Hello, welcome to McDonald's January 23rd, 2015 investor conference call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question and answer session for investors. At that time, investors only may ask a question by pressing star one on their touch-tone phone. I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald's Corporation. Mr. Stent, you may begin.
Hello, everyone, thank you for joining us. With me on the call are President and Chief Executive Officer, Don Thompson, and Chief Financial Officer, Pete Bensen. In addition, McDonald's USA President, Mike Andres, will join us for Q&A. Today's conference call is being webcast live and recorded for replay by phone, webcast, and podcast. Before I turn it over to Don, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. Now I'd like to turn it over to Don. Don?
Thank you, Chris, good morning, everyone. 2014 was a difficult year during which performance fell short of our expectations, but it was also a building year. As we entered 2014, we were well aware of the obstacles that we faced in terms of growing comparable sales and margins amid ongoing broad-based challenges and cost pressures throughout our P&L. Now while some of the challenges were anticipated, others were not, like the supplier issue in Asia, Pacific, Middle East, Africa, and the volatile operating environment in Russia and Ukraine. We experienced shortfalls in our internal plans, particularly in key markets such as the U.S. In response to these shortfalls, we took a number of important steps to lay the foundation for our turnaround. We're acting with a sense of urgency as these steps are critical to addressing current performance and to advancing our longer-term strategies.
Specifically, we renewed our focus on our customers with the evolution of our strategic plan. We brought in new talent in several major markets around the world to provide innovative thinking and fresh perspectives. We announced the changes that we're making to the U.S. organization to put decision-making and accountability closer to the customer. We redefined menu choice and personalization with the introduction of the Create Your Taste platform in Australia and the U.S. We focused on the service experience through an increased emphasis on operations excellence and the initiation of our global digital strategy. We did more to bolster trust in brand McDonald's because we know that when our customers feel good about us and about eating at McDonald's, they visit us more often. Now let's turn to 2014 results.
In constant currencies, operating income was down 15% for the fourth quarter and 8% for the year. Earnings per share was down 14% for the quarter and 11% for the full year, both in constant currencies. Excluding the impact of the higher tax rate and the supplier issue in APMEA, earnings per share for the year would've been down 1% in constant currencies. For the full year, global systemwide sales grew 1% in constant currencies, and global comparable sales were down 1%. Comparable sales were down 90 basis points for the quarter. Looking to January, comparable sales are expected to be negative, due in part to the shift in Chinese New Year and consumer perception issues in Japan. The changes we're making are designed to refocus our system on those areas that matter most to our customers today and for the future.
That starts with deepening our relationship with customers to increase relevance, drive traffic, and position McDonald's for longer-term growth. Our actions are guided by our four strategic growth priorities, which are broad enough that markets adapt and focus on those elements most relevant to their local customer bases. Beyond our existing menu, we're asserting McDonald's burger leadership by offering greater customization and choice. Not only does Create Your Taste provide new menu news that excites consumers, it has the potential to lift sales of core classics by bringing more customers into our restaurants. At the same time, we're strengthening the menu pipeline to create greater choice at the local level that reflect attributes like taste preferences and demographics, and those things that make each market unique.
Greater localization enables us to take advantage of those attributes and tailor our menu and our marketing efforts to strengthen our relevance and appeal to customers in those regions. You'll also see changes in our customer service models as we work to create more memorable experiences and to deliver unparalleled convenience. For example, multiple order point strategies include self-order kiosk, table service, or mobile order and payment will modernize how customers interact with our brand and quite simply make it easier to get McDonald's their way, whatever that might be. We're also strengthening the value proposition. We're strategically evaluating pricing relationships across the entry-level, core, and premium tiers of our menu. At the same time, we're thinking differently about how to encourage customers to bundle products and use add-on purchases to create a satisfying, affordable meal.
You'll see a shift in the way we engage our customers and consumers in general. We're being bold and direct as we talk about what matters most to customers, especially the quality of our menu ingredients with multifaceted efforts like Our Food. Your Questions. in markets including the U.S., Canada, and Australia. Collectively, these changes create the McDonald's Experience of the Future, which brings the work that's happening within each strategic priority together to deliver changes our customers will notice. It builds on the investments we've already made in technology, re-imaging our restaurants, and operations improvement with an increased emphasis on tangible customer-centric innovations for menu and service to profitably grow the business. We have enduring competitive advantages that have served us well over time, and those advantages are even more relevant today.
Our size and geographically diversified restaurant portfolio allow us to test new products and concepts at a local level, then broadly scale those that are successful. Like we've done in the past with beverages, and like we're currently doing with Create Your Taste. McDonald's operates as one single brand, allowing us to focus our energy and resources on evolving the customer experience and changing the way we engage with consumers, while also leveraging the equity inherent in our iconic core products. Our global infrastructure enables us to tap into a variety of perspectives and expertise. Our franchisees are an integral part of the communities in which they do business. Suppliers bring innovation in their disciplines, and company employees focus on strategic direction to complement day-to-day execution in our restaurants. Finally, our strong financial foundation, which is supported by industry-leading average unit volumes.
