McDonald's Corporation (NYSE:MCD)
Sanford Bernstein 2013 Strategic Decisions Conference
May 29, 2013 9:00 a.m. ET
Donald Thompson - President & Chief Executive Officer
Alexia Howard - Sanford C. Bernstein
Good morning everybody and thank you so much for coming along this morning. My name is Alexia Howard and I cover the U.S Packaged Food Manufacturers, standing in for Sarah Senatore, our US restaurant panelist. It’s my very great pleasure this morning to introduce Don Thompson, CEO at the McDonald's Corporation. Don joined McDonald's 23 years ago, became COO of the company in 2010 and assumed the role of CEO in July of last year. McDonald's has over 34,000 restaurants worldwide, which makes it the largest global food service company in the world. The company is currently looking to expand its business globally, building upon the footprint that it already has established in 119 countries. So he’s to tell us a little bit more about his plan to win.
I’ll now hand it over to Don.
Thank you, Alexia. Good morning. You all will have to excuse if I pause every now and then for a sip of water. I’m battling a little summer cold here. That’s something we don’t often get in McDonald's. There’s no time for colds at McDonald's. But very good to be here with you all. Again good morning and thanks for coming out to spend some time with us. It’s really a pleasure to be here. We always enjoy coming to this conference.
This morning I’d like to spend a few minutes talking about our recent performance and share perspective on how we continue to fortify our business through a renewed emphasis on our three global growth priorities, which are optimizing our menu, modernizing the customer experience and broadening accessibility to brand McDonald's and all of these are within the framework of our plan to win which many of you heard about before.
Today you’ll see a brand that’s focused on the customer. You’ll also see a brand that continues to adapt our approach to ensure that we capture an even greater share of the informal eating out category by staying committed to getting better and aggressively acting on the opportunities that will drive our future growth.
So let’s start with our 2012 performance and year to date April sales results. Last year McDonald's reported its ninth consecutive year of positive comparable sales growth in every geographic segment with a global increase of 3.1%. We increased operating income 4% and diluted earnings per share 5%, both in constant currencies. While these results demonstrated continued growth, our 2012 performance was softer than recent years. This reflected both the challenging global economic and operating environment and bottom line pressures that were the result of planned strategic decisions on our part.
To date, our 2013 results have been mixed. For the first quarter, operating income was flat and constant currencies and diluted earnings per share increased 3% in constant currency to $1.26. Through April, global comparable sales were down 0.9%. This reflects a strong prior year comparisons that included an additional day due to leap year and yes, something we don’t talk about much, but we did have some favorable weather.
We entered the year aware of the challenges with growing capital and bottom line results, the steep first quarter lap, flat or declining informal eating out categories as well in many of our major markets and cost pressures throughout our P&L. And while sales comparisons will ease as we move through the year, the informal eating out industry is not expected to grow. For example, in the U.S the IEO industry is expected to be down in 2013 and relatively flat through 2015.
So unless there’s a radical change in the economy or in people’s eating behaviors, the size of the industry will remain relatively stagnant, also pressuring our growth. The good news is that we’re maintaining or growing market share in most of our major markets around the world despite the challenging environment. For example, our comparable sales performance in the U.S has exceeded the performance of the quick service restaurant sandwich competitors in 16 out of 19 weeks thus far this year.
Our commitment to staying focused on our three global growth priorities to optimize our menu, modernize the customer experience and also broaden accessibility are key to both our short and our long term growth. We remain focused on our customers. This enables us to come up with the right solutions that are unique to McDonald's and most importantly, that matter most to the 69 million customers around the world that we serve each and every day. Wherever in the world our customers may be, we know that what they want from McDonald's is great tasting food and beverages, modern and contemporary, convenient restaurants and every day affordability. Those things haven’t changed and our ability to address these fundamental needs as a global system enables us to scale proven successes more quickly.
