Information in this presentation contains certain forward-looking statements which reflect management's expectations regarding future events and operating performance and speak only as of November 14, 2013. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to differ materially from those expressed in or underlying our forward-looking statements is detailed in the company's filings with the SEC, such as its annual and quarterly reports. Access our SEC filings by going to www.aboutmcdonalds.com/mcd/investors. Our website also includes reconciliations of non-GAAP financial measures we mention in our presentation, if any, to its corresponding GAAP measures. Those reconciliations may be found at www.investor.mcdonalds.com.
I actually have a little stool. I didn't grow. Good morning, everyone, welcome. I'm Kathy Martin. I'm Vice President of Investor Relations here at McDonald's, we appreciate your interest in McDonald's and the fact that you've taken the time to join us here today. For those of you who are here attending in person, hopefully you had a chance to try some of our great breakfast products that were outside of the room. We had a terrific selection, hopefully, you enjoyed it as well. I also want to welcome those who are joining us on the webcast. In your Investor Day materials, you're going to find an agenda, a preview of our lunch menu, photos and biographies of our speakers and our Q&A panelists, as well as the other officers who are attending our meeting today.
Today, we're going to share our vision for enhancing shareholder value through some of the disciplined investments we have that support our long-term growth opportunities and differentiate the brand McDonald's. In a few moments, I'll ask that our CEO, Don Thompson, our CFO, Pete Bensen, and our Chief Brand Officer, Steve Easterbrook, to present the morning session and discuss strategies and global priorities for the future. This afternoon, Tim Fenton, our Chief Operating Officer, will kick off our Area of the World presentations, you'll hear from our Area of the World presidents as well. Following each session, we have time for Q&A, so we'll be able to take those. At the end of the day, we also have a final Q&A panel with Don, Tim, and Pete to cover any remaining questions that you might have.
As always, our folks will ask you to state your name and firm when you're asking questions, wait for the microphone so everyone can hear, this is particularly important for our webcast participants. During our lunch break, you'll again have the chance to interact with management and try some of our great products that we have in test, along with some newer products that are already in some of our international markets. This evening, we have our cocktail reception, it'll provide, again, ample time for a lot of interaction with our management team, as well as the officers that are here today. We'd appreciate it if you wore your badge at all times. It's your access to all events. Just a couple housekeeping things. We will issue a press release this morning summarizing the highlights from today's meeting.
There are hard copies that will be available at the end of the morning session. We will have handouts, including the reconciliations at the start of Pete Bensen's presentation, so we'll hand them out here in the room. Key slides and of course, the reconciliations will be available out on our website. Finally, before I turn the meeting over to Don, I want to remind everyone, if you could please silence your phones, we'd appreciate that. With that, let's start the meeting, and it's my pleasure to introduce McDonald's Chief Executive Officer, Don Thompson. He doesn't need the stool.
It's okay, Cath. I'll move it up just a bit. Well, good morning, everyone.
Good morning.
Hopefully, you all are awake, had a good breakfast already. Kathy, thanks so very much for the introduction. It is really great to see so many of you here today and get a chance to chat with you a little bit. I'd also like to acknowledge our Chairman of our Board of Trustees, Andy McKenna's here with us. Andy, as always, we appreciate you. Thanks, Andy, for being here, and as always, for all of your support and all of the support of the board. We truly appreciate that. We are looking forward to sharing a perspective today on how we're managing our business and our performance for the present, also how we're driving enduring profitable growth into the future. The objective of the meeting from our perspective is to demonstrate why McDonald's is a solid investment, both today and also for the long term.
I think you'll get a chance today to see how we continue to build on our unique business model and the key competitive advantages that we have inherent in that model. Yes, for us, this is about our scale. It's about our size. It's about our geographic diversification and how we leverage those. It's also about our sizable marketing presence, our strong cash flows, and the efficiencies that we're able to capture as a result. Together, these advantages underpin our confidence that we will become an even stronger force in the informal eating out marketplace. At the same time, we understand that as our customers in the marketplace continue to evolve, so must we, and we must evolve by truly differentiating ourselves as McDonald's. We can become an even greater part of our customers' lives.
Throughout the day, you'll hear about how we're adapting to keep pace with our changing markets, how we're investing to meet future demand, and the work that's underway to address performance in the current environment. This morning, we're going to concentrate on our long-term strategy and where we're headed. This afternoon, Chief Operating Officer Tim Fenton and our area of the world presidents and the management teams will focus on performance and how we're executing our plans and our strategies around the world. Also joining us in the audience is a very talented team of global leaders from around the company. As you spend some time with them, please take the opportunity to hear more about their tremendous knowledge of our business and their specific experiences within the functions or within some of the global markets.
What you'll see today is that we have plenty of runway within our vision to be our customers' favorite place and way to eat and drink. The word customer is the most important part of our vision, and our system remains aligned around continuing to place them, those customers, at the front and at the center of everything that we do to address our largest opportunities. It's through the use of deeper consumer insights, the framework of our Plan to Win, and our three global growth priorities, which are optimizing our menu, modernizing the customer experience, and broadening accessibility, that we are capitalizing on our position as the biggest player in a highly fragmented market to become an even stronger force. We have an infrastructure that is built for growth, and we're confident that we can be an even bigger piece of the pie.
Again, throughout the day, you'll hear three key themes. First, our long-term opportunities are significant. We continue to invest across a diversified portfolio of markets and of food and beverage categories. Secondly, our near-term opportunities revolve around optimizing current initiatives for broader reach and better execution around the world. Third, we believe we can successfully balance near-term performance with long-term strategic investments to drive enduring and profitable growth through an even deeper connection with our customers. Let's talk a little bit about current performance. Our commitment to keeping the customer at the forefront is the reason we're serving more than 69 million customers every day, which is up from 64 million customers a day the last time we were together in 2011. Our customer focus is also the reason we've delivered the following performance through September of this year. We grew system-wide sales 3% in constant currencies.
We've increased operating income 3% in constant currencies. We've delivered $4.16 in diluted earnings per share, and our franchisee cash flows continue to lead the industry. It goes without saying that all companies today are fighting even harder for growth in this environment, and we here at McDonald's are no exception. Unemployment remains at higher than desirable levels, and retailers are battling for a greater portion of a smaller pie. Competition remains intense, and we are making adjustments as we strive to better understand these shifting dynamics and their impact on our business. Even though we can't control how consumers will adapt to the environment, we can stay focused on the elements within our control. Our customers still want great-tasting and affordable food and beverages and convenient and contemporary restaurants, and that's our job, to deliver on that.
The challenge is to remain consumer-led while balancing our system's needs along with that. We see opportunities to more effectively balance these two objectives as we move forward, and you'll hear more about that in the area of the world presentations this afternoon. Turning to strategy. We're excited about the future because, as I mentioned earlier, we are the biggest player in a highly fragmented $1.2 trillion global marketplace, and we are well-positioned to participate in the market's long-term growth. For McDonald's, the key to thriving is growing sales at existing restaurants while simultaneously increasing our global footprint through targeted new unit growth. Our ability to appropriately balance the two has been critical throughout our history, and it's the key to generating robust income growth into the future. Early on in the 1960s, '70s, and '80s, we grew units and average unit volumes both at a healthy rate.