It enables us to pursue our global growth priorities in every type of operating environment while returning significant amounts of cash to shareholders each year. Now, in our July call, we outlined the steps required over a 12-18 month period to strengthen our foundation and enhance our relevance and appeal to customers. Having reached the six-month mark, we're beginning to see signs of progress in some of our priority markets. While the specifics vary across the markets, the underlying formula has been very consistent. In 2014, these markets brought in fresh leadership with new perspectives on how to get customers back in the restaurants. They strengthened franchisee alignment in those relationships and re-emphasized value and re-energized our marketing approaches. We're already seeing a shift in Australia, which has over 900 restaurants.
It started with fundamental improvements in our marketing efforts and across our entire menu. It was enabled by much stronger alignment with our franchisees. We're building on this strong foundation with plans to roll Create Your Taste across the majority of our restaurants by the end of this year. It's the first of our priority markets to demonstrate signs of recovery with positive comparable sales and guest counts since September. It'll take longer to see an uptick in the U.S., which has more than 14,000 restaurants across 22 different regions. The changes we announced last year to create a flatter, more nimble organization have opened the door for decisions to be made closer to the customer.
Mike Andres is on the call today. He can share more during the Q&A about the work that's being done to take shape around our menu, marketing, and service, which will enhance our relevance and appeal to customers. Now over to Germany. Negative trends are beginning to moderate, with the month of December marking the highest comparable sales performance in more than two years. While we expect an uneven recovery as market dynamics remain challenging in the near term, we are focused on driving sales and guest counts by strengthening value offers, highlighting the quality of both core and premium products in our marketing messages, and aggressively pursuing growth opportunities within the family and breakfast businesses. Our position in Australia, the U.S., and Germany is much like what the U.K. experienced in the early 2000s. We can, and we will, turn around these markets with a balanced approach.
Russia and China are also key markets that are in a recovery mode. While the specific tactics are different, both markets are focused on enhancing our brand image and winning customers back by emphasizing food quality and also celebrating the many reasons to choose McDonald's, such as convenience and affordability. Fourth quarter comparable sales in China were negative 6.7% due to the lingering impact of the supplier issue. Each month of the quarter showed sequential improvement, reflecting the positive impact of our ongoing customer recovery efforts in the market. Finally, in Japan, the team continues to work to overcome significant challenges. The market is executing a multifaceted brand recovery campaign, which is designed to rebuild brand trust and strengthen quality and affordability perceptions. While we know these actions will win back customers, history tells us that these efforts will take time to resonate.
We expect continued volatility in the market through most of 2015. 2015 will be a year of regaining momentum globally. We expect further growth amid the pockets of success we're already seeing. However, it will take time, especially in our larger markets, for customers to notice the comprehensive changes that are underway. Our internal projections assume continued sales and earnings pressure and volatility in the business, particularly in the first half of the year. In light of continuing headwinds, we've made thoughtful adjustments to our 2015 plans, pulling back in some areas to fund key growth initiatives focused on delivering greater customer relevance, broader consumer reach, and better restaurant execution. For example, we've reduced capital expenditures by paring back on new store openings in markets that are experiencing significant near-term challenges, including China, Russia, Germany, and the U.S.
We're redirecting G&A from the U.S. business and corporate to priority initiatives that will drive our growth. We're committed to taking necessary actions to improve performance and position McDonald's for enduring profitable growth into the future. As we embark on a new year, we maintain high expectations of ourselves and for our brand. I remain confident in our prospects, both in the near and long term. We're keenly focused on the opportunities that exist within our global growth priorities to serve our customers' favorite food and drink, to create memorable experiences, to offer unparalleled convenience, and to become an even more trusted brand. We're changing, and we're doing it aggressively.
We know that some tactics will be different from market to market and region to region around the world, and that's why our plans are supported by comprehensive and localized execution approaches that rely on our franchisees, our company employees, and suppliers to satisfy customer expectations and drive stronger business results. Thanks again for being on the call, everyone, and I'll now turn it over to Pete.
Thanks, Don, and hi, everyone. 2014 was a challenging year for McDonald's all around the world. Our results were impacted on a variety of fronts and across each of our geographic segments. Today, I'd like to spend a few minutes putting our 2014 performance into perspective, providing details on some key fourth quarter numbers, and outlining the critical components of our 2015 financial plan. I'll begin by reviewing our results for the quarter and full year, highlighting the three factors that had a notable impact on performance in each of our major geographic segments. First is the underperformance of our U.S. business. Throughout 2014, our results reflect the impact of ongoing broad-based challenges, including operating in an increasingly competitive marketplace amid sluggish industry growth. For the year, the segment's operating income declined $257 million, or 7%, partly due to negative comparable sales and guest counts, which contributed to margin declines.
U.S. results were also impacted by higher G&A spending and other operating expenses associated with positioning the U.S. business for the future, including the segment's revamped marketing approach and development of the new Brand Love campaign. We expect to incur additional U.S. restructuring costs in the first quarter. The second significant item that affected our global results was the APMEA supplier issue. The total impact from lost sales and expenses associated with our customer recovery efforts was approximately $110 million, or $0.09 per share for the quarter, and $290 million, or $0.23 per share, for the full year. The markets most affected by this issue include China, Japan, and Hong Kong. Prior to the supplier issue, these markets collectively represented about 10% of global systemwide sales and 5% of global operating income. In APMEA, our results were also pressured by ongoing performance issues in Japan.