As you’ll see when I talk about our menu, our markets first adopt solutions that are working well in other parts of the world, then they adapt those solutions to be even more relevant to local cultures and taste as appropriate. Our ability to match business opportunities with proven solutions is made possible through our strong alignment and partnership with our franchisees, also with our agencies and supplier partners and our company employees. This alignment is an unparalleled competitive advantage that allows us to leverage our size and our scale in ways that are truly unique to McDonald's.
Our economic model represents another strength for us. With 81% of our restaurants operated by franchisees, we benefit from a stable rent and royalty income. To provide a little perspective, profits from rent and royalties generate approximately 70% of our total restaurant margins. And this income is less volatile when compared to our income from a company operated restaurant.
We continue to navigate the near term challenges and drive long term growth by prudently investing our time and resources in those areas that will generate strong returns over time and most significantly improve the customer experience. I’d like to give you a greater sense of how we’re building our business by providing just a little bit more insight into our priorities to optimize our menu with relevant food and beverage offerings to modernize the customer experience as I’ve mentioned and to broaden accessibility to our brand through new restaurant development, convenience and affordable price value initiatives.
So let’s start out with optimizing our menu. We continue to balance the strength of our global core products with efforts to remain locally relevant across all product categories, all day parts and most importantly in this economic environment, our price points. Our core menu remains front and center because these products truly are billion dollar brands. Classic favorites like the Big Mac, our world famous fries, hamburgers, cheeseburgers, chicken nuggets. These products give our customers compelling reasons to visit McDonald's time and time again.
We’re also strategically strengthening our established platforms with relevant, new offerings, particularly in the categories of beef, chicken, beverages and breakfast. And in Australia, even a little bit of lamb. We know that larger sandwiches, both new and core, power our topline growth and the work we’ve done to build our premium beef burgers is just one way we brought this principle to life. Let me show you what I mean.
Another great addition to this portfolio of premium burgers is the quarter pounder of product line extension that’s launching here in the United States next month. By the way yesterday I was out in the marketplace and I know New York already has these burgers. So some of you may have tasted them already, but they’re available in three delicious flavors, habanero ranch, deluxe and then bacon and cheese. These sandwiches offer even more variety and they build on the core burger lineup our customers know and love.
When I was here last year, I talked about how we’ve increased our emphasis on innovating locally, sharing winning concepts with each other and then scaling those ideas across our system to create a brand that’s relevant globally and also locally. Another recent example of this is our premium McWraps, which originated actually in Poland and were recently introduced in the United States. Today, McWraps are in 33 markets around the world and continue to grow in popularity because they’re portable and easy to customize to match local taste preferences. Savory combinations of additional ingredients such as shrimp, pork and goat cheese have proven successful in markets outside of the U.S and highlight the flexibility that this platform provides us for the future.
Our beverage platform is another testament to this strategy. The U.S just launched the blueberry pomegranate smoothies which originated actually in Canada as part of its ongoing effort to bring new news to this important and profitable lineup. And in June, the UK will expand its McCafe line with the introduction of smoothies and frappes. These menu additions will enhance our position as a beverage destination by offering customers even more beverage variety, served and modern contemporary restaurants with the quality, convenience and the value that only McDonald's can provide.
Breakfast also remains a significant growth opportunity for us. Earlier this month, the U.S added the egg white delight McMuffin to its morning lineup. This tasty 250 calorie sandwich features egg whites, Canadian bacon and white cheddar cheese on an English muffin made with 8 grams of whole grain. And our customers can now request egg whites on any breakfast sandwich at McDonald's.
In Asia Pacific, Middle East and Africa where our breakfast sales as a percentage of full day sales are about half of the U.S average. 30 countries recently participated in a national breakfast day promotion. 5,000 restaurants gave away 5 million of our great tasting and nutritious egg McMuffins and we significantly increased awareness and trial for our breakfast products.
Now onto our second priority which is how we continue to modernize the customer experience. We spend a lot of time talking about the look and the feel of our restaurants because as consumers, all of us we eat with our eyes first. When our restaurants are modern and beautiful, the food simply tastes better, but this is about more than aesthetics. The look of our restaurant has the most significant and immediate impact on both perceptions of our brand and our business results. Contemporary restaurants enhance our ability to introduce additional premium products and to offer even greater convenience.