In the 1990s, our growth was more one-dimensional, with a focus on getting bigger through new unit growth, new businesses, and partner brands. In 2003, we deliberately shifted our focus to growing same-store sales by being better, not by simply being bigger. Over time, our Plan to Win provided a framework to optimize our growth by pursuing quantifiable customer-oriented business opportunities like everyday value platforms, re-imaging, beverages, ownership optimization, menu development, and a more appropriate pace of new unit growth. There is even more potential in all of these areas, today we believe we can become even better and bigger, and you'll hear more about that today. We're confident that we can appropriately balance driving comparable sales increases at our existing restaurants while continuing to expand our global footprint with new restaurants in order to grow the real market opportunity that we have in the broader marketplace.
Our operating knowledge across many diverse markets, combined with world-class franchisees, suppliers, and agency partners, who are all supported by our seasoned teams around the world, enable us to capitalize on significant growth across both our established and also our emerging markets. We believe that we can grow share in the quick service restaurant category and in the overall informal eating out category. We also believe we can attract customers to trade into McDonald's from other categories, and we can capture additional customers who will return to the marketplace as the economies recover. Each of these opportunities is significant. We're building on our foundation with smart strategic moves that deliver on the most critical tenets of the customer experience. We're focused on menu quality and choice, we're focused on customer service, we're focused on affordability, and on consumer engagement.
Our three global growth priorities are focused on these consumer-based opportunities. Let me first discuss our current menu opportunities. Today, about 75% of global IEO sales are food and the remaining 25% are in beverages. The way in which we've successfully established ourselves across meal occasions, proteins, and day parts is a competitive advantage for us. We believe that the equity that we've built into our diverse menu offerings enable us to grow in both the food and beverage categories. Within optimize our menu, we're focused on broadening appeal by introducing new menu ingredients and greater choice. Also, by celebrating the quality and the provenance of our food even more loudly and by increasing our emphasis on personalization. This is especially true of our core classics in the four categories where we believe growth will outpace the overall industry.
Those categories, as we mentioned before, are the categories of beef, chicken, breakfast, and beverages. Globally, beef is the second-biggest protein for the informal eating out category, and it remains our number one selling protein. We're focused on growing top-selling sandwiches like our Big Mac, Quarter Pounder with cheese, cheeseburgers, McDoubles, and double cheeseburger. These timeless brands continue to resonate with customers and significantly contribute to income. We're also building equity and strong limited time promotions that expand our reach and provide variety, some of which you'll hear about later today. Chicken is another substantial opportunity for McDonald's. Globally, it's the biggest protein in the IEO category. It's also our fastest-growing protein, and we continue to build even greater equity in the chicken arena.
Breakfast is a category that McDonald's essentially established for the IEO industry, and it's still one in which we have tremendous potential around the world. While our breakfast growth has been solid, we have significant opportunity to expand McDonald's presence during the early morning hours in numerous markets around the world. In our fourth category, beverages, we continue to build credibility, particularly through the McCafé brand. Today, you'll hear more about our plans to expand McCafé in many markets throughout the coming years. I'd like to delve just a little bit into beverages to more clearly demonstrate how we strategically approach growth in each of these four categories. Beverages are the largest single category in the global IEO market at nearly $300 billion today, and with solid growth projected in the next five years.
About 90% of beverages that are sold are in one of four categories: carbonated soft drinks, tea, bottled water, and coffee. Of these four, coffee and tea are the two fastest-growing segments. We currently capture less than our fair share of the overall beverage category. That gap alone equates to more than $3 billion of sales opportunity. Strategically pairing new and existing food products with drinks that you can get only at McDonald's is another area we're exploring to further grow our share of the beverage category. As part of our three-year planning process, markets are actively pursuing targeted opportunities using a sequenced, thoughtful approach aimed at growing the business in the right way for their local markets. This approach is consistent across the other three key menu categories of beef, chicken, and breakfast.
Our markets also benefit from our global menu pipeline that enables us to continue evolving, continue adapting, and optimizing our menu around the world. Let's shift now over to modernizing customer experience and our increased efforts to connect brand McDonald's with our customers. Our decor is becoming increasingly more modern, and we're contemporizing our service models through smarter technology and by continuously improving the way we engage with our customers. We know that we must exceed customers' expectations for fast, accurate, and friendly service at each and every one of our nearly 35,000 restaurants around the world. Specifically, relative to digital is playing a more prominent role in modernizing our brand. For example, we continue to increase our marketing allocation to digital media as we create more personal dialogue and conversation with consumers.
We know that people visit McDonald's more often when they feel good about our brand. For them to feel better about McDonald's, they want to know a little bit more about who we are and what we stand for. Transparency is no longer a nice-to-do. It's a greens fee. We're proud of who we are and how we conduct our business around the world. We're excited about the ways in which we're doing even more to effectively tell our story. Later this morning, Steve Easterbrook will discuss our digital strategy and efforts that are underway to elevate our customer engagement strategies. You'll hear how we believe that the key is moving together as one brand. It's easy for markets to develop solutions that address their immediate local needs. Increased world connectivity requires a unified voice, digital is an important enabler of this effort.
Our third growth priority, broadening accessibility, is about being wherever our customers want McDonald's, whenever they want McDonald's, and at the right price. We're currently focused on three aspects of accessibility. First, improving the capacity of our existing restaurants. Second, increasing our footprint by building new restaurants in both established and emerging markets. Third, by continuing to offer affordable choices at every price tier across our menu. Capacity enablers like our point-of-sale platform and mobile ordering are tangible, consumer-facing improvements that yield efficiencies in our operations and our service. They're helping build customer loyalty by making the McDonald's experience easier to deliver for our restaurant teams and more enjoyable and engaging for our customers. We're also well-positioned to capture the true market potential through diversified global new store development. This is not about going after a specific new target.
Instead, it's about applying a strategic, thoughtful, and disciplined approach in both our established and emerging markets as we continue to grow. You'll hear more about this today as well. There is no one-size-fits-all solution. We have a variety of solutions in our toolkit, individual markets are leveraging that robust toolkit on what's most appropriate given their local situations. The last way in which we're broadening accessibility is through affordability, a foundational element of our brand and a key driver of the customer experience. Specifically, we continue to strengthen our value platforms in many markets as we maintain an emphasis on affordability across our menu. Finally, I want to address the notion of doing good and subsequently our focus on sustainability. At McDonald's, we know that improving brand perceptions translates to stronger customer loyalty and overall financial performance.