For the full year, APMEA's operating income declined 28%, or 25% in constant currencies, $413 million. Japan's contribution to APMEA's operating income includes royalties and the company's share of McDonald's Japan after-tax results. The third significant impact on McDonald's global results for 2014 was in Russia and Ukraine. During 2014, McDonald's Europe experienced significant declines in company-operated margins, driven by weakening currencies and economic slowdown and store closures in these two markets. For the year, Europe reported a $90 million decrease in operating income, a 2% decline in constant currencies, with the segment's company-operated margins weighing heavily on results. The entire operating income decline for the year was solely driven by Russia and Ukraine company-operated margin results. Over half of this margin decline reflects the significant impact of weakening currencies on imported commodity costs in these two markets.
We expect this currency impact to significantly pressure the segment's company-operated margins again in 2015, especially in the first half. While we expect to move beyond some of these unique events of last year, certain challenges remain. In the U.S., our turnaround initiatives to reignite momentum are in progress. Mike Andres and the U.S. leadership team are implementing a new, more nimble organizational structure that places decision-making back in the hands of the local market teams. The U.S. business is working aggressively to implement these changes, but it will take time before we see the benefits in the segment's overall financial results. In Russia, while all of our restaurants impacted by the temporary closures are back in operation, the market remains in a recession and the economic outlook is weak. More broadly, consumer confidence across most of Europe is forecasted to remain low throughout 2015.
In APMEA, in response to the supplier issue, customer recovery efforts initiated in September in each of our impacted markets. While sales trends in China showed signs of improvement during the fourth quarter, our best estimate is that it will take at least three to six more months for our business in China to return to a normalized level. For McDonald's Japan, recovery from the supplier issue has not been as strong. At the same time, new consumer perception issues have emerged, which have further depressed sales and profitability. We expect these issues to impact results for the foreseeable future. Japan remains on our priority market list. Next, I want to provide a 2014 update and a 2015 preview for some of our key financial items: commodities, pricing, G&A, and currencies. I'll start with commodity costs for the U.S. and Europe.
For the fourth quarter, U.S. commodity costs rose approximately 3.5%, primarily due to higher beef prices. For the full year, commodity costs ended up about 3%, which was the upper end of our forecast, as reductions in other commodities were more than offset by increases in beef. Commodity cost pressure is expected to continue into 2015, with the full-year increase projected at 1.5%-2.5%, again driven primarily by beef. Excluding currency, Europe's commodity costs were up 1% for the fourth quarter and were relatively flat for the full year. For 2015, our full-year outlook is for Europe's grocery basket to also reflect an increase of 1.5%-2.5%. To help offset this pressure, we have taken some price increases.
The U.S. ended 2014 with pricing up roughly 1.8%, notably lower than the 2013 increase of about 3% and lower than food away from home inflation, which ended the year at 3%. During the second half of the year, we consciously did not completely offset the prior year price increases that rolled off. This further pressured our margins during the third and fourth quarters. Based on where we stand at the start of 2015, we expect this pressure to continue in the near term. Our price increases in Europe vary by market, with the overall segment, excluding Russia, averaging about 2% year-over-year. Consolidated G&A increased 9% in constant currencies for the fourth quarter and 5% in constant currencies for the year.
For the quarter, these increases were driven largely by costs associated with positioning our U.S. business for the future, as well as costs related to our long-term growth initiatives. As I mentioned in October, during 2014, we identified $100 million of G&A savings in the U.S. and corporate. These savings are being redirected toward our critical long-term growth initiatives in 2015. Our review of the corporate G&A spending was completed in December. We are nearing the completion of our full G&A review of the U.S., and we'll provide more details on these efforts later this quarter. While our G&A increased for both periods in 2014, I want to emphasize an important point. McDonald's operates in a pay-for-performance culture. As such, short-term incentive payouts for 2014 were zero for all corporate and U.S. employees. In addition, 2014 performance negatively impacted management's long-term incentive compensation.
We expect 2015 G&A to increase 7%-8% in constant currencies, primarily due to the restoration of incentive pay. Excluding incremental incentive-based compensation, 2015 G&A is expected to increase 1%-2%. More than 100% of this remaining increase relates to costs associated with the expansion of our strategic growth initiatives, including Experience of the Future and our digital strategy. Foreign currencies proved to be another headwind in 2014, with translation negatively impacting fourth quarter EPS by $0.08 and full-year EPS by $0.12. Given the recent strengthening of the U.S. dollar against virtually all major foreign currencies, we expect a negative translation on first quarter 2015 of $0.08-$0.10 per share and a full-year impact of $0.35-$0.40 per share. As usual, take this as directional guidance only, because rates will change as we move throughout the year.
Finally, I'd like to share our current capital expenditure and restaurant opening plans for the upcoming year. Our plan for 2015 capital expenditure budget is approximately $2 billion, nearly $1 billion less than our initial capital expenditure plan last year. The decrease in our 2015 capital expenditures is driven primarily by an $800 million decrease in capital allocated to new restaurant openings. The most notable reductions will take place in markets experiencing the greatest challenges: China, Russia, Germany, and the U.S. Our $2 billion capital budget is divided relatively evenly, with approximately one-half earmarked for new restaurant openings and the remaining $1 billion dedicated to reinvestments. We continue to rigorously screen new restaurant opportunities to determine where they will generate the most attractive returns, given each market's potential, competitive environment, and current industry dynamics.