Globally, nearly 60% of our interiors reflect our current contemporary look and we expect to reach the 50% milestone with our exteriors by 2015. The UK is a great example of the power of this critical mass. This fully reimaging market continues to deliver strong year over year sales increases. And in the U.S, the average sales lift from our reimaged restaurants is 6% to 7% above the local market after one full year. Throughout 2013 we plan to reimage more than 1600 restaurants, including about 800 in the U.S, 450 in Europe and 225 in APMEA.
Tangible consumer facing improvements at our operations and our service also continue to build customer loyalty and increase our capacity to serve more guests. The different ways in which we’re leveraging technology is probably the best example of this. The new point of sale system that’s in more than 60% of our restaurants globally now helps crew take orders more quickly and more accurately. It also opens the door for even greater personalization’s the consumers expect these days. At the same time, our e-commerce efforts, which include mobile ordering and digital engagement, are launching pads for increasingly data driven marketing strategies. This enables us to increase our focus on one to one conversations with our customers wherever they may be, whether that’s at home, at work, on the road or in our restaurants already.
Another opportunity for this is how we engage consumers at an entirely different level. A great example is a new app recently launched by our Australian team that integrates product quality, freshness and nutrition messaging with fun to connect with our customers on a deeper level. TrackmyMacca’s, that’s our Australian customer scan and QR code on many product packages to see where their food comes from. Let’s take a look at it. That was really exciting.
Now let’s shift over to our third growth priority, broadening accessibility. Price value is an important part of our accessibility strategy and it’s foundational to our brand’s identity. Around the world, we remain focused on offering great taste at a great value across our menu board. We know how important this is, especially today as I mentioned earlier since affordability remains top of mind for consumers everywhere. Our goal is simple, to ensure that our branded affordability platform satisfy our customers’ broad taste and their preferences both in terms of products and price points.
We’re driving top and bottom line results with a two pronged approach that offers great products at affordable prices and the compliments that foundation by featuring premium products and promotions that encourage trade up and higher average checks. In France for example, the Casse Croute sandwich and drink combination enables us to compete more aggressively with local bakeries with an offer below the critical 5 euro price point. And in Germany we’ve continued to refine our value offers across day parts to further strengthen value perceptions for some of the world’s most price sensitive customers.
We’ve also seen a benefit from our ongoing emphasis of the dollar menu in the United States and while the new Grilled Cheddar Onion Burger and the hot and spicy McChicken exceed expectations and lifted sales across the value category, it’s important to note that the dollar menu continues to represent about 13% to 14% of our overall sales.
Accessibility though is more than just price and price value. It’s also about convenience, making McDonald's more available to more customers more often. That’s why strategically adding new restaurants when and where appropriate remains an important component of our convenient strategy. We’re currently on track to open between 1500 and 1600 new restaurants this year. Our focus is on markets that demonstrate significant potential and generate attractive long term returns.
Convenience is also about being open longer in more restaurants, about improving the capacity of our existing restaurants so they can serve more customers more quickly. And by developing day parts like overnight and breakfast that may be under penetrated in some markets that we have around the world.
When it comes to maximizing restaurant throughput and capacity, our restaurants leverage proven labor and operation solutions such as proper scheduling and positioning. In addition, investments in multiple order points, including side by side drive-throughs and APMEA’s web ordering platform for delivery, are building capacity in our restaurants across the region.
Notwithstanding the pressures that we’re experiencing today, we remain confident in our future. We have the right strategies in our plan to win in our three global growth priorities and our local markets continue to make the necessary adjustments to their plans to adapt to local conditions. Our season team of franchisees, suppliers and company employees are experienced in a variety of operating environments and they know how to balance the need to manage for the long term and deliver results in the here and now by staying focused on what matters most, which is our customers.
As I mentioned earlier, we still see significant opportunities to grow sales and market share and profit for the long term and we have the capital, the financial strength, the resources and the system alignment to seize that opportunity and continue to stretch and grow our McDonald's brand.