Yes, it's a proven business driver that can create efficiencies through business practices that we know will allow us to use fewer resources and improve our processes. This is also about our contributions and our impact as a global leader, locally and globally. We humbly recognize that we help move economies, both through our sourcing and by shifting the social and the economic fabric of communities. Our work across the broad spectrum of sustainability, from health and wellness to energy efficiency to animal welfare, reflects our understanding that sustainability across every level of the McDonald's system drives our growth. It also creates jobs, and it fuels economies. Our business and our responsibilities to society are inextricably linked. We have to and we must do both. Together with our franchisees, McDonald's is one of the largest employers in the world.
We provide opportunities whether someone's looking to start a part-time job or to start a long-term career. In fact, McDonald's has been recognized as a great place to work in more than 30 countries in which we do business around the world. Consumers expect us as McDonald's to be a leader, and we're proud to be stepping up our efforts to better communicate our ongoing commitment and the meaningful actions that we continue to take. Let's now turn to the financials and our system's longstanding commitment to fiscal discipline and maintaining a strong financial foundation within our primarily franchised business model. Our long-term average annual targets of 3%-5% sales growth, 6%-7% operating income growth, and return on incremental invested capital in the high teens remain intact.
We continue to see them as realistic and attainable for a company of our size, particularly as we invest to widen our competitive advantages and stretch our brand. We believe they keep us focused on making the best decisions for the long-term benefit of our shareholders. While our recent performance has not consistently met all of these targets, these are average annual targets. In just a moment, Pete will discuss why they remain appropriate for our company and what's needed for us to meet them in the future. Our business continues to generate a significant amount of cash from operations, averaging about $7 billion per year since 2011. Our priorities regarding the use of that cash have not changed. Our first priority is to reinvest in our business to drive future growth.
After that, we expect to return all of our free cash flow over the long term to investors through a combination of dividends and share repurchase. Year-to-date October, we've returned $3.8 billion to shareholders through dividends and share repurchases, and we expect to finish the year between $4.5 billion-$5 billion. Looking ahead for McDonald's, we remain confident in our ability to grow our share of the $1.2 trillion informal eating out marketplace. We'll do that by building greater frequency in our existing customer base. We'll do that by attracting new customers as they return to the marketplace. We'll do that by getting customers and consumers in general to trade into us from other categories. We'll do that by creating an even deeper connection with our customers.
While we're staying true to those actions that are foundation to our business model, this also means that we're doing things differently in some spaces, like leveraging digital and social media to advance our brand messaging, like increasing the energy and excitement with which we go to market with new product news and improving our creative executions. Today's dialogue will also demonstrate how we continue to invest to build demand and focus on customer service, which is at the core of everything that we do. McDonald's is well positioned for sustained profitable growth, where we're an investment that will continue to yield meaningful long-term returns for all of our stakeholders as we make even greater progress toward becoming our customers' favorite place and way to eat and drink. Thanks everyone for being here with us today.
I'd like to turn it over to Pete, and then we'll open it up for Q&A afterwards.
Thanks, Don. Good morning, everyone.
Good morning.
For the next 10 minutes or so, I'd like to cover three main topics. First, our financial model and targets. Next, our preliminary outlook for 2014, finally, our philosophy regarding the use of free cash flow and our overall capital structure. As I discussed on an earnings call earlier this year, our business model has an infrastructure built for growth. We see significant long-term opportunities and are confident that McDonald's is uniquely poised to seize them. Consequently, we continue to make investments that will strengthen the future value for our system and our shareholders. We are also keenly aware of our short-term challenges and the reality that our recent growth has not been sufficient to meet our long-term average annual financial targets. More recently, new store performance has been solid, comparable sales growth has been soft.
Our strategy is to achieve a more balanced approach to growth between comparable sales and new restaurants, which leads to more robust income and cash flow generation and higher returns. To frame our recent performance and provide some context for how and when we expect to get back to achieving our long-term financial targets, I'd like to begin by taking a closer look at the macro environment and how that has impacted our comparable sales and ultimate performance. From there, I will drill into the key drivers of comparable sales and discuss what is needed for McDonald's to generate more substantial growth. First, the macro environment. The IEO industry in most of our major markets has been flat to declining for the past two years, while expense pressures have been felt throughout the P&L. As these dynamics have persisted, competition has intensified, further pressuring sales and margins.
In addition, from an internal standpoint, our innovation around new products, marketing, promotion, and value enhancements, while solid, has recently not generated enough comp sales lift to overcome these environmental headwinds. Due to all these factors, our operating income growth and returns have dipped below our average annual long-term targets in 2012 and thus far in 2013. Our financial model is really driven by our ability to grow comparable sales, which is dependent upon two factors, average check and guest counts. Average check is affected by changes in pricing and product mix. Pricing is the most accretive to our margins. Historically, we've been able to take a 2%-3% price increase that covered most of our cost pressures. Lately, however, we have not realized enough effective price increase or flow-through to offset most of the expenses across our P&L, thus pressuring margins.
You'll hear more about our efforts to address product mix in the Area of the World presentations this afternoon. The second driver of comparable sales growth, guest counts, has been negatively impacted by the lackluster growth in the IEO industry and the heightened competition in nearly every market around the world. When we look at the market dynamics expected for 2014, we do not see significant changes versus 2013. We realize our performance is not entirely driven by the external environment. We remain focused on those things within our control. More so than ever, we are leveraging consumer insights in our planning process, taking an honest assessment of our execution in every market, and identifying areas for improvement, while more proactively sharing best practices around the world to better leverage our size and scale advantage.
Despite recent performance in the near-term outlook, we continue to believe that our long-term average annual constant currency targets remain achievable. There has been no structural change in either our business model or our industry that would suggest these targets are not valid over the long term. The IEO industry is projected to grow both in dollars and number of customers served over time. In addition, we believe that our innovation across menu, operations, marketing, and customer engagement will ultimately drive gains in market share. These factors bode well for growing our comparable sales, and in turn, our operating income, cash flow, and returns in the years to come. We are the industry leader, and we intend to strengthen our competitive position, which is why we continue to invest to drive future growth.
We have unique competitive advantages in a large, highly fragmented industry. We look forward to sharing our plans with you throughout the day for how we will capitalize on these advantages. I will now turn to our performance and our preliminary outlook for 2014 across some key items. The largest driver of operating income continues to be franchise margins, which represent approximately 70% of our overall restaurant margins. The most significant driver of franchise margin growth is comparable sales performance. Four out of every five restaurants globally are franchised. We enjoy consolidated franchise margins in excess of 80% due to the relatively low level of direct costs required in our model. The second driver of operating income is company-operated margins, which represent the other 30% of our overall restaurant margins.
For a perspective, Europe comprises 47% of our company-operated margin, with the U.S. and APMEA at about 25% each. Unlike franchise margins, which are somewhat insulated from inflationary cost pressures, company-operated margins are impacted by commodities, labor, and other operating expenses. As a result, sales leverage is even more critical to increasing company-operated margins. At 17.6% through September 2013, while down from prior years, our company- operated margins remain at healthy levels. Looking at commodity costs for next year, our preliminary guidance is for our basket of goods to be up 1% to 2% in the U.S. and 1.5% to 2.5% in Europe. It's also worth noting that labor and occupancy costs have increased around the world. We expect this trend to continue in 2014.
