Overview
The Company franchises and operatesMcDonald's restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. Of the 39,020 restaurants atJune 30, 2020 , 36,371 were franchised, which is 93% ofMcDonald's restaurants. The Company's reporting segments are aligned with its strategic priorities and reflect how management reviews and evaluates operating performance. Significant reportable segments includethe United States ("U.S.") and International Operated Markets. In addition, throughout this report we present the International Developmental Licensed Markets & Corporate segment, which includes markets in over 80 countries, as well as Corporate activities.McDonald's franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with entrepreneurial experience and financial resources, as well as the local, legal and regulatory environment in critical areas such as property ownership and franchising. The business relationship betweenMcDonald's and its independent franchisees is supported by adhering to standards and policies and is of fundamental importance to overall performance and to protecting theMcDonald's brand. The Company is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences and driving profitability. Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength ofMcDonald's global brand, operating system and financial resources. Directly operatingMcDonald's restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allowsMcDonald's to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Company-owned and operated restaurants provide Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefitMcDonald's restaurants. The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms. The Company's Other revenues are comprised of technology fees paid by franchisees, revenues from brand licensing arrangements, and third party revenues for the Dynamic Yield business. Conventional Franchise Under a conventional franchise arrangement, the Company generally owns or secures a long-term lease on the land and building for the restaurant location and the franchisee pays for equipment, signs, seating and décor. The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry. Franchisees are responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company may co-invest with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants. The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to facilitate consistency and high quality at allMcDonald's restaurants. Conventional franchisees contribute to the Company's revenue, primarily through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. The Company's heavily franchised business model is designed to generate stable and predictable revenue, which is largely a function of franchisee sales, and resulting cash flow streams. As most revenues are based on a percent of sales, the Company expects that temporary restaurant closures, limited operations and dramatic changes in consumer behavior, as a result of COVID-19, will continue to have a significant negative impact on revenues. Developmental License or Affiliate Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants. The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based on a percent of sales, and generally receives initial fees upon the opening of a new restaurant or grant of a new license. 15
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While developmental license and affiliate arrangements are largely the same,
affiliate arrangements are used in a limited number of foreign markets
(primarily
COVID-19 Impact and Strategic Direction Driven by our Velocity Growth Plan (the "Plan") the Company delivered strong global comparable sales in 2019 and early 2020. The outbreak of COVID-19 and the resulting operational impact brought on by several related factors, including temporary restaurant closures, limited operations and dramatic changes in consumer behavior, led to a marked decline in sales during the second half of March and early in the second quarter. The Company focused on contactless service and enhancing operating procedures to create a safe environment for both customers and crew. Global monthly comparable sales sequentially improved throughout the second quarter as markets reopened and government restrictions eased. In addition, the Company is: • Capitalizing on our high drive-thru penetration during the COVID-19 pandemic. Our drive-thru presence around the world has proven to be a competitive advantage as markets with a higher percentage of drive-thru are showing quicker recovery.
• Focusing on running great restaurants by simplifying operations through a
limited menu rooted in our core, iconic menu items and by creating a better
customer experience with improved speed of service.
While the Company cannot predict the duration or scope of the COVID-19 pandemic, it has negatively impacted the business and our financial results, condition and outlook. The Company has demonstrated the strategic foresight that will position our business for future success. This includes the Company's investments in technology and new capabilities through the following initiatives:
• Delivery. We now offer delivery in over 27,000 restaurants around the world
and our delivery sales are up significantly versus pre-COVID-19 levels. We have been leveraging learnings throughout the System and sharing innovative best practices across our markets, including the use of contactless delivery, to adapt to changing customer behaviors. We continue to see great opportunities with delivery, and are focusing our efforts on encouraging customer order frequency and retention in 2020 and beyond.
• Digital. The investments the Company has made over the past several years
with our emerging digital customer experience platform; including mobile order and pay and the acquisitions of Dynamic Yield and Apprente, remain a priority for our business. Dynamic Yield has been implemented via outdoor digital menu boards across theU.S. andAustralia , offering customers a more customized experience, while Apprente, the conversational interface technology is expected to provide more efficient and accurate ordering in the drive-thru in the future. Our digital investments enable us to give customers more choices and flexibility in how they order, pay, and receive their food during this unprecedented time and will remain important to our business moving forward.
The Company is confident that our customer focus and current prioritization of resources will be important levers as we drive our recovery and we will continue to use our strategic agility to adapt to the evolving environment. While the Plan has served us well and elements of the Plan will continue to be important, we will continue to evolve the strategy as needed to meet the needs of the customer.
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Second Quarter and Six Months 2020 Financial Performance Global comparable sales increased 7.2% for the two months endedFebruary 2020 , with all segments benefiting from Leap Day. Globally, sales results began to markedly decline during the second half of March due to COVID-19. Throughout the second quarter of 2020, theU.S. , International Operated Markets segment and global monthly comparable sales results sequentially improved as markets reopened restaurants and governments eased restrictions. Global comparable sales decreased 23.9% for the quarter and 14.0% for the six months. •U.S. comparable sales decreased 8.7% for the quarter and 4.5% for the six months. Comparable sales results for the second quarter of 2020 continued to benefit from strong average check growth. Comparable guest counts remained negative, particularly at the breakfast daypart. • International Operated Markets segment comparable sales decreased 41.4% for the quarter and 24.8% for the six months. Both periods were heavily impacted by temporary restaurant closures and limited operations, particularly in theU.K. andFrance . • International Developmental Licensed Markets segment comparable sales decreased 24.2% for the quarter and 14.4% for the six months. The second quarter results were primarily impacted by temporary restaurant closures across nearly all geographies, most notably inLatin America . Results for the quarter and six months reflected continued negative comparable sales inChina . Results for both periods also reflected positive comparable sales inJapan .
In addition to the comparable sales results, the Company had the following financial results for the quarter and six months 2020:
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