McDonald’s
The McDonald’s Corporation or how we all are used calling it simply “McDonald’s” has grown into a multinational company, the world’s largest chain of fast food restaurants serving millions of people daily in over 100 countries of the world. So it may be hard to imagine that this “giant” has grown out from a small barbecue restaurant opened by Richard and Maurice McDonald in 1940 in San Bernardino, California. Later in 1948 their business concept was reorganized into a hamburger selling place very much close to what we know it is now. And in 1955 the business was purchased by Ray Croc, who gave McDonald’s worldwide growth and the status of billion dollar business.
According to the information listed on the company website, McDonald’s is operated in 119 countries with more than 34, 000 restaurants serving nearly 69 million people every day (Getting to Know Us, 2013). First international McDonald’s restaurant was opened in Canada and Puerto Rico in 1967. The expansion of the chain has been so huge that in 1986 The Economist magazine even introduced a “Big Mac Index” in order to compare prices for Big Mac burger all over the world. However, of course the context of the term is much broader. It helps to measure the purchasing power parity of two currencies, depending on the market exchange rates in the countries where McDonald’s has its restaurants.
All business operations of McDonald’s have been divided into 3 strategic geographical regions – United States; Europe; APMEA (Asia, Pacific/Middle East, Africa). The reasons for choosing countries in these three specific reasons are numerous. These regions provide a huge consumer base. There are constant possibilities of expansion especially in countries of Eastern Europe and Asia. Talking about Eastern Europe market, new business possibilities are still quite promising there, even though the McDonald’s chain was established in 90’s. McDonald’s knows how to adapt, offer innovations, fresh ideas and products for diverse consumer market. Besides, there are no major competitors for the company on the international level if you take fast food industry. McDonald’s is good for both Europe’s austerity and robust growth in Japan and China (McDonald’s Winning Strategy At Home and Abroad, 2012). The company wins by getting its foot in the door first and outlasting competition. However, before placing business into the new location, McDonald’s also thinks what to give back to the host country, like buying raw materials, providing construction and jobs, etc. (What Makes McDonald’s International a Model of Success?, 2011) So when the company chooses new country to put its restaurants in, this choice is not a random one.
At the year-end of 2012 among 34,480 restaurants worldwide 27, 882 were franchised (including 3, 663 licensed to foreign affiliates) and 6, 598 were operated by the company. As for year-end 2012 sales in Europe rose 2.4% marking the ninth consecutive year of growth in the region. Main contributors to this success were Russia and UK. The APMEA region brought 1, 4 % raise. The percentage is lower than of Europe region mostly due to Japan uneven recovery from natural disaster in March, 2011. However, China and Australia positively contributed to the raise and balanced the outcome. Globally, the combined operating margin was 31.2% in 2012 (which is 0.4% less than of year 2011). Cash operations were nearly $7 billion exceeding capital expenditures by $3, 9 million in 2012. “While changes in foreign currency exchange rates affect reported results, McDonalds’ mitigates exposures by financing in local currencies, hedging certain foreign-denominated cash flows, and purchasing goods and services in local currencies” (Financial Report, 2012). Revenues from franchised restaurants licensed to foreign affiliates include royalty based on a percent of sales and initial fees. If we take Company-operated sales in foreign regions, Europe received $7, 850 million revenue (2% increase), APMEA - $5, 350 million (6% increase excluding currency translation), other countries - $873 million (5% increase). Franchised restaurants in Europe brought $2, 977 million (5% increase), APMEA - $1, 041 million (9% increase) and other countries - $662 million (11% increase). Total revenues coming from foreign regions were: Europe - $10.827 million (6% increase), APMEA - $6, 391 million (6% increase), other countries - $1, 535 million (with no increase overall). With total profits of $27, 567 million, the part of the foreign regions is reaching up to 68% ($ 18, 657 million).
In order to analyze the financial implications of the sales figures in these regions we also need to differentiate the specifics of the regions themselves and what financial strategies have been implemented there. For Europe, as was already mentioned, main contributors to the positive increase were UK and Russia in 2012. There has been a big chain expansion in Russia, and the sponsorship of Olympic Games held in 2012 in London brought overall UK sales up to the expected amounts. In 2011 same position was held by France and Germany. For the AMPEA region, the main sales booster was China with its market expansion and Australia. The noted countries are expected to bring even bigger percentage increase in 2013.