While we continue to make adjustments and closely manage our restaurant expenses, we expect our company-operated margins to remain pressured in 2014 as this environment of muted top-line growth and ongoing cost pressures persist. The third component of operating income is G&A. We effectively manage this area by prudently investing for the future while seeking efficiencies where warranted. We have demonstrated responsible spending and attention to G&A, as reflected by the decline as a percent of revenues over the past five years. Looking to 2014, we expect G&A to increase approximately $200 million, reflecting higher employee expenses, primarily due to the impact of below target 2013 incentive pay, as well as costs to support restaurant growth, capacity enhancements, and our digital initiatives, and also reflecting expenses associated with our worldwide owner-operator convention and sponsorship of the Winter Olympic Games in Sochi.
We ultimately measure overall profitability by our combined operating margin. Year to date, we are up 10 basis points to 31.2%, a healthy percentage that we believe we can continue to grow over time. As you can see in the slide, an established, more heavily franchised market, such as the U.S. at 89% franchised, can yield a combined operating margin in excess of 40%. McDonald's continues to generate a significant level of cash from operations. Through September 2013, we generated $5.2 billion, which was up $131 million over the prior year. Returns on incremental invested capital have decreased recently, primarily due to softer operating performance amid fairly consistent capital spending over the past two years. As of September 2013, the one and three-year returns were 12.9% and 21% respectively.
Return on invested capital increased 300 basis points in the four years ended December 2012, with each area of the world contributing to the increase. While results through September 2013 have come down slightly, consistent returns of 20+% indicate that the investments we've made over the long term continue to generate a steady flow of income. Return measures around the world are consistent with the consolidated trends as shown on this slide. As I mentioned earlier, our income and returns are highly correlated to our comparable sales growth, so we are focused on improving this in every area of the world. As Don reiterated, our priorities for the use of cash remain unchanged. Our first priority is to reinvest in the business to drive future growth and returns. We'll do this by investing $2.9 billion-$3 billion in 2014.
Consistent with this year, more than half of that capital will be devoted to new restaurant openings, while the remaining portion primarily allocated to reimaging, rebuilds, and other sales and capacity building initiatives. We believe now is an opportune time to continue investing in new restaurants and will slightly increase our pace in 2014, as we are under-penetrated in many emerging markets and continue to have opportunity in many established markets. New restaurants continue to offer some of the highest returns of any of our investments, and they typically grow over time. To take advantage of this, we plan to open between 1,500 and 1,600 new restaurants next year. The biggest increase in openings will be in APMEA, where most of our emerging market opportunity resides. Our overall growth in units will be a healthy combination between established and emerging markets.
This is not about growing just for growth's sake. Tim will discuss the tools that we are employing to identify the best locations that can offer the greatest returns over the life of a restaurant. Next year, we plan to reimage about 1,000 restaurants. As we make progress in our reimaging efforts, the pace has naturally slowed, especially in markets that are largely complete. The biggest reduction in reimages will be in the U.S. Jeff will discuss the rationale behind the U.S. decision later this afternoon, but the headline is that we, along with our owner-operators, are prioritizing some investments in our kitchen to deliver enhanced service capabilities and menu choices to our customers. We are moving some of our 2014 reimages into future years.
The last topic I'd like to cover is our philosophy regarding the use of free cash flow and our overall capital structure. We remain committed to returning all free cash flow, that is cash from operations less capital expenditures, to our shareholders over the long term. For the five years through 2012, we returned more than $27 billion to shareholders. Through October 2013, we returned $3.8 billion, comprised of $2.3 billion of dividends and $1.5 billion of shares repurchased. We continue to balance increasing dividends, which provides a steady source of income to our investors, with repurchase activity, which will contribute about 1% to EPS growth this year. I'd like to discuss our capital structure. A strong balance sheet and overall financial foundation is vital to our system as our franchisees and suppliers benefit from our industry-leading single A credit rating.
As our business grows, so does our ability to modestly increase our debt levels. We will do so prudently, keeping our credit metrics within the current ranges. We believe our capital structure is appropriate and best positions the company and the system for enduring profitable growth. We ask our franchisees and suppliers to be financially strong and disciplined. We feel it is important to lead by example. In closing, I remain confident that our fundamental business model is intact. We are the global leader in an industry that will grow in the coming years. We have clear, distinct competitive advantages and an infrastructure built for growth. Our geographically diversified portfolio and various ownership structures allow us to optimize our investments within a market. We are patiently and deliberately making investments today to seize those long-term opportunities that will make McDonald's even better and bigger in the future.
We are confident in our ability to create long-term value for our customers, shareholders, and the entire McDonald's system. Thanks. Now I'd like to invite Tim Fenton to come up and join Don and me for the Q&A.
All right. I believe we have folks with paddles in the aisles. Would love to entertain some questions from you guys. Please do me a favor and also mention your name as you ask your questions. Let's go to number 1 first. Chris, you got this? Okay.
Hi, David Tarantino from Baird. How are you?
Hey, David, how are you?
Good, how are you?
Good.
My question's for Pete. I guess there was a lot of detail on the 2014 margins, and you mentioned some pressure, and I'm wondering what it would take to hold EBIT margins flat at the corporate level in terms of comps. I know that's the biggest driver. I guess it's an unknown. Could you talk about what it would take to hold that and maybe get operating income growth more in line with your long-run targets for next year?
David. We don’t model out the comp to necessarily drive operating margin growth. Historically, we’ve talked about needing a 2%-3% comp in the U.S. and something like a 3% comp in Europe to maintain margins in what we call a more normal environment. That’s where we’re able to have the ability to pass on the inflationary pressures to the consumer and see that flow through and benefit that to the bottom line. As we’ve seen over the last several quarters, that environment is a little bit different. Obviously implying something a little bit higher than that as we look at the cost pressures. The commodity outlook I gave means commodity pressures should be maybe a little bit better next year in some of these markets. While we’ll still have labor increases, hopefully they’ll be a little bit less than they’ve been this year.
Our margins will continue to be under pressure next year because of these factors. Probably not as much pressure as they’ve been under this year.
Number two.
Hi, David Palmer, RBC.
Hey, Dave.
Hey, Don. You mentioned macros seem to be stable, probably similarly unspectacular in 2014 as to what they’ve been in 2013. You’re maintaining the same sort of targets, the incremental returns in the high teens, that sort of thing. Pricing will be less than maybe you’ve done in the past, but similar to what we’ve seen very recently. It seems like to get to those targets, it’s really the remaining factor here, if all else is equal, is traffic. Traffic is the part that has to get going for these existing asset dollars, which will be growing at the same rate. Is that fair, that really to do this, it’s going to be that one line item?