Underlying our growth strategies is our commitment to financial discipline. Our predictable cash flow and strong balance sheet allow us to return a substantial amount of cash to shareholders. During the past five years we’ve returned more than $27 billion to shareholders, including $5.5 billion in 2012 and another $1.1 billion in the first quarter of this year. In 2012 this included dividends paid of $2.87 per share, more than 75% higher than the amount we paid in 2008.
Going forward, our philosophy regarding the use of cash remains unchanged. Our first priority is to reinvest in the McDonald's business and enhance our financial returns. After that we expect to return all free cash flow to investors through a combination of dividends and share repurchases over time.
So with that, I’ll close by re-emphasizing my confidence in the future of McDonald's. We remain committed to our long term strategies as we make thoughtful and strategic decisions to drive performance amid the persistent headwinds that we face today. We have defensible competitive advantages, a resilient business model and the necessary alignment across our owner operators, our supplier partners and our company teams to be able to drive enduring and profitable growth for our system and for our shareholders for the long term.
I’ve said this before but it’s very true. This is not yesterday’s McDonald's. This aggressive and appealing leadership brand is the McDonald's of today and of tomorrow.
Thank you for your attention and I’d be happy to entertain any of your questions.
Alexia Howard - Sanford C. Bernstein
Thank you so much, Don. If you have questions, you can write them on the cards that are on the seats out there and hand them in and we’ll make sure that we get through them. Don, thank you so much for the presentation. Maybe I could just kick the Q&A off with one of my own. So McDonald's has described its ability to learn, share and scale as a competitive advantage. Could you give us some initiatives or describe some initiatives where it has applied this approach successfully and which other areas of the business could benefit from greater learning, sharing and scale? Thank you.
Alexia, I would say that the first and we talked a little bit about it during my comments is around food. For a long time at McDonald's we were very separate in terms of how we developed food. Today we have over 160 products in the global pipeline. When I look at McWraps that started in Poland, moved across Europe, now in the U.S, now in other areas around the world, smoothies which started in Australia and New Zealand, moved to Germany, the U.S, now in Canada and we’re seeing now development of products like the Canadian blueberry pomegranate that are coming back to the U.S. We’ve seen chicken sandwiches that moved last year’s Cheddar Bacon Onion in the U.S. So there’s been a lot of food products that are moving around the world and we need to be able to continue to do that and do that even quicker. Another area happens to be our operations and operations improvements, whether they’d be the made for you system in the U.S and how that’s translated to other areas around the world to be able to get us more efficiency and provide product variety.
The way we develop sites now around the world is very different than we did years ago. The technology advancements that have been made and our ability to scope in on a market and understand the demographics and dynamics and where we should be positioned as McDonald's across the marketplace rather than in an individual site very different and those learnings are now transferring around the world. So this learn, share and scale philosophy that we have is not just food. It is across the broader range, including people practices, operations, development et cetera.
Alexia Howard - Sanford C. Bernstein
Okay, a follow-up question. How are your franchisees coping in this low-growth environment, and do you track their take-home profit as well?
Absolutely we do. The franchisee relationship is very critical and one of the things we see in McDonald's often is we really want the franchisees to make money first because we’re 89% franchised in the U.S. globally we’re 80% franchised. So they have to be successful. So we’d like to see that their success, our suppliers success and then our success all at the same time. We call that the three legged stool. The way that we deal with times like this is twofold. One is to continue to stay focused on the basics of the business, so driving guest counts, continuing to drive sales that are as profitable as they can be in this environment. We know that there are some margin investments that we’re making relative to guest count growth and the franchisees understand that. So we have a constant communication with our franchisees around the world.
Tim Fenton, our Chief Operating Officer, myself, the divisional presidents, we’re always in the market. I just came back from one of the toughest impacted areas in the world which is the southern division of Europe. I was in Portugal and I was in Italy, talking to the franchisees and you know what, I will tell you that there is uncertainty in those market places. What gives our franchisees a little bit more confidence is the fact that McDonald's is still very strong and we’re right there with them throughout these things. Our average franchisees don’t own 60 and 70 restaurants. They own in the U.S 5.5 restaurants and so for them it’s really important that we have that touch tone and touch point. By the same token the cash flows of our restaurants far exceed any of our competitors. So that gives us a little bit more robustness if you will in times like this.