In 2015, we do expect to open more than 1,000 McDonald's restaurants, primarily in China, the U.S., Russia, and France. This compares with about 1,300 restaurant openings in 2014. On a net basis, we expect 600-700 additions for the year, compared with approximately 800 in 2014. The majority of our reinvestment dollars are slated for the U.S. and Europe. Expansion of the Create Your Taste burger platform in up to 2,000 restaurants in the U.S. and continued rollout of Experience of the Future in Europe accounts for a majority of the reinvestment dollars. Earlier this year, we outlined plans to pursue additional opportunities to enhance shareholder value by optimizing our capital and ownership structures and scrutinizing our G&A spending. As we close out the first year of our three-year plan, I'd like to update you on our progress.
During 2014, we refranchised over 400 restaurants against our three-year target of at least 1,500. In the area of G&A, we identified and redirected nearly $100 million in savings for 2015 toward future long-term growth initiatives such as the digital strategy and the McDonald's Experience of the Future. As always, we continue to explore additional savings opportunities. As we move into 2015, we remain on track to deliver against our three-year target to return $18 billion-$20 billion to shareholders between 2014 and 2016 in the form of dividends and share repurchases, having returned $6.4 billion to shareholders last year. We're moving forward aggressively to regain business momentum. Together, our strategy, strengths, and structure provide the capability and opportunity for us to change the trajectory of the business and our financial performance. We're on the right path.
We've made tough decisions, are holding ourselves to rigorous standards of performance, and are doing more with less. As a system, our charge over the coming year is to accelerate the pace of change and elevate the overall McDonald's experience in the eyes of our customers. Thanks. I'll turn it over to Chris to begin the Q&A.
Thanks, Pete. I will now open the call for analyst and investor questions. Please press *1 if you have a question and *2 to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, please limit yourself to one question. We'll come back to you for follow-up questions as time allows. The first question is from Joe Buckley of Bank of America Merrill Lynch.
Thank you. I'm going to cheat right away and ask two, but that's down from three, so I'm directionally complying. A lot of discussion of plans for the U.S., and it seems more long term than near term. Near-term sales results, notwithstanding the slight improvement in the month of December, have been so weak. I guess I'm curious what the plan is to change the trajectory of sales. The related question, I guess, is on Create Your Taste. I think when we visited the restaurant with you, your mini meeting in December, that was the sixth restaurant with Create Your Taste. Now you're talking about 2,000. What is making you accelerate this from a financial standpoint? How confident are you that it works, and what are the economics of Create Your Taste, I guess, is the basic question.
Hey, Joe. Thanks for the question, or questions, in this case. A couple of things. What I'll do is I'll respond a little bit to the Create Your Taste piece. I'm going to ask Mike to speak a little bit to some of those initiatives and actions that are actually in the near term, because I think that was really your question. Relative to Create Your Taste, please keep this in mind. We have been modeling out, looking at Create Your Taste, Build Your Burger, now for over three years. We started this in the Innovation Center. We moved it to a test restaurant in Romeoville. As you know, Joe, when we look at something, we look at all aspects of the implementation from not only the production side and the service side to crew interactions to consumer relevance.
We've been doing quite a bit in the prior years. We've had this in a restaurant in test in the California area, in the SoCal area. We had it in test for about another year plus. Also, keep in mind that we've had similar initiatives in markets outside of the U.S., markets like France on the service side of this. We've been looking at some of the digital application pieces of this in markets like Sweden. All of these things have come together into what we today call Create Your Taste. As we move forward now, this is not about just having had one restaurant. This is about having
Three-plus, four-odd years of looking at a concept and various pieces of that concept coming together. Create Your Taste is not just about the food from a customization and personalization perspective. It's also about the digital engagement and interaction of customers via kiosk or mobile ordering. It's also about a change relative to the interaction with our restaurant employees and how they engage and embrace the customers. It's also about the physical changes within the restaurant, as well as how we present our food so that you can understand and see the freshness of the produce and the quality of our proteins. This is a much broader piece than simply about the food itself. It is about the overall experience. Hopefully, that answers that question.
I'll ask Mike to speak a little bit to some of the things taking place in the U.S., because there are quite a few relative to the near term.
Hi, Joe. As you mentioned, we're looking at our business clearly from a near-term and a longer-term perspective. In the nearer term, this is a market share game. It's always going to be a market share game. We trust and we expect to see a more customized approach from our owner-operators in terms of an owner-operator driven business plan locally. It's based on the customer insights and the unique competitive sets in the marketplace. These plans are going to be multilayered in nature. You'll see disruptive value, you'll see new product news, you'll see service initiatives. Then our regional management in our new structure is empowered to commit the resources to make these plans come to life.
I don't think it could be underestimated the power of ownership by owner-operators of their own plan to execute it, own it, and get results that we expect to get from those marketplaces. We're also looking at our marketing approach, making sure that we're leveraging the power of kind of the three layers of marketing. Clearly, we've got our local co-ops, we've got our national, and we also have local store marketing. We're looking at a revamped marketing approach that better coordinates the specific roles and deliverables of our co-op marketing plans using more sophisticated analytics and data to understand the best way to approach. Certainly, our national messaging comes on top of it to help build our brand.
