that exist within and among the more than 100 countries where corporations operate. Initiatives they undertake may not have universal appeal among different segments of their customer base and can drive unanticipated changes in guest counts and customer perceptions. Operations, plans and results are also affected by regulatory, tax and other initiatives around the world, notably the focus on nutritional content and the sourcing, processing and preparation of food “from field to front counter,” as well as industry marketing practices. These risks can have an impact both in the near- and long-term and are reflected in the following considerations and factors that we believe are most likely to affect our performance. Corporation’s ability to remain a relevant and trusted brand and to increase sales and profits depends largely on how well they execute the Plan to win and their global growth priorities.

Many factors affect the volatility and price of common stock in addition to operating results and prospects. The most important of these, some of which are outside of control, are the following:  The continuing unpredictable global economic and market conditions;Many factors affect the volatility and price of common stock in addition to operating results and prospects. The most important of these, some of which are outside of control, are the following: The continuing unpredictable global economic and market conditions; Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the United States which is the principal trading market for the common stock, and media reports and commentary about economic or other matters, even when the matter in question does not directly relate to the business; Changes in financial or tax reporting and accounting principles or practices that materially affect company's reported financial condition and results and investor perceptions of our performance; Trading activity in common stock or trading activity in derivative instruments with respect to  common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about performance, plans or expectations about business; actual performance and creditworthiness; investor confidence generally; actions by shareholders and others seeking to influence the business strategies; portfolio transactions in corporation's stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald's may be included, such as the S&P 500 Index and the Dow Jones Industrial Average; The impact of  stock repurchase program or dividend rate; and The impact on the results of other corporate actions, such as those they  may take from time to time as part of their continuous review of  corporate structure in light of business, legal and tax considerations. The strength of the alignment among the Company, its franchisees and suppliers has been key to McDonald's success. By leveraging the System, company is able to identify, implement and scale ideas that meet customers' changing needs and preferences.

In 2013, System wide sales growth was 1% (3% in constant currencies), operating income growth was 2% (3% in constant currencies), one-year ROIIC was 11.4% and three-year ROIIC was 20.2% (see reconciliation on page 23). Our operating income growth and returns fell below long-term financial targets, reflecting the impact of soft comparable sales performance. In heavily franchised business model, growing comparable sales is important to increasing operating income and returns.

In 2013, comparable sales increased 0.2%, reflecting higher average check and negative comparable guest counts of 1.9%. Challenging conditions, including a flat or contracting informal eating out (“IEO”) segment in most major markets, heightened competitive activity and consumer price sensitivity, continued to pressure performance. Furthermore, McDonald’s customer-facing initiatives did not generate the comparable sales lift or customer visits necessary to overcome these headwinds. In 2014, McDonald does not expect significant changes in market dynamics given modest growth projections for the IEO segment. However, they continue to believe that their targets remain achievable over the long term.

Globally, McDonald’s approach to offering variety and value across the menu to customers is complemented by a focus on driving operating efficiencies, and leveraging their scale and supply chain infrastructure to manage costs. In 2013, they maintained a full-year combined operating margin of 31.2%, as company grew revenues 2% and managed their expenses.

Corporation continued their long-standing commitment to fiscal discipline and maintained a strong financial foundation. Cash from operations benefits from their heavily franchised business model as the rent and royalty income they receive from franchisees provides a stable revenue stream that has relatively low costs. In addition, the franchise business model is less capital intensive than the Company-owned model. Locally-owned and operated restaurants are important to McDonald's being not just a global brand, but also a locally-relevant one.

In 2013, cash from operations was $7.1 billion. Their substantial cash flow, strong credit rating and continued access to credit provided them flexibility to fund capital expenditures as well as return cash to shareholders. Capital expenditures of approximately $2.8 billion were invested in the business, of which more than half was devoted to new restaurant openings and the remainder was reinvested in existing restaurants. Across the System, 1,438 restaurants were opened and over 1,500 existing locations were reimaged.

McDonald continued to return all free cash flow (cash from operations less capital expenditures) to shareholders, and in 2013 returned $4.9 billion to shareholders consisting of $3.1 billion in dividends and $1.8 billion in share repurchases

Chanes in System wide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2.5 percentage points to 2014 System wide sales growth (in constant currencies), most of which will be due to the 949 net restaurants (1,098 net traditional openings less 149 net satellite closings) added in 2013; With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2014, the total basket of goods cost is expected to increase 1.0-2.0% in the U.S. and Europe. The Company expects full-year 2014 selling, general and administrative expenses to increase approximately 8% in constant currencies, with fluctuations expected between the quarters. The increase is primarily due to the impact of below target 2013 incentive-based compensation, expenses associated with our Worldwide Owner/Operator Convention and sponsorship of the Winter Olympic games, and costs related to other initiatives. Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2014 to increase approximately 5-7% compared with 2013. 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. If all four of these currencies moved by The Company expects the effective income tax rate for the full-year 2014 to be 31% to 33%. Some volatility may be experienced between the quarters resulting in a quarterly tax rate that is outside the annual range. 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents. The Company expects capital expenditures for 2014 to be between $2.9 - $3.0 billion. Over half of this amount will be used to open new restaurants. The Company expects to open about 1,500 - 1,600 restaurants including about 500 restaurants in affiliated and developmental licensee markets, such as Japan and Latin America, where the Company does not fund any capital expenditures. The Company expects net additions of between 1,000 - 1,100 restaurants. The remaining capital will be used to reinvest in existing locations, in part through reimaging. Over 1,000 restaurants worldwide are expected to be reimaged, including locations in affiliated and developmental licensee markets that require no capital investment from the Company. The Company expects to return approximately $5 billion to shareholders through dividends and share repurchases in 2014.