Alexia Howard - Sanford C. Bernstein
Great. I've got a few questions here around the comp slowdown and what it's going to take to re-accelerate comp growth. And linked to that, what is going on with the competition, particularly in the US. Are they improving structurally, or do you see that some of the benefits from their initiatives as fairly short lived? What will it take to reaccelerate comp growth and what’s happening with competitors?
So comp growth is a little bit different based upon the area of the world. If I were to look at the U.S as an example, last year our performance was at best I would say lackluster last year. We didn’t do what we needed to do from a menu, bringing menu and excitement to customers. That’s not something we’re doing this year. So this year already we’ve seen Fish McBites come in. we’ve got blueberry pomegranate I talked about. Last year we didn’t talk about our smoothie flavors after about April. We kind of went dark to talking about all of our blended ice beverages in our McCafe lineup. So this year you’ll see more of that. We’ve implemented McWraps this year. The first major new sandwich we implemented last year was in October, Cheddar Bacon Onion. So we’ve got the quarter pounder line that’s coming out in June and already here in markets like New York.
We’ve got other product innovations that will come later in the year. So we’ve gotten our menu back front and center. Our marketing is stronger. It’s more direct. It’s more aggressive relative to how we’re getting our messages out in the U.S. So the U.S I would say part was economy, but I think a bigger part was in our execution. Across Europe, it’s also slightly different but there’s a couple of buckets. Macroeconomic pressures exist and they will exist for a while across Europe. What that means for us is that when you see IEO contraction in many of these markets, we've got to make sure that we’re taking market share and we’re positioning ourselves when the recovery does come. At the same time we’ve got to make, the way that you gain business in times like this when you don’t have the opportunity to price to a higher level due to lower inflation is you’ve got to take share. So there’s not a lot of new entrants into the category.
So in Europe, for many other areas of Europe, that’s what we have to do. And so we’ve had stronger value messaging in those markets as well as mixing some of the premium products that they’ve always had and done great in Europe. But those things will help us. Across Asia, Australia, finally their economy softened in the last couple of years. They have a little bit more robust competitive set than what we have in other areas, but it’s not a very strong, it’s not as strong as the U.S competitive sec. So in Australia great reimage market, physical assets look good, menu and marketing is strong. What we didn’t have was the value platform. The economy got soft. We needed to fortify that base. So when I say it’s a little different, each of those things we have to know locally which triggers we have to pull to be able to drive the business.
Alexia Howard - Sanford C. Bernstein
Maybe we could just move over to China. You mentioned Asia just now. You're in the unusual position of lagging behind Yum! Brands and others in terms of unit counts and system wide sales. What’s your strategy there? How do you plan to compete?
The headline I would say for us is -- this is not about a race with any one competitor. Not only that, for us at McDonald's the 1500 to 1600 restaurants that I talked about from a development perspective are spread around the world. We think that that is the best approach. It gives us diversification in our portfolio of assets around the world. We’ve got 34,000 plus restaurants, almost 35,000 restaurants around the world. When we grow and develop we will grow and develop in not only the BRICs of Brazil, Russia, India, China, we’ll also grow in the South Koreas of the world. We’re also growing in the Malaysias of the world. We’re growing and franchising even stronger in many other areas that are around the world. So our portfolio is more diverse. We think that’s the right approach. Relative to China specifically, China is a great market and it will be a great growth market for years to come.
Today it represents 3% of our operating income. Will that grow in time? Yes, it will grow in time, but we don’t have all of our eggs in one basket. So we’ll continue to grow China. We’ll grow it at a pace that allows us to franchise effectively. We’ll grow it at a pace that allows us to continue to seek out sites that we can place drive throughs in because that’s the best long term returns. And we’ll do it in a way that grows along with the automotive growth in China. We’ll start to grow outside of the core cities which we begun to do and we’ll establish development licensees even stronger which we’ve already begun to do. So our strategy in China is a solid strategy, but it is part of a broader strategy. It’s not just about China.