David, I think, first of all, as we talk about the targets, we talk about long-term average annual targets. For us, we’ve not changed those long-term targets because we don’t think there’s anything structural or foundational that’s changed in the world from a business model perspective. We clearly realize that the macros themselves are still not in favor, and I think Pete went over a lot of that as he talked about margins being under pressure to David’s question. We know that the three critical ways that we continue to drive sales, we understand which ones are pressured. If I was to look at, let’s start with price. We realize that if we still have low inflationary levels around the world, then that hinders our ability to take price a bit.
We’ll see how inflation levels go, but with some of the forecasts, you guys have seen those yourselves. We realize that from a guest count perspective and driving demand, it’s more competitive intensity today around price, and you’ll hear this a little bit later from some of the teams. We realize that’s out there. For us, what this really boils down to is how do we become much more differentiated in the experiences that we’re going to offer at McDonald’s? You’re going to hear today about food offerings, you’re going to hear about the experience in our restaurants, and you’re going to hear even more about how we try to structure a much more differentiated experience. Steve will talk a little bit about digital engagement, et cetera. We believe that we’ve got to be able to appeal to consumers in a stronger fashion.
2014 is a year that will be under some challenge. Long-term, we believe that the growth targets that we set are still intact.
Hey, Jeff.
Hey, Don. Jeffrey Bernstein from Barclays. Just a two-part question. Just first following on your comments about the franchising, and you talked about, I think Pete mentioned that the company-operated restaurant margin is a lot more vulnerable to these pressures we’re talking about, where the franchise margin is so much more stable and contributes the larger percentage of your operating income. I’m just wondering what perhaps stops you from being more aggressive. You had a chart there that showed the U.S. sitting at 90% franchise, the rest of the world in the low 70% range.
Thinking, I know you always want to have skin in the game and the different markets have different reasons, but what stops you from pushing those other markets to that 90% plus, especially, that seems to be working well for you in the U.S. and these other markets would seem to make more of a contribution. Just separately, there was no mention, Pete, of the real estate portfolio. I know you talk kind of about creating the longer-term shareholder value. I just was wondering if you can give us an update since you do own such a large portfolio of real estate.
Jeff, I'll take a part of the first one. I'm going to ask Tim Fenton to talk a little bit about franchising around the world, too, because one of the scenarios, we show the pictures and we show the larger numbers and the rolled-up numbers. Each market is a little bit different relative to some of the real estate-based cost structures. When we talk about the franchise margins, you'll see some differences in the U.S. versus what you might see in an Australia versus what you might see in a France. That has an impact as well when we look at the overall franchise margins. I just ask you all to keep that in mind as you look at the numbers.
We are continuously pushing to move forward, maybe, Tim, you can give a thought about some of the other strategies we have from a franchising perspective around the world.
Sure. Let me pick Asia Pacific, Middle East, Africa, I guess, is probably the one that has the most opportunity for us, Jeff. Right now, about 71% franchised. We don't really set up targets, I think the biggest opportunity we have, Dave Hoffmann and Kenneth Chan will talk a little about China later on. We'd say let's start with China. If you recall, and some of us had this discussion in the hallway, back in 2008, we had three franchisees in China.
Today, we sit at around 170 restaurants that are franchised. Our goal is to be up to 20%-25%. It took us a while to get a franchising model, the economic model, right where we could split the pie on that. I think the folks have done a tremendous job, starting four years ago, to build the infrastructure for that, and they've got a good pace. Again, Kenneth will talk a little bit more about that. Some of the other markets, too, where they've developed the economies of scale and the economic model in Southeast Asia, where you have a lot of development growth, Malaysia, Korea, where they've got pretty good franchising plans in place. There is a little work that Doug and the team are maybe working in some of the restaurants and countries in Eastern Europe.
As always, there's some portfolio management, if you will, with McOpCo, selling stores that we think that would be better serviced and run by franchisees than McOpCo. We've got some of that going out there. I guess the other big one would be Australia, where Australia, I think we were at about 77%-78% franchise. I think we're going up to about 82%, 83%. The issue we have with a country like Australia, it's the geographical size of the U.S. We do need McOpCo for people pump. We do need McOpCo for testing new systems, and we do need McOpCo for profitability. Work in progress. We got more that we can do. I'm not sure that we would set a target to reflect the U.S. of 90%, but certainly there'll be some movement on that.
Jeff, I think later you'll hear from some of the different areas of the world, but we're focused on those things Tim just mentioned. Mix in a portfolio along with the base cost of sales, whether they be real estate or construction, or it be this opportunity, really the best way to drive margins, as you all know, and we say it continuously, is to drive sales. That's what we're focused on.
Pete?
Jeff, regarding the real estate portfolio, our business model is fundamentally built on co-investing with our franchisees and being the landlord as well as the franchisor in those sites. Periodically, we'll go through exercises to see, can we create greater value by monetizing our portfolio or continuing with the same business structure? Every time we go through that exercise, we conclude that the business model as it is today is the best opportunity to create long-term value for our shareholders and our system vis-a-vis some spinning off or monetizing of the real estate.
Yes. Number 3. Oh, number 2.
Hi, Sara Senatore.
Hi, Sara. How are you?
I'm well, thank you. I had a question, sort of a two-part question about the idea of pricing. The first is, you talked about actually seeing inflationary pressures but not having a lot of pricing power. Just trying to reconcile those two things, the ability to price with inflation, and the impact on margins. The second question related to that, some other QSRs have seen some success in more premium products and trading people up. Even if you can't take price per se, you can get a higher ticket. What I feel like I've seen recently from McDonald's, at least in the U.S., is actually maybe shifting away from that. The Angus burgers came off the menu, the Chicken Selects and salads. Is there something about your customer that is maybe less trade up-able, if you will?
I'll touch base on the last question, I'll have Pete touch base a little bit on pricing and inflation. As I was mentioning to one of the earlier questions, when we look at customers and we look at overall sales and how we drive overall sales, Sara, we're looking at demand, we're looking at PMIX, and we're looking at price as well. From the perspective of PMIX, this is where we really get into what that menu selection will be for the upcoming year, and that menu that is inherent within the marketing calendar. I think what you're going to hear today is from each of the areas of the world, you'll hear a little bit about some of their focal points. You'll most certainly hear from the U.S. how they're looking at this.
In the U.S., I know that Jeff and the team will talk a little bit about Angus, they'll also talk about product repositioning. This is not about just pulling off high-margin products. We'll talk about repositioning a little bit. You'll hear a little bit more about that later. If you still have some questions, just follow up with us. We are focused on continuing to grow in areas that give us additional margin. Beverages are a great platform. Premium beef's a great platform. Chicken is a great platform. Clearly, breakfast represents the largest margins across the business, we have a large breakfast focus. Each of those helps us to address some of the concerns that we see or opportunities we see in the marketplace, as well as some, I think, of the fundamentals around part of your question.
