McDonald's on its China Drive-Thru Strategy

From McDonald's (MCD) Q3 2006 earnings conference call earlier today:

Ralph Alvarez - President and Chief Operating Officer, McDonald's

Now, let's turn to Asia-Pacific, Middle East and Africa. Their third quarter comp sales growth was plus 6.1%, led by Japan. We also generated a 150 basis-point increase in company-operated margins, primarily driven by China.

Our team in China is focused on executing the basics of the business and growing our brand equity. We are laying a strong foundation for the continued growth of our convenient strategy there. This means a movement to almost 50% of our new restaurants is being built with drive-thru’s.

While building a drive-thru restaurant in China is costing us about $200,000 more U.S., we are achieving opening volumes that are tracking at least $250,000 higher than before -- clearly a good investment.

We are confident in the leadership of our China team and the opportunities that we will capture in this market.

Jeff Omohundro - Analyst, Wachovia

I wonder if you could elaborate a bit more on the higher costs associated with the drive-thru initiative in China. During the recent analysts meeting in Shanghai, this was touched on, but I was wondering if you could elaborate on the opportunities over time to reduce those costs? Thanks.

James A. Skinner - Vice Chairman of the Board and Chief Executive Officer, McDonald's

Ralph, did you want to talk a little bit about the drive-thru costs there?

Ralph Alvarez - President and Chief Operating Officer, McDonald's

Sure. The higher cost is obviously we are buying property that is freehold versus going in line, and we have slightly higher construction costs that also play a part there. The $200,000 additional cost is really a reasonable amount, relative to what we have there.

We will, as we start building some of these restaurants that we are doing with the deal that we signed with Sinopec, some of those costs may be different. It may be lower because we are sharing property with the gas station. Our experience with that is that we are to lower some of our fixed costs.

Matthew Paull - Chief Financial Officer and Corporate Senior Executive Vice President, McDonald's

Also, we tend to -- when we do something for the first time, we usually do it in a bigger way. As we build more drive-thru’s, they may not all be as big as the ones that we are currently building. These are more flagship right now.

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