Alexia Howard - Sanford C. Bernstein
Got you. It has been almost 10 years since salad innovation reinvigorated comps here in the US. Is that planned salad innovation ongoing now?
Salad innovation reinvigorated comps. Okay. Well, salads -- from the time we implemented salads to the day, salads have probably ranged about 2% to 3% of sales. It went as high as 3% and we have some really great salads. But one of the challenges with salad has occurred has nothing to do at all with McDonald's or facilities. It has to do with the number of issues that occurred around salads and whether it was sprouts in Germany, whether it was tomato issues in the US, lettuce issues in the U.S, there’s been a number of issues around salads. So it’s been between 2% and 3%. So salad in and of itself won’t be the innovative arm of growth for McDonald's. The growth categories are beef and that’s premium beef. Chicken. Chicken is the major protein growth category right now. Breakfast is still a growing category and a driving category and then beverage is a huge category and opportunity of growth. We will innovate around salads and continue to bring our freshness.
There was a time when we would always have one of our seven national windows of marketing we would dedicate to salad. So we were dedicating one sixth if you would of our national marketing windows to something that was yielding about 2% to 3% of sales. I’m still bullish on salads, but not bullish to the extent that I wouldn’t’ take that window and put quarter pounder line of chicken sandwiches or wings or something else in that window. And so I think at this point we’ll continue to market, continue to innovate around it, continue to bring a lot more of vegetables and fruits to the marketplace as you see in the McWraps that we show. But we’ve got to figure out there’s other ways of being able to bring that produce to market. Salads will be one, but it won’t be -- I don’t see salads being a major growth driver in the near future.
Alexia Howard - Sanford C. Bernstein
What is McDonald's doing to win mind share and market share amongst 10 to 20 year olds?
It’s a great question. The different group, different set today, this group as it moves into millennials, they are much more socially conscious and socially aware. So there’s a couple of things. One that’s really important is around the world this is also the group that seems to be impacted the most by some of the recessionary environments that are around the world. So when you look at Spain as a great example. When you’ve got 27% unemployment but you’ve got nearly 55% unemployment of teenagers and this is similar to other markets across Europe, this group has a little less money than they had before. I guess that means mum and dad to a great extent, have a little less money than they had before. But when they come in now they’re bundling much more. So they’re buying in bundles. They’re buying in snack portions. They’re sharing a lot more.
So we have to have products that basically lend themselves to that. The other thing we have to do is because of their social conscious nature, things like the TrackmyMacca’s, the digital engagement and the social message are much stronger for this age group, much stronger than it has been in a long time. So we are beginning to tell the McDonald's story much more about the things that we’ve done relative to sustainability over the years. We never talked about it. We never talked about our alliance with Green Peace from the rainforest perspective in the Amazon. We never talked about all the things that we’ve done to lead environmentally from a recycling perspective in many of the markets that we have around the world. We haven’t talked a lot about some of the things we’ve done, whether it be animal welfare related, around beef, around chicken. And so we’re talking more about these things and we’re talking more about carbon footprint.
We established a function which we had not had. We were doing this very decentralized. We established it at the global level and this is a big focus for us for our sustainability efforts around people and community, around our supply chain and strategic sourcing, are big things that are moving forward. And we will talk more about Ronald McDonald House Charities. It’s our charity. It has been our charity since the ‘70s and we just never talked about it. It was more about our heart than it was about talking about it. But today there was a time where people would catch you doing things right. That’s not today. Today if you’re doing something right you have to at least let it be known. You don’t have to be braggadocios, but you have to let it be known. So we’re going to try to tell our story a little bit better in the years to come.
Alexia Howard - Sanford C. Bernstein
A real quick one here, about three or four people asked the same thing. Will you be rolling out the Macca app tracking say globally and when?