Cash provided by operations totaled $7.1 billion and exceeded capital expenditures by $4.3 billion in 2013, while cash provided by operations totaled $7.0 billion and exceeded capital expenditures by $3.9 billion in 2012. In 2013, cash provided by operations increased $155 million or 2% compared with 2012 primarily due to increased operating results. In 2012, cash provided by operations decreased $184 million or 3% compared with 2011 despite increased operating results, primarily due to higher income tax payments and the negative impact of foreign currency translation on operating results.Cash used for investing activities totaled $2.7 billion in 2013, a decrease of $493 million compared with 2012. The decrease primarily reflected lower capital expenditures and a decrease in other investing activities related to short-term time deposits. Cash used for investing activities totaled $3.2 billion in 2012, an increase of $596 million compared with 2011. The increase primarily reflected higher capital expenditures, an increase in other investing activities related to short-term time deposits, and lower proceeds from sales of restaurant businesses.

Cash used for financing activities totaled $4.0 billion in 2013, an increase of $193 million compared with 2012, primarily due to lower net debt issuances and higher dividend payments, partly offset by lower treasury stock purchases. Cash used for financing activities totaled $3.8 billion in 2012, a decrease of $683 million compared with 2011, primarily due to lower treasury stock purchases and higher net debt issuances, partly offset by higher dividend payments.

The Company’s cash and equivalents balance was $2.8 billion and $2.3 billion at year end 2013 and 2012, respectively. The Company made a debt repayment of $535 million in January 2014. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements. For the last three years, the Company returned a total of $16.4 billion to shareholders through a combination of share repurchases and dividends.

The Company’s Board of Directors approved a share repurchase program, effective August 1, 2012, that authorizes the purchase of up to $10 billion of the Company's outstanding common stock with no specified expiration date. In 2013, approximately 18.7 million shares were repurchased for $1.8 billion, bringing the total purchases under the program to $2.6 billion.

The Company has paid dividends on its common stock for 38 consecutive years and has increased the dividend amount every year. The 2013 full year dividend of $3.12 per share reflects the quarterly dividend paid for each of the first three quarters of $0.77 per share, with an increase to $0.81 per share paid in the fourth quarter. This 5% increase in the quarterly dividend equates to a $3.24 per share annual dividend and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.

 These conditions have pressured corporations’ performance, adversely affecting sales, guest counts and their market share in many markets, including some major markets. Companies are also facing increasing competition from an expanded set of competitors that include many non-traditional market participants such as conventional retailers and coffee shops. To address this environment, McDonalds is intensifying its focus on value as a driver of guest counts through menu, pricing and promotional actions. These actions can adversely affect their margin percent and therefore they expect that margins will remain under pressure. The key factors that can affect their operations, plans and results in this environment are the following: Whether strategies will be effective in enabling market share gains, which have been achieved at declining rates in recent periods, while at the same time enabling them to achieve targeted operating income growth despite the current adverse economic conditions, resurgent competitors and an increasingly complex and costly advertising environment; The effectiveness of supply chain management to assure reliable and sufficient product supply on favorable terms; The impact on consumer disposable income levels and spending habits of governmental actions to manage national economic matters, whether through austerity or stimulus measures and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers; The impact on restaurant sales and margins of ongoing commodity price volatility, and the effectiveness of pricing, hedging and other actions taken to address this environment; The impact on margins of labor costs that company cannot offset through price increases, and the long-term trend toward higher wages and social expenses in both mature and developing markets, which may intensify with increasing public focus on matters of income inequality; The impact of foreign exchange and interest rates on financial condition and results; The challenges and uncertainties associated with operating in developing markets, which may entail a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest, all of which are exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment; The nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment charges that reduce  earnings; and The impact of changes in  debt levels on  credit ratings, interest expense, availability of acceptable counterparties, ability to obtain funding on favorable terms or  operating or financial flexibility, especially if lenders impose new operating or financial covenants. Results of operations are substantially affected by economic conditions, both globally and in local markets, and conditions can also vary substantially by market. The current global environment has been characterized by persistently weak economies, high unemployment rates, inflationary pressures and volatility in financial markets. Many major economies, both advanced and developing, are still facing ongoing economic issues. In the U.S., these include concerns about the long-term direction of federal fiscal policies. In many European markets, consumer and business confidence and spending remain muted. Important markets in Asia have also been experiencing slower growth rates. Uncertainty about the long-term environment could derail any potential improvements in economic activity for 2014.

References:

1. Brealey−Meyers: Principles of CorporateFinance, Seventh Edition  ch. 9; 17.2;  27; 29.

2. http://whttp://www.sec.gov/Archives/edgar/data/63908/000006390814000019/mcd-12312013x10k.htmww.marketwatch.com/investing/stock/3420/financials

Comments: 0
PARTNERS
 
 
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
Would you like to know all the news about GISAP project and be up to date of all news from GISAP? Register for free news right now and you will be receiving them on your e-mail right away as soon as they are published on GISAP portal.