We have a unique relationship with our customers, the recent advertising is rekindling that relationship in a way that we've been used to over the years and we have enjoyed. The local market aspect of it is that it's been our heritage, owner-operators and McDonald's being the hub of their local communities, very important to our turnaround plan as well as the local marketing store, things that they're doing to combat the guy across the street from them. That's kind of the key to that. We're looking at how we address the simplicity, the complexity, I should say, of our menu. We've simplified our menu, as we talked about last month. That's going into place, as a matter of fact, this week. It includes reduction in LTOs, other menu items.
Our test market results, which included faster order times and faster total times in the drive-thru, continue to see performance above the controls. No single initiative is going to drive the improvements, but it's all of these working together and things that will create a differentiated customer experience that our customers will notice. We're looking at the U.S. as 22 different regions. As you know, there's multiple markets within those regions. We're already seeing pockets of success and expect those pockets of success to grow. Parallel to this short term, we're looking at a longer term of refining our plans to make comprehensive changes that create an enhanced experience for the customers and continue to differentiate McDonald's from the other QSRs. Don talked about CYT, you asked about it. That is only one element of this refined experience. It is comprehensive in nature.
We are calling it the Experience of the Future. We're co-creating this with our owner-operators, we will present the plan to all of our owner-operators at a national meeting in March. Right after that, we will start aggressively expanding that up to 2,000 stores in 2015.
Okay, next question is from Karen Holthouse of Goldman Sachs.
Hi, thank you for taking a question. We've seen pretty meaningful pressure on margins of the fourth quarter this year, even if the commodity outlook into 2015 is fairly muted, we are starting to see, sort of on a more macro level, some signs of QSR wages re-inflating. Is that something you're also seeing in your system? Assuming that is a factor in 2015, how should we think about a company's philosophy of accepting that pressure versus passing it on? On the franchise side, really their ability to accept that pressure versus need to pass it on.
Hey, Karen, it's Pete. As we've talked a lot over these last couple of years, margins are such a top-line game for us, very critical in the margin area that the plans and initiatives that Mike talked about, especially in the U.S., start to gain momentum and get that traction back on the top line. Having said that, we are in a relatively low inflation environment, pricing, as I noted in my commentary, pricing will still be probably below our average if you assume the low inflationary environment continues. At the same time, multiple states are increasing minimum wages. We've got national healthcare impacting 2015 for the first time. That's going to hit the McOpCo margin for about 20 basis points.
I think the margin in the U.S. will continue to be a little bit pressured by the combination of less price flexibility and a few of these costs. Long term, as the sales get back on track and start to grow, that is what will allow us to start to see the margin leverage. The same kind of dynamics are impacting franchisees' restaurants as well. As they start to grow guest counts and cash flow, they will start to offset some of these pressures.
Next question is from David Palmer of RBC.
Thanks. Good morning. Could you talk a little bit more about Europe? My greatest area of curiosity lies with really the heart of Europe. France has been getting softer in recent months, at least I believe so. Germany has been soft for a while. It doesn't look like in those markets you're playing your B game. You've done a lot of good things there. Are consumer perceptions of McDonald's and fast food changing in Europe, or is this purely an economic issue? What are the steps you're taking to restore growth? Thanks.
Thanks for the question, David. There's some positives, and then there's some challenges relative to our business in Europe. Some of the positives are in 2015, if you look globally around the system first, you'll see some good IEO growth. There's parts of Europe where we'll see a little bit of IEO growth, i.e., Germany will see a bit projected in 2015. The U.K. will see a bit. France is a more difficult market. France is actually projected to have some IEO decline. We have been gaining market share in both France and the U.K., despite some of the difficult broader business or macro environments. Germany, we've lost some share, and we've talked about Germany as a priority market. What I will tell you is that as a priority market, there were a number of changes that Germany has implemented.
Some of those I spoke to relative to the actual team that we have there, our marketing leadership there. Actually, our agency, we changed out the agency in Germany. We're seeing a collaboration with the franchisees that is much stronger. We're making some positive moves in our marketing plans, our menu plans, and we're seeing some changes relative to how we're addressing the consumer in those markets. I'm feeling as if, I mentioned Germany, it seems to be we're seeing some recovery in Germany. We're cautious as we say it because there are some challenges across Europe, as we all know right now, relative to the euro itself. We are seeing some positive things there. I would tell you it's broadly economic in many of the markets with the exception of Germany, where we have some things to do in terms of our own internal plans.
For many of the other markets, we're gaining share, or we're at a point where our businesses are continuing to compete on par with our competition there. It'll be primarily an economic piece relative to Europe.
Next question, Jeff Farmer of Wells Fargo.
Thanks. Just following up on an earlier question, what level of same-store sales growth do you guys need in both the U.S. and Europe segments to hold on to restaurant level margins in 2015? You touched on it, but do you have any opportunities in the shorter term to control some of your potential costs on, you mentioned labor, but some of the other costs on the restaurant level line?
Jeff, historically, we've talked about a 2%-3% comp needed to maintain margins in the U.S., and again, that's been modeled in what we call a normal year. Where you have kind of normal commodity inflation, normal price elasticity and ability to raise prices, normal wage inflation, et cetera. A lot of those variables are a little bit out of whack for 2015. The prices I already addressed, we don't see getting to our historical levels. Wages will probably grow a little faster than normal, especially if you throw in the healthcare impact of that. Again, as we think about it, especially in this first half of the year, U.S. margins will continue to be a little bit under pressure.