I knew that was going to happen when we showed that one. TrackmyMacca’s is a phenomenal application and this transparency into the supply chain is a major part of the consumer trend toward real and fresh. So there are applications and visibility into the supply chain system that we will be looking to move forward. Whether or not it will TrackmyMacca’s exactly I don’t know if that’s going to be the case if it will look exactly that way, but we believe that that model is a phenomenal model to get the messages out the right way. There’s other things that we have done. One is when we’ve done basically your questions, our thoughts our answers. I’ve forgotten exactly what we called it when we did this in Canada.
We’ve gone online and people can ask any questions they want and we get right back to them with the answers that we have. In Australia we did a listening tour. The U.S we did a listening tour. So we’re going to be doing more things. But I think that digital engagement of TrackmyMacca’s is what makes it so special and that is something that we will be moving forward to look at how you engage more and have the transparency that’s there. I can’t say that TrackmyMacca’s will be the one that is launched around the world, but I think you can look forward to seeing something that helps us be a little bit more transparent in our supply chain.
Alexia Howard - Sanford C. Bernstein
Okay. McDonald's is focusing on a price/value proposition, but with US market recovery and improving consumer sentiment, consumers may be more willing to trade up to more premium restaurants over time. So how is McDonald's sort of thinking about that recovery over the next few years?
I think we’ve focused a lot on trying to make sure we could sustain the base and grow the base i.e. grow market share and we’ve been able to do that consistently across the years, particularly the years of this recession. But that’s not the only thing we’ve done. This year is really a good testament to that. If you look we try to be on the leading edge, whether it’d be the beverage strategy that begun already, whether it’s the McWraps that are in now, whether it’s the quarter pounder line that’s in now, whether it’s the blended beverages which are higher margin, higher price point but higher margin. So those things we have in place. We’re talking more about a core menu; Big Macs, Quarters, Filet-O-Fish, hamburgers and cheeseburgers.
So those things we’ll be doing now and we think that we’re quite well prepared when the economy does change. The critical point is not to get there and leave customers behind. And so if all of a sudden we decided the only thing that we were going to advertise were higher margin products and not advertise the $1 menu, that will not be a good move since three out of four customers will use that $1 menu in some form or fashion, whether it’s adding on a product to an extra value meal or making up their own meal out of it. That’s about 46% of the people to you that actually make up a meal. So we’ve got to make sure that we have a good balance of both of those.
Alexia Howard - Sanford C. Bernstein
On the topic of alignment, which part of the business is the least aligned today, and how will you address it?
Which part of the business is the least aligned right now? Actually it’s me and my body in this cold. One of the things we’re blessed within McDonald's is and many people have asked this, Don, how much time do you spend on the road? And as a Chief Operating Officer I used to say about 70% of my time. The good thing is now Tim spends about 70% of this time, the new Chief Operating Officer, but I’m still about 50%. Why is that? Well because within our alignment structure we have things like the Operator National Advertising Body in the U.S, the European Franchise Leadership Group, the Food Improvement Teams around the world that are franchisee supported, the Supplier Leadership Councils. We have the McDonald's Hispanic operators associations, the Black McDonald's Operator Association, the Asia McDonald's Operator Association, the Women’s Operator Network. We have a number of franchisee organizations.
What it allows us to do is to get to these various groups and continue to get messages out about here’s what’s happening in the business, here’s what’s happening with healthcare reform, here’s what’s happening with our overall business momentum. Here’s opportunities to look at profitability maximization and optimization at a restaurant level and food and paper cost. So our structure is set up to have a number of leadership groups and that helps us with the alignment. The same thing with the suppliers. They’re embedded in all of these various groups. And so at McDonald's we spend a lot of time communicating with each other and that is what has kept us as strongly aligned as we are today, that and the fact that we have a centrally focused plan, which we call the plan to win. We have called it that. It’s less about the plan and more about the framework for alignment. The three global growth priorities are really the plan within it, but the plan to win everyone in our system knows, this is the thing that keeps us in line and keeps us focused is the framework and that is consistent around the world. Flexibility within it, but the plan itself and the framework is the same around the world no matter where you are.