We'll be addressing that throughout the day as well. Pete, on the-
On the pricing. Yeah, Sara. We look at a couple of things when we set our pricing, and typically, you hear us talk about what's going on in food away from home inflation. This year, that's projected to be up 2%-3% in the U.S. If you think about general inflation, CPI and some of the headline numbers, that still remains below the Fed's 2% target rate. Actually, food at home, the grocery store inflation, is running about 1% this year. While we're seeing inflation in commodities and labor and utilities and some of the other restaurant operating expenses, the general public is seeing this inflationary environment that is lower than that, and actually in food, if you will, at the grocery store, even at a lower level.
That creates this dynamic when you couple that with an IEO market that's relatively stagnant to be very disciplined about the pricing and realize that if you go too fast and too quickly, that your likely outcome is to chase away some customers. In this environment, keeping that traffic is important to us, and the U.S. and the markets all around the world work through this balance and are continually looking at that, as well as some of the factors that Don mentioned about how do you bring product mix in, how do you do something like a Mighty Wings, or they'll talk later this afternoon in the U.S. about some premium products next year to boost check a little bit if you can't necessarily just raise prices.
One of the solid things about the management team too, is many of us have been through some of these cycles. Some of you here remember 2007 through 2009, we saw some similar things at food at home. We saw grocery prices at one year were down low. Another year, they reflected the opposite way. What we tried to do was to migrate somewhere in the midst relative to our price increases. That has worked for us historically, not just in the '07 through '09 timeframe, but also in prior timeframes. We bring with us some education and experience about some of these economic periods as we make the decisions for the future. Where next?
Good morning. Hi, it's Nicole Miller from Piper.
Hi, Nicole. How are you?
Great, thanks. I thought the very early on comment about beverage was interesting. My question is, what is your current beverage share, and can you quantify the opportunity? The second part is, who's the competition then? Who are you going to take that share from? The final part is, how are you going to do that? Do you have to get faster, or do you have to compete on price as well? Thank you.
Okay, Nicole. You got quite a bit in there. From a beverage perspective, we quantify our global opportunity at about $3 billion. The way that we look at this opportunity is based upon what we view as a McDonald's fair share based upon our overall share within the marketplace, which basically tells you that we are less than that fair share now and feel like we have some room to go to catch up relative to our opportunities within beverages. Having said that, it's also a growing category. As beverages continue to grow, we also want to participate in the growth. Competition, any place that you can buy a beverage. When anyone that stops off to get a cup of coffee anywhere, that's a competitor. That's an opportunity potentially for us. Now, we're not chasing every single competitor.
We're looking at what the larger buckets of opportunities are. What's coffee on the go? Where are we strongest in that coffee arena? We're pretty strong in drip coffee. We can be stronger. There's more players entering the space, but we can be stronger in terms of our coffee execution. Having said that, we also know you can't just do coffee. Along with coffee, you have to have food. For us, that's a big strength we have, and we have some real equity relative to breakfast. For us, the beverage strategy is more than just beverages. Beverages are an impulse purchase, and they're a habitual purchase. We want to make sure that we participate there. The competitive landscape is broad, and it is vast, and that part will not change. How?
We'll do that by looking at those categories that we talked about earlier. Those categories are coffee, those categories are tea, those categories are still carbonated soft drinks. It's just a matter of which ones within the carbonated soft drink. There are certain categories that still maintain some solid presence and solid growth within carbonated soft drink. We're focused not only with our internal teams but also with our suppliers, the Coca-Colas, Dr. Peppers, et cetera of the world, on how we address that and how we do it from a consumer perspective, and we differentiate the McDonald's experience. All of those things will help us, and you'll see activities around the world relative to how we approach beverages as we move forward into the future. We got number two.
Yep. Thanks. Will Slabaugh from Stephens.
Hi, Will.
Hi. Pete, question for you on G&A. Can you touch on the $200 million increase for next year? Maybe if you could break out to the extent possible between incentive comp increases, growing the restaurants, digital, as you mentioned. As a quick follow-up there, can you talk about what incentive comp did in 2013 off of 2012? I assume the decline there, if you could quantify that.
Yeah, Will. Of the $200 million, a little over 60% is the comparison to below target incentive pay from around the world in 2013, the Olympics, and the convention. We've got the remainder is the combination of the kind of normal increase as well as these focus areas around restaurant growth and digital and our capacity enhancements. I don't want to make it sound like that just is kind of happening. There's a lot of activities underneath that where we've gone in and we've reallocated G&A, we've cut some projects. We've done some things you would expect in this environment. Generally, as Don mentioned, we don't see a fundamental shift in the business model or our customer base. We're not trying to cut our way to prosperity. We want to continue to invest for the future growth.
Around the edges, we've done some things to trim back where it makes sense to trim some of these things back. It's just the comparison against the incentive comp below target this year, which, yes, is down from 2012. I don't have the exact number. Maybe we can get that by the end of the day. It is a factor.
We got number one, and then we'll go back over to number four.
Hi. David Fuchs from the Lowy Family Group.
Hi, David.
Hi. My question's around your franchisees.
Trying to get a sense for how existing franchisees are feeling and how they're doing. As regards prospective franchisees, how's the value proposition looking for prospective franchisees, how's the pipeline looking, are you seeing any changes there, positive or negative?
I'm going to ask Tim to talk a little bit about what he's seeing as he's traveling around the world. I know you're going to hear more about this as well from Jeff Stratton and the team. We spend a lot of time with our franchisees. I will tell you that what I've seen is that there is still an alignment, there's still an excitement. When you have industry-leading cash flows, that does help. Nonetheless, there are certain pressures that the cash flows are under that hit our franchisees as well. I know you'll hear about it from Stratton a little bit later on the U.S. end. You'll hear about it from Doug and Dave on the other end relative to Europe and APMEA. Maybe Tim, just some of your travels, some of the things you've been talking with the franchisees and teams about.
Sure. Thanks. I would say from the travels to the U.S., to Europe, to Asia Pacific, it remains, I think, one of our strongest assets is the alignment that we do have with our franchisees. We don't always agree, I think that's healthy. In any relationship, you have some disagreements and you have some nudging, and it keeps us honest. When it comes to the alignment of what we have to do, I know Jeff Stratton and his team, Jeff being new in the job the last 14 months, I think has probably spent 85%-90% of his time on working alignment and understanding and listening and rallying and motivating. When we get this alignment going, which has always been a strength for us, it's a powerful machine for us.
Europe, I think Doug and his team and the division presidents have done the same thing. Dave Hoffmann and his folks in the Middle East and Pacific, where we have the majority of our licensees, have done a great job on alignment, on getting things focused, on getting the plan together and moving in one direction. I really think it is a strength for us. As far as registered applicants, we have a healthy inventory of registered applicants, particularly where most of our franchising is happening in APMEA. In the U.S., you have a good inventory of the U.S. team. I think more of the restaurants go to existing operators or second generation. Correct me if I'm wrong on that, Jimmy J. and Jeff. Overall, don't have an issue on recruiting registered applicants or people that want to become McDonald's franchisees.
We haven't advertised in many years to get registered applicants in training. I think it's healthy on both sides.