Next question is from David Tarantino of Robert W. Baird.
Hi, good morning. A couple of questions, Pete, around financial strategies. I guess first, as you get into the refranchising program that you mentioned, are you finding opportunities to potentially go deeper? I guess the big picture question is: could you take the system to a much higher franchise percentage over time? Say, into the 90s or even approaching 100%? Is that even practical or are you thinking about it differently? Then maybe a second part of the financial question would be, are there ways to go deeper on some of the G&A cuts? I know you're reallocating $100 million, but are there other opportunities that you're seeing that might be able to sort of limit the increases that you'll see this year and into next year?
Thanks, David. First on the refranchising. We start out with our guidance that said at least 1,500 restaurants, we feel comfortable in being able to accomplish that over the next three years. I'll tell you, the dialogue with the area development presidents has increased around refranchising and the benefits that can bring to the overall business. We're not committing to a new target by any means, but we also said that after that three-year period, franchising will continue to be something that we look at and go after. Percent we'll never be, but certainly the ability to continue to increase that franchise percentage over time is something that we will look at. On the G&A side, I think we've been fairly consistent since we announced our plans for the savings, that we believe there are significant growth opportunities available in this McDonald's Experience of the Future.
In fact, since we first started talking about it, we've gotten a little bit more aggressive in our plans to go after that in 2015. For the short term, you've heard us say we don't think we can cut our way to growth in the G&A area. We recognize these are a fairly significant amount of resources we're reinvesting, but we believe that it's right for the long-term benefit of the business, as Mike said, to change the customer experience in the McDonald's restaurants. As we think about reallocating growth resources by cutting over $800 million of capital allocated to new restaurant openings and redirecting it towards the McDonald's Experience of the Future, we think that's an appropriate and prudent thing to do in this environment.
Next question is from John Glass of Morgan Stanley.
John, you there?
Yeah. Can you hear me okay?
Yeah, we can hear you now.
I'm here. Okay, thanks. Pete, could you just clarify if the reduction in CapEx is a one-year reduction, or you view this as the new run rate, and what happens to this windfall? Is it upside to the $18 billion-$20 billion return, or are you just sort of making up for the shortfall in the cash flow of the business in the last year or so? Mike Andres, can you just talk about the pricing? I think you said menu item reductions. Where are you in that process? Is it hurting sales, or have you found it actually is sales neutral? The same thing for the pricing adjustments. I think you talked about maybe lowering or adjusting prices. Is it possible to actually see menu pricing go negative as a result of that?
All right, John, I'll take the first half, and Mike Andres will take the second half. The cut down to $2 billion, that's not a permanent run rate. In these markets that we described, you've heard us talk about the growth opportunities that exist in these markets. I'll call it a relatively shorter-term readjustment as we face the realities of the business environment we're operating in. Think about it as this is 2015 only, and as we move throughout the year and regain that momentum that Don Thompson talked about, we'll start to realize where the capital will go in 2016. Keeping that balance between investing in the Experience of the Future and the appropriate level of new restaurant openings, and think about all of this in our $18 billion-$20 billion target.
John, one of the things, and I know there's been a couple of questions kind of around this, we firmly believe based upon the strength of our business and the reach of our business, as you all know, we touch about 70 million customers a day. One of the things that we've not leveraged as strongly has been the whole digital engagement aspect. As we embarked upon the digital strategy, we knew we were embarking upon something that was going to require us to make substantial investments to get it up to par, to be able to have mobile ordering and mobile payment, to be able to have promotional offerings that really were relevant to customers today across all age ranges. We have made substantial investments there. Our focus now is to focus on that in-restaurant experience of our existing base.
If we can improve upon that, whether that's digital engagement, the physical assets themselves, the way the restaurants look, the placement of kiosks in the restaurants, our food offerings in the restaurants, that is where we're making substantial investments. This is not that much different than when we decided that we were going to focus on McCafé at one point, pull back some of the new store capital at that time, and reinvest it back in existing restaurants. We're doing something very similar as we look at the digital strategies, the in-restaurant experience, and the Create Your Taste and food experiences in the restaurant.
As we look at this, we will continue to look at our expenditures both internally and externally. We'll also be mindful where we have opportunities in some of the markets to grow as those markets return to the level of growth and the level of, I'll say, stability that we think is going to be needed for us to be able to continue our new development strategies in some of those markets. Mike, if you would, a little bit on menu.
Yeah. John, the menu rationalization that is being rolled out as we speak, we are expecting to see the same results that we saw in the test markets, which obviously would be a throughput improvement because we're making it easier to order for our customers, less complexity in the kitchen. The time to get the food out of the kitchen and to the windows increases. We're seeing improved sales results against the control markets in our test, and we expect to see that happen in the rest of the country. I did not speak specifically about pricing. I did speak about value and that the markets are clearly more targeted in terms of their efforts around value and competitive threats within the marketplaces. We are seeing more aggressive, disruptive value offers in the marketplace today.
