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McD pins global growth on upgrades to units, experience

McD pins global growth on upgrades to units, experience

OAK BROOK ILL. McDonald’s Corp., in reporting its second-quarter results, said it remains exceedingly bullish on building its international business, despite a rare quarterly loss related to a Latin American transaction. —

“The real news is the strength of the global business,” Matthew Paull, McDonald’s soon-to-retire chief financial officer, told analysts in July following the release of results for the quarter ended June 30. —

Paull and McDonald’s chief executive Jim Skinner were especially upbeat about Europe, one of the company’s most mature regions, and the much-newer China market, which is part of McDonald’s Asia-Pacific, Middle East and Africa division. —

Those two international regions led McDonald’s same-store sales gains for the quarter, with the Asia-Pacific region showing a same-store sales increase of 10.9 percent, and Europe posting a 7.8-percent increase. In comparison, domestic same-store sales rose 5 percent. —

For the quarter ended June 30, McDonald’s reported a 25-percent jump in earnings from continuing operations, to $1.4 billion, or 71 cents a share, from $1.1 billion, or 56 cents a share, a year ago. Tempering that positive news was a net loss of $711.7 million, or 60 cents per share, compared with a profit of $834.1 million, or 67 cents a year, a year earlier. —

The loss, which was expected and was the company’s second-ever quarterly loss, resulted from a one-time charge of $1.6 billion for the sale to a franchisee of 1,600 restaurants and development licenses in Latin America and the Caribbean. McDonald’s officials said the sale would reduce the company’s financial exposure in a challenging region and would strengthen profit. Operations in Latin America are now 77 percent franchised. —

In Europe, McDonald’s also is tilting the ownership balance in favor of franchised over company-owned stores. That balance now stands at 64.5 percent franchised and 35.5 percent corporately owned. In the United Kingdom, the percentage of franchised restaurants has risen 10 percent in the past two years, Paull said. —

Executives credit three strategies for building sales in key European markets: upgrading the customer and employee experience, building brand transparency, and preserving local relevance. The European division, comprising 6,400 restaurants in 40 countries, accounts for 35 percent of net income, Denis Hennequin, president of McDonald’s Europe, told an international group of journalists during a recent media tour of key restaurants in London, Paris and Munich, Germany. —

McDonald’s Europe experienced its best results in 15 years last year, and Hennequin hopes that 2007 results may surpass them. —

“More people visit us more often,” he said, adding that McDonald’s share of the quick-service market grew from 10.6 percent in 2005 to 11.2 percent last year. —

Restaurants in Germany, France and the United Kingdom make up 30 percent of McDonald’s European holdings. The fast-growing markets of Spain, Italy and Russia should account for 70 percent of new European operations this year, he said. —

Corporate revenues in Europe have surpassed those in the United States. For the second quarter, Europe reported revenues of $2.18 billion, compared with $2.02 billion for the United States. Systemwide revenues hit $6.01 billion, a 12-percent increase from a year ago. —

Hennequin said McDonald’s is better at meeting its customer needs than it was some years back, for which he cited the creation of a more welcoming environment, menu innovation, extended hours, the addition of cashless payment and providing good value. —

Thirty percent of European units recently have been reimaged, and the company’s goal is to reimage 700 more this year, including the addition of 100 more McCafe sections, which offer upscale coffees and desserts in a separate area of the restaurant. The number of McCafes in Europe soon will reach 300, compared with only 19 in the United States. —

Sales in Europe’s recently reimaged restaurants have risen. In Wolfratshausen, Germany, outside of Munich, franchisee Michael Heinritzi said sales were up about 22 percent since the reimaging of his 125-seat restaurant, which also has a 200-seat outdoor deck. Sales are up even more at his restaurants in smaller cities where there is less competition, he said. —

Upgrades in the McCafe portion of Heinritzi’s restaurants include wooden floors, leather chairs, a fireplace, fresh flowers and candles. Heinritzi’s restaurants are open between 16 and 24 hours daily and double as community and business meeting places, he said. —

Hennequin expects all units to offer free Wi-Fi connections by the end of this year. Europe’s highest-grossing McDonald’s, located in Munich’s historic Karlsplatz, also offers customers the ability to download cell phone ring tones and burn photos from their digital cameras onto CDs. Seventy percent of business in that 400-seat urban restaurant is eat-in. —

“Coffee in general is very important,” said Hennequin, who noted that coffee sales have risen 25 percent in Europe. Restaurants in several countries have rolled out sustainable coffee programs, which have struck a chord with Europe’s environmentally conscious consumers. McDonald’s recently switched to organic milk in United Kingdom units. —

Artificial trans fats in frying oils will be reduced in all European countries within 18 months, Hennequin said, and sooner in countries where transfat bans go into effect before that. Denmark was the first country to ban trans fats in 2004, a deadline that McDonald’s met. —

“We have a rollout time scheduled for each country” that is dependent on adequate supply of rapeseed, said Rebecca Jaramillo, chief quality execution officer for McDonald’s Europe. The amount of trans fats in frying oils has been reduced to about 5 percent at this point. —

Hennequin said premium items and extra-value meals — a dual strategy similar to that employed at U.S. restaurants — have helped to drive sales. —

“We are delivering good food fast, not fast food,” he said. —

Regarding the corporate goal of upgrading the employee experience, Hennequin said, “We are one of the major employers of young people in Europe.” —

The McPassport program, launched last fall, allows residents of any country in the European Union to easily transfer to the country of their choice to work. —

Building brand transparency has been key to changing a generally negative image that Europeans have had about American fast food. Some of the ways in which McDonald’s is achieving transparency are through nutrition labeling in the restaurants, a Quality Scouts program that allows the public to review the brand and comment publicly, and an Open Doors program that invites people to go behind the scenes in the restaurants. —

During the recent second-quarter analysts’ call, Paull noted that a new point-of-sale system installed in about 10,000 stores internationally is making employees’ jobs easier. The systems are in only about 200 U.S. restaurants so far. —

Skinner called quarterly results in Asia-Pacific “robust” and credited the availability of breakfast at 70 percent of the region’s restaurants, extended hours and branded affordability for building sales and customer traffic. —

McDonald’s currently is searching both within and outside the company for a new chief financial officer to replace Paull, who will retire by the end of this year to pursue a college teaching assignment. —

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