We can always tell when the franchisees are not happy. There's enough meetings that they'll tell us. That's number 1. Number 2, you'll see franchisees wanting to leave the system or not have their next generations be a part of McDonald's as we move forward. We're not seeing those things at all. As a matter of fact, the next generation folks are pretty psyched. They are pretty aggressive relative to the opportunities we have. Number 4 over there.
Joe Buckley, Bank of America Merrill Lynch. I got a couple of questions. Pete, talking about the debt rating, why is the focus on maintaining the current debt rating as opposed to maybe maintaining an investment-grade debt rating? How much incremental debt do you think you can take on to maintain the current rating? Maybe tie in the overall comments to levels of share repurchases. I think you said share repurchases have added about 1% to EPS this year. It sounds like it may be less than that next year if you maintain the current system. Don, you mentioned a $3 billion opportunity in beverages. Can you put that in perspective? Where are you now? That's a global number, I'm assuming.
Maybe lastly, just confidence on what the sales trajectory is going to look like next year. That seems to be, I guess, as always, the key to the whole thing is, maybe we'll get into this this afternoon, I realize, with the regions, but just the confidence on your ability to positively influence that sales trajectory.
Joe, regarding the single A, this actually ties into something that Tim just mentioned around the franchisee alignment. We spend a lot of time aligning with our franchisees around what is going to drive the business going forward and how are we going to get there together. We have a history of co-investing with them, and the idea that we would, in essence, kind of withdraw capital from the business with them through higher debt is going to cause a misalignment with the franchisee system that from a long-term value to the business, as we estimate it, is probably more destructive than the short-term value we could create through some kind of additional leverage event. We check this periodically. We go out and look and see what is the impact of doing certain things. We continue to get back to the power of that alignment.
The greatest creator of shareholder value at McDonald's is when the company and the franchisees are aligned in executing at driving comp sales. That continues to be the bias at which we look at it. In terms of incremental debt, I don't think we've given a forecast, per se. The last couple of years, we added maybe about $1 billion each year. This year will probably be something a little less than that, in the couple several hundred million USD kind of range. That's of the magnitude, and obviously, we talk about the financial model being so dependent upon driving comps. As we continue to drive more comps, you get the cash flow and the whole model works extremely well.
Joe, relative to beverages, I have to make sure I state this in balance. We're a restaurant business. We serve food and we serve beverages, and we do it very fast, and we're accurate, we're friendly. We want to make sure that all of that stays together, Joe. We're not trying to be something we're not. Matter of fact, we're following the strategy that began in New Zealand, Australia relative to McCafé. I'm going to ask Tim to talk a little bit about where McCafé is positioned around the world. We have different opportunities that make up that $3 billion. In the U.S., Stratton and the team will talk about part of that with Kevin. Over in Europe, Doug's going to talk about the opportunities that are there.
You'll hear a lot more about beverages from those two, I'll refrain from further comments on that. Later on in the day, while they're here or in any conversation, we can chat even more about beverages. That $3 billion, we think is very achievable relative to our global brand. Tim, maybe just to touch on McCafé.
Sure. Two quick points. Just coffee globally. Coffee globally is $65 billion globally. McCafé, we have about 4,200 McCafés globally now between Europe, Asia Pac, and Latin America, averaging anywhere from 5%-8% of sales, and growing. We plan to open anywhere from 350-450 McCafés this year and 350-400 next year. On coffee, what we have learned, and Don talked about beef, chicken, beverage, and breakfast. Breakfast and beverage or breakfast and coffee go hand in hand. In many of our emerging markets that have aspirations to have 25% of their sales be breakfast have learned to grow breakfast by leading with coffee, being coffee the loss leader to get them in and trade them up. And we have done that successfully throughout Asia Pacific. Europe's doing a great job with their breakfast on a lower base, but growing on that. Coffee is a key.
Beverage is the key for us, and we have served coffee since 1955. It's nothing new to us. It's the way we have expanded it and how we plan to really take more advantage of that market and that growth that's out there. Coffee and tea, as Don said, are the biggest growth. But our McCafé approach, our coffee approach globally ties right in with breakfast and beverage.
I think we're out of time for this segment, but what we're going to do is we're going to be around all day. We will have a chance to have some more dialogue and some more interactions. There is a couple of things. One, throughout today's presentations, what I would offer to you all is it will be a little different from those who have been here before. We're going to go deep in a couple of the areas of the world on some of the topics that we have discussed, ask all the questions that you have, and then we will have that final Q&A section so you can ask any broader questions that are still remaining. With that, I would like to now turn it over to our Global Chief Brand Officer, Mr. Steve Easterbrook, to talk a little bit about brand and digital and all kinds of things.
Thanks very much, Don. Good morning, everyone, and a pleasure to be here. And I know I have interacted with a number of you on previous occasions, and I look forward to spending more time with you for the rest of the day. And as many of you also know, I am about six months back into my time at McDonald's. Before that, I was here for 17 years, serving in a number of different leadership roles, including CEO of McDonald's U.K. and Division President for Northern Europe and Global Chief Brand Officer for a short while, and then finally President of McDonald's Europe. I left the company in 2011 to become CEO of a couple of smaller restaurant companies and returned back to McDonald's this past June as Chief Brand Officer.
In truth, I spent the last two years experiencing the restaurant industry on some new levels and was able to see it through a different lens and saw and learned a good deal. It improved my horizons a little. Ultimately, I found I have ketchup in my veins, and I missed the adrenaline buzz that comes with this place. Now I'm thrilled to be able to return to such an iconic and global brand, and a brand that all of us believe has so much more to offer. I'll echo something that's already been said this morning, which is the notion of opportunity, the sizable opportunity in McDonald's for us to grow our business while being even more valued and loved by consumers.
To be our customers' favorite place and way to eat and drink is an aspirational notion, but one that McDonald's is well-positioned to achieve. Think about it. Few other brands have a presence in so many areas of their customers' lives. What they eat and drink, where they come together, how they manage their workday and their weekends with their families, and how they socialize and have fun. The bottom line is we touch so many lives in so many ways, and here's just a glimpse of that from Spain.
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A Father's Day ad that launched in Spain really captured the cultural meaning of that day, particularly in Spain. It went viral, having shown it as well to more than 6 million views. There's an incredible runway for us to strengthen our emotional connection with our customers and ultimately drive more visits more often for our business. It's a journey, and one that involves listening to our customers more intensely than ever and elevating all we do around three key consumer areas, the experience at our restaurants, the perception of our food, and how we engage in the modern-day marketplace. Right now, we're pursuing all of these things around our system, but sometimes just in pockets.
Our great opportunity is leveraging our modernized restaurants, our high-quality food, and all the best ways we engage consumers around the world so we can take the entire brand to a higher level in the minds of consumers everywhere and build that great loyalty and love that's going to drive more visits. On the experience front, it's about delivering a more modern and destination atmosphere by leveraging our reimaging efforts. We can develop further service enhancements and even greater means of convenience. Most importantly, continuing to make our food and beverages more relevant and in step with where our customers are going. This includes a greater commitment to menu innovation, from our core offerings to new products, with a greater focus on freshness, customization, and more unique tastes.