As a matter of fact, we are moving to a strategy of more flexibility for the local markets to price Dollar Menu & More, which is complementing their other value messages so that the level of aggressiveness and the tactics can be more reflective of the customer expectations, the specific competitive activity, and the economic realities of each market.
Next question, Keith Siegner of UBS.
Thanks. I want to ask a question about Japan, and I realize that it's a relatively small percentage of the overall operating profits, but it is having a material impact on results. We've talked about the strategic rationale for this in the past. Pete, what you've told us is keeping that ownership percentage was important because it lets you influence that business and help to improve it. We've had years of negative same-store sales, including unit closures. You just mentioned that you expect this to continue for the foreseeable future. Is the plan enough? Since you are there to help influence it, do we need a wholesale restaging of the brand at this point? Where do we go with Japan? Thanks.
Keith, I think that's a fair question. If you think about the unforeseen events over the last, let's say six months, it's had a significant impact on the consumer perception of the brand in Japan. Frankly, there were some concerns about the consumer perception of the brand before these incidents. To your point, I think there is an opportunity here, and in talking with the APMEA leadership and the Japan leadership, the recognition that there's kind of a clean sheet of paper approach to take a look at what we're doing with our brand positioning there and how we connect with the consumer so we can improve the trends in our business there over time.
Next question is from Will Slabaugh of Stephens.
Yeah, thanks, guys. I wonder if you could talk a little bit more about the simplification of the menu, and I know you've mentioned that it's happening right now. I wondered if you could talk about how much further you'd be willing to go, assuming you do see some improvement here, and if you think that there would be much more room to take more off of the menu. If you could sort of contrast that with any potential new menu items that you may introduce and where they may fall in terms of premium versus value.
Thanks, Will. I think this menu rationalization process is clearly ongoing. As we look forward, we've added quite a number of products over the last 18 months or so. We're rationalizing that, looking at clearly what the customers are ordering, what they expect to see. I think, moving forward, one of the things that we're seeing with Create Your Taste, obviously, that offers unlimited variety to our guests. They can now choose whatever they want, so it takes some of the pressure off of a lot of the other menu items that we would have showing on the menu at any given time. In terms of the overall menu pipeline and what we're looking at today, obviously, food is a high priority for me personally. I think that's the foundation of where we're taking the business moving forward and what the expectations of the consumer are.
We're seeing this localization of more locally relevant products that are being drawn or pulled from the marketplace as they get into the customer insights. We're looking at building our culinary talent to support our talented U.S. chefs. We're including our supplier team of chefs. We've got some outside consultants who bring a fresh and forward-thinking perspective on our menu vision. We're looking at educating America on Our Food. Your Questions., giving them facts. We've seen 20 million hits on YouTube, 4.1 billion earned media impressions, so that's resonating with our consumers, and all about the quality story. We have to make sure that our quality aligns with the consumer's definition of quality moving forward.
We're going to be very aggressive in that area. We're working with our owner-operators to revise our product vision for a very different future as led by the consumer, from the provenance to the label ingredients, to the processes we use to bring the food from farm to table. We have opportunities to clean up our ingredient list and enhance the taste. As you mentioned, a lot of innovation going on, including Create Your Taste. We're evolving our menu in response to a lot of the consumer trends. We're launching new products at a national level this year, and we're complementing that on differentiated products at a local level. As I mentioned, allowing the marketplaces to address the specific and the regional tastes that exist out there today.
A lot of new product news to see in the coming year and news on our food in general.
Next question, Matthew DiFrisco of Buckingham Research.
Hi, this is Catherine for Matt. Can you talk about your comp gap between your December same-store sales to the QSR overall QSR sandwich category? Also the second part of question is regarding your Create Your Taste. Can you comment on this, any incremental traffic that you're seeing? With the customization, is it adding another level of complexity to the operations? Any effect on the speed of service? Thank you.
Regarding the comp gap, clearly that is an important metric for us to follow, and certainly, we have high awareness of that in our marketplaces today. We're seeing that we were confronted with some inflationary pressures that have been well-documented. I think we've kind of lost our focus on the customer relative to value while the competition became more aggressive. We are seeing that gap start to improve, be less negative. Of course, that gap varies by marketplace. We have markets that actually have a positive comp gap. Obviously, we're learning from the things that are happening in those markets. As I mentioned, our plans and our tactics in each market, they've got multiple layers, which include proactive and reactive targeted tactics against specific competitive activity.
Okay. Specifically, the gap for December was 4.1. Negative 4.1.
Relative to Create Your Taste, clearly we are seeing positive results. We have Australia at a point that by year-end, they will have implemented nearly 900 restaurants on the platform. It is a much more integrated platform. It encompasses service, it encompasses multiple order points, the kiosk applications, mobile applications, those things, as well as being able to still approach the business in a traditional sense through the front counter or through drive-thru. We are looking at all aspects of how we bring this new food offering and customer choice and customization to all the customers who want to experience McDonald's. We are seeing some positives in the markets, clearly. Otherwise, we would not be implementing this.
I would tell you that from a service perspective, no matter what you implement throughout the years in the McDonald's system, initially, what you are going to see is a slight service increase or decrease, I'd say, in terms of the effectiveness of us being able to serve in the initial month or two. That should come right back, and we should be able to be even more efficient. That's the same thing that we've seen with Create Your Taste thus far. Thus far, we are very positive on Create Your Taste. We are also mindful that we need to do this the right way. We are not rushing to try to implement the U.S. over a one or two-year period.