Alexia Howard - Sanford C. Bernstein
More of a capital allocation question here. Why are you paying out all that money in dividends and share buybacks when you've got a very high return on assets? Would you be better off growing the franchise more quickly and what are the constraints to growth?
That’s an interesting. I probably should turn this one back to you guys. I think there’s probably some people in the audience that would view that the other way. I think we also have a lot of contacts and communications with our shareholders and dividends are important to our shareholders and that’s the by and large. They like to see a dividend. We enjoy sharing the profitability with those shareholders who have invested in the future of this great business. So we continue to return as we said all free cash flow post investments, reinvestments in the business, to shareholders over time through dividends and share repurchase. We’ll continue to do that. We have invested stronger in our business.
As I said though, even this is with a balance. When you get to softer economies like we’re in now, when you get to softer sales like we’re in now, then clearly your return suffers. Now it’s shorter term in terms of that. We adjust very quickly relative to what we need to do. But this business still yields a very solid return. So we’ll continue to invest in it, but also as we’re investing, we’ll continue to share those gains with our shareholders. So it’s not one or the other. We have to be able to manage and do both of these things over the longer term.
Alexia Howard - Sanford C. Bernstein
We’re almost out of time now, but I've got a couple of questions around the healthy food, obesity kind of questions. And basically saying [is] fast food in the US now becoming a mature -- a very mature industry with those concerns coming up, and healthy foods the way of the future, how does McDonald's adapt to that going forward?
I think if you look back at the history of food around the world, it’s very interesting. Today we’re in this time period where people are defining “healthy” and non-healthy and the question really is in the restaurant business is what does the customer want? Do you want a salad? We’ve got great grilled chicken salads and great McWraps, the new Egg White Delights and parfaits. We’ve got that, or do you want a quarter pounder with cheese and a large fry and a drink? A customer needs to be able to make that determination. What we have to do is make sure we’re following the consumer trends and customer trends around what it is they want. Ray Clark said this very well years ago. Whatever is it the customer wants, we’ll be selling more than anyone else. That’s our goal. What a customer wants is what we’ll sell in the restaurant.
Now, having said that do we feel we have a social responsibility if you would to provide more fruits and vegetables? To a certain extent when it’s related to children, but at the same time we’re not the parents of everyone else’s child. But for me and my children I love going them going to McDonald's because I know that there’s choice and I know where our food comes from and I know it’s safe and I know they can get, my daughter can get the salad, my son who’s a football player and offensive lineman can get what he likes to get which is an Angus Burger with big fries and a big shake and he’ll burn it off in a few minutes. But I think that this is one of those things we have to be very careful of. If you go to Europe, there’s not many places that have cooked with more butter in some areas in France.
And many of us go oh this is absolutely fantastic. Europeans walk a lot. If you ever go to Europe they walk a lot and it’s rare to see many Europeans that are very, very heavy. So when you’re in the food business we have to be about the food first and the taste of the food and then we have to provide choice so customers are able to balance their menus and their meals at. I eat at McDonald's every day, every single day and the last year so I’m down about probably 20 some pounds. I’m sharing my personal stuff down. So how are you down Don? What did you do? You know what, I didn’t change eating at McDonald's every day. I got my butt up and started working out again. I had stopped working out when I transitioned into the CEO role. A new CEO you think either you want to know everything, you need to know everything if somebody else knows everything.
And so I stopped doing some of the thing that were taking care of Don. And so all of us have to make personal choices, whether you’re a parent, whether you’re an individual, we want to make sure we provide you the options so you can come in and get whatever you want at McDonald's. So one day get that Big Mac. It’s only 540 calories. Another day, you might want to get that grilled chicken salad with the balsamic vinaigrette. Don’t go and get the ranch, get the balsamic. And another day you may just decide you know what, I haven’t had it in a while, but I think I want to try that new McWraps. And so I think that balance is really important to people.
Alexia Howard - Sanford C. Bernstein
Great. I think we are out of time. Thank you so much for your time Don this morning. We really appreciate the answers to the questions. Thank you.
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