Being a multinational company McDonald’s is exposed to global market risks. Therefore it needs to hold currency management program to deal with negative effect different foreign currency fluctuations have on the annually reported results, changes in interest rates, etc. The main concept of company’s management as well as franchise holders is excluding the effect of foreign currency translation. So that business results are analyzed along with incentive compensation plans to better represent company’s business trends. “Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates” (Impact of Foreign Currency Translation, 2009). McDonald’s is using derivative instruments along with foreign currency denominated debt to mitigate currency fluctuations. Nevertheless, company’s practices exclude using derivatives with high risk level and complexity. What is more, McDonald’s does not issue or hold derivatives for trading purposes. Company’s hedging instruments include foreign currency options, interest rate exchange agreements and forward foreign currency exchange agreements. Forward foreign currency exchange agreements and foreign currency options are the most valuable ones for currency issues management. The risk of forecasted foreign currency cash flows being affected by changes in foreign currency exchange rates is mitigated by using these two instruments.
While the success of McDonald’s global operations fully depends on the effective hedging of income statements against the foreign exchange and interest rate risks, in some regional markets the task is still challenging. Company funds its assets with more than $8 million in debt globally. More than $4 million of debt is denominated in a foreign currency. In order to manage financial risks the management has implemented the strategy of active use of swaps and options. For instance, Darin Aprati, Foreign Exchange Manager at McDonald’s, and Brian Moore, Manager of Financial Markets, together have implemented basket option strategy to hedge company’s foreign exchange risks. The convenience of such method is in the fact that while using basket options the payoff depends on the “basket” of income and assets.
Also in order to manage its debt balance McDonald’s is known to be using different approaches in terms of qualitative and quantitative analysis. In those countries where McDonald’s business is placed the main fundamentals of each economy are taken into account, as well as local currency is analyzed to define whether it is needed to take measures and secure changes in currency exchange rate. For the part of quantitative analysis, the company’s management weights assets and liabilities on one scale so that possible negative impact of changing currency rate risks can be forecasted. The company’s management also actively examines foreign exchange data precisely according to Bloomberg and Reuters and other financial live feeds (Increasing the Effectiveness of Hedging Interest Rate and Foreign Exchange Risks, 2009). In general, if we examine the figures of Annual Report as for the year-end of 2012 we can say for sure, that company is dealing with currency exchange rate changes effectively. To prove the fact, even with foreign currency adjustments the gain of $274, 7 million was recognized in the net income in the amount of $5,464.8 million total. That must be compared to loss of $310, 5 million also caused by foreign currency adjustments in 2011.
According to McDonald’s long-term debt and solvency analysis open to public online we can also examine company’s capital structure. As for December 31, 2012, debt to equity ratio was 0.86, debt to capital ratio – 0.47, along with interest coverage of 16.64 (Long-term Debt and Solvency Analysis, 2012). It needs to be mentioned that first two ratios has slightly deteriorated over the last 3 years. Total debt reached as high as $13, 632, 500 in relation to $15, 293, 600 of shareholder’s equity and the total capital of $28, 926, 100. If we take 2011 results, then we can clearly see the deterioration: total debt of $12, 500, 400 in relation to $14, 390, 200 of shareholder’s equity and the total capital of $26, 890, 600.
References
About McDonald’s. Official Website. Getting to Know Us. (2013) Retrieved from
http://www.aboutmcdonalds.com/mcd/our_company.html
Annual Report McDonald’s Corporation. Financial Report (2012) [PDF document] Retrieved from http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investor%202013/2012%20Annual%20Report%20Final.pdf
Giovanni, A. What Makes McDonald’s International a Model of Success? (2011, January 4) Yahoo Voices Retrieved from
http://voices.yahoo.com/what-makes-mcdonalds-international-model-success-7525636.html
Mourdoukoutas, P. McDonald’s Winning Strategy At Home and Abroad (2012, April 20) Forbes Retrieved from
http://www.forbes.com/sites/panosmourdoukoutas/2012/04/20/mcdonalds-winning-strategy-at-home-and-abroad/
McDonald’s Corporation (NYSE:MCD). Impact of Foreign Currency Translation (2009) Retrieved from
http://www.wikinvest.com/stock/McDonald's_Corporation_(NYSE:MCD)/Impact_Foreign_Currency_Translation
FinancialCAD Corporation. Increasing the Effectiveness of Hedging Interest Rate and Foreign Exchange Risks (2009) [PDF document] Retrieved from http://www.fincad.com/pdfs/mcdonalds.pdf
Stock Analysis On-Set. McDonald’s Corp (MCD). Long-term Debt and Solvency Analysis (2012) Retrieved from
http://www.stock-analysis-on.net/NYSE/Company/McDonalds-Corp/Ratios/Long-term-Debt-and-Solvency