We are looking at the applications to make sure that they get the impact that we want from a guest count, a sales, and an average check perspective, which is also a huge aspect, as well as the halo around the freshness of our food and all of our produce. We are excited about what we see thus far. We are also cautious about how we continue to implement this across the year.
All right. Next question is from Sara Senatore of Sanford Bernstein.
Thank you very much. Actually, two follow-ups. The first is on Create Your Taste and what you're seeing in Australia. I think one of the differences certainly, for example, with France, where you've had some very nice success with some of these initiatives, is that the dine-in traffic or the dine-in is a much smaller portion in the U.S. I guess the first question is, are these kinds of initiatives less relevant in the U.S. because just the mix of your business, so much of it goes to drive-thru or even carry out? The second question I wanted to ask was a follow-up on when you're talking about improving the quality halo and the provenance.
When I look at the competitive set, what I would call traditional QSRs, there are some that are doing quite well without any of that with, I think, just sort of a core competency around speed and service. Mike, maybe you could talk about diagnosing that, why some of your very direct competitors seem to be doing well, even in the absence of fitting in with some of these trends about quality and provenance and just sort of the fast casual direction. Thanks.
Okay. I'll take both parts, Sara. On the first part, relative to Create Your Taste and different dynamics, or better yet, Experience of the Future and different dynamics. What France is doing is not an implementation of Create Your Taste at this point. They have implemented multiple order points, and now you can place an order through the kiosk, front counter, table service, web ordering, et cetera, mobile ordering. When you look at the table service in France, yes, there is a stronger skew to in-store versus drive-thru. However, I would tell you this. What we do is look at things like that, and we will tailor those based upon the market that we're implementing in. We already know that in the U.S., with the restaurants that are implementing Create Your Taste, that we've seen very positive results.
Therefore, what we're doing is pulling customers who have a little bit more time and want to experience the restaurant inside to come inside the restaurant. We've made tremendous investments in terms of re-imaging, and actually, we have more customers that are seeing those investments in this environment and with the offering of Create Your Taste. They will be modeled for the various markets around the world based upon what is going to appeal to customers the most. France will not be implementing Create Your Taste at the same pace to say Australia has. Australia is at a different point with regard to, say, web ordering than France has been. We'll learn from all of those things as we bring this forward. Nonetheless, Create Your Taste, table service in France, kiosk applications across Europe, all of those things have been successful for us.
Really, the Experience of the Future aspect pulls them all together. So you're going to see some variations across markets. Clearly, we'll look at the performance metrics to make sure we're moving forward effectively. This is not unlike, again, McCafé was very different in Australia than it is in the U.S. Yet and still, McCafé has worked in both. On the other side, relative to traditional QSRs, I would offer this. No one is really shining that brightly relative to the traditional QSR space. I think what we're talking about at McDonald's is appealing more to the consumers that are out there that are IEO customers. It's not about a QSR thing or a fast casual thing. It's about good tasting food. It's about affordability. It is about transparency as a brand. It's about a great service experience that gives me choice.
Those are the things that we're putting in place, and those are the things that will help us propel this business and move it forward. We're not gauging ourself by other QSRs, if you would. We're gauging ourselves by the market opportunity, and we want to do that. I would also tell you that as we look forward at the markets around the world, each of those markets, as we've said today, is very different and at different places. They will be able to bring the Experience of the Future to life in their markets relative to their customer bases. We are not skipping over the existing execution of the core products that we have, the core menu that we have, core service expectations, quality service, cleanliness. Those things are important in every single market we have around the world today.
We are out of time, I'll turn it over to Don, who has a few closing comments.
Okay. Let me just make a couple of comments because it came up a couple of times about our franchisees, and thoughts about someone mentioned something relative to implementation and franchisees and how they thought about it. I have to tell you, the last couple of years, as we've said, have been difficult, but as a global system, all of our system has experienced quite a bit and endured many unforeseen changes in the local markets. At the same time, we've charted and begun to implement a stronger pathway for future growth. I couldn't be more proud of the franchisees we have around the world. They own and operate 81% of our restaurants. Without them, we would not have been able to endure those things which we have over the last couple of years.
Whether that was geopolitical issues or food-related issues, our franchisees, along with the employees and suppliers, have done a tremendous job, and it's that strength that is going to propel us forward. It's that unmentioned strength, if you would, that we don't often talk about when we talk about the financials, but it's one of the things that has made McDonald's special, and it's one of the things that will fuel our growth as we move forward. I want to thank all of you for joining us on the call today. 2015, as we've said, will be a year of regaining momentum. We're making progress as we move even closer to our customers and as we change to be more relevant and more progressive. Modern service, genuine hospitality, personal engagement, more relevance, customized menus, and a brand that people can trust, truly trust.
This is the McDonald's Experience of the Future. It is the path that we're forging, and I will tell you that the future is already on its way. Our confidence in our brand and the competitive advantages and strengths of our system are truly a reflection of our ability to learn from our past, but to also be purposeful and agile in the present and to strategically plan and evolve with changing customers' perceptions, attitudes, and desires as we move into the future. Thank all of you for attending and participating on the call today, and have a great day.