You'll hear more about our menu focus during the other world presentations and how our markets around the system are bringing this to life. It also means responding more quickly to today's consumer realities and being more of an on-the-spot brand. This means using big data to give us more real-time consumer feedback and a dialogue to give us stronger insights. It's about always knowing the landscape and delivering offerings and innovations that keep making our customers' lives just that little bit easier and a little bit better. Like the breakthrough value lunch in France that was developed through deep customer insights, or how we're creating a new McDonald's experience during the evenings and overnight in APMEA and in the U.S.
This is what we want to be in a bigger way moving forward, a brand with a greater sense of urgency to always meet our customers' needs where they are right now. Quality, which really is where it all starts for us. We're a restaurant company that serves great-tasting, high-quality food, and we must keep raising customers' perceptions about the quality of the food on our menu by heightening our overall transparency and telling our food quality and sustainability story in a more compelling, a more authentic, and more impactful ways. Take a look at these two ads from Canada, which has been part of their ongoing food quality campaign.
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Cute and nicely done, the simple truths. The breakthrough on food quality, we must also act more iconically with big moves that truly make a statement in the marketplace. Like our recent announcement with the Clinton Global Initiative to make salads, fruit, and dairy a more prominent part of our Happy Meals and Extra Value Meals in the years ahead. Our work around quality is no doubt a long-term proposition, but one to which we are truly committed. We've seen this commitment pay off in several markets around the world, where before we did anything else, we changed minds about the quality and goodness of our food, and the business took off from there. This remains one of our biggest opportunity areas for unlocking greater affinity for our brands and further growth of our business.
We'll be working even harder to deliver all this on a broader scale. Our final focus is how we engage consumers as a brand out in the marketplace. Our goal here is on continuing to make our work more relevant, more engaging, and more effective. Let me touch first on our traditional mass marketing, especially television, which is still a hugely powerful medium for us. We're using a more rigorous return on marketing spend process to better understand the effectiveness of our work and where and how we can have a bigger impact. From a creative standpoint, we're working to ensure more universal traits across all of our efforts. Such things as being based on deep consumer insights, focusing on a strong, clear message, and telling an authentic and engaging story. Here's a new spot from the U.K. that brings those three motions to life.
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All that said, our strategic focus is moving from mass marketing to a more one-to-one relationship with our customers. This is the future. What consumers continue to seek is a personalized relationship with everything they engage with, from music to entertainment, to brands like ours. Enabling this in a massive way is digital. Digital has become an undeniable part of everyday life. Historically, we've relied on our scale and our ability to speak with one voice to our 69 million customers a day, it's worked really well for us. As the environment in which we operate changes, our marketing model must evolve. We're moving from mass one-way push communications, we're building deeper one-to-one relationships that go beyond our restaurants. These relationships are about personalized, fun, social engagement that's interactive, pulls the customer in, and works their way.
Evolving to 69 million customers, each interacting with McDonald's in their own unique way. We've made some progress. New engagement experiences inside our restaurants, such as augmented reality, with Track My Macca's in Australia, which highlights our food quality by giving customers a digital tour of how our food is sourced right on their smartphone. There's new engagement experiences outside of our restaurants, such as delivery in APMEA, beverage and dessert kiosks in Latin America. We're offering new ways to order, such as self-order kiosks in France, and a number of mobile ordering and payment tests are underway. Different ways to pay, such as the near-field communication payment in Japan. The Arch Card in the U.S. and PayPal in France are further examples. It's all terrific stuff, and what we plan to do now is to move from market answers to more system solutions.
That does not mean that all markets will function exactly the same way. What we intend to do is leverage our size and scale with some outside partners across our system to offer customers the digital experience that only McDonald's could deliver. That's been my theme of sorts today, executing against our brand-building areas on a bigger and broader scale to offer more meaningful benefits for our customers. Even just scratching the surface, we see the incredible potential with digital for building our business. Whether it's on the home screen of their smartphone when they wake up in the morning, or the windshield of their car as they drive home from work in the evening, we want to be wherever our customers may be and have whatever it is they're looking for.
Imagine a customer walks into their local McDonald's and receives a message on their smartphone that welcomes them back to the restaurant by name. A message that offers them the ability to place their favorite order, perhaps a Big Mac Extra Value Meal from their phone. Maybe then support it with a personalized offer for being a loyal customer. Or perhaps it's a customer relationship management program that gives loyal customers access to fun and exciting rewards that only McDonald's can deliver. Digital presents the ability to greatly modernize and personalize our connection with each and every one of our customers, and the millions more who are aware of our brand. That's what we're focused on doing. We recently took a significant step in that direction.
Last month, we announced a new senior level position, which was Chief Digital Officer, and brought on board Atif Rafiq to fill the role. Atif is here with us today. You'll have a chance to meet him. Atif is a leading figure in the digital industry, and he comes to us from Amazon.com, after having also spent time with Yahoo and AOL. Atif will lead a newly created digital team at McDonald's, whose charge will be to deliver a more cohesive approach to both our digital strategy and our execution across the system. We're extremely excited to have Atif with us and leading this effort. He brings a level of expertise and cutting-edge thinking that will help McDonald's make that crucial leap into being a more modern digital brand. With that, I'll close out.
I want to reiterate how excited I am to be leading our overall brand efforts and working with our system partners to drive the tremendous opportunities we still have to strengthen brand McDonald's across so many fronts. What it will take and what we'll be focused on more than ever, is truly hearing our customers and delivering what they need more quickly, more easily, and in a bigger way that lifts our entire brand. Thank you, and I'll be grateful to take questions for the day. Number three.
I guess, yeah, that's me. Keith Siegner from UBS.
Hi, Keith.
We just spent a long time talking about other ways to engage the customer, broadening and deepening that brand relationship. There have been some interesting press releases over the last couple weeks that I'm surprised haven't come up at all tonight or today, was wondering if you could talk about these coffee announcements, taking that McCafé brand here in the U.S. and maybe extending the reach outside of the retail store. Any color you could add around that would be very interesting. Thank you.
As I said, I'd also refer that to the U.S. team. They'll be happy to take that question later. In terms of brand extensions and getting the brand out and getting more familiar and getting people's. What we do know, here's where I would start, I'll leave the rest to the U.S. team. The longer a customer engages with a brand, the deeper the affinity grows. That is really the basis upon what they've made their plans. I think they can talk some detail to it later this afternoon, if you're okay.
One quick follow-up.
Sure.
In terms of that, let's say a loyalty program and that type of engagement, at least in the Northeast now, we have this value club membership that you can sign up for, and you get emails specifically targeted to you with your information. Is that just a local market test right now, or is this something that's going on more broadly?
No, we have initiatives going on all around the world, I can assure you. I think what we want to do is capture some of the energy and some of the best practices that are taking place in the market and working out which of those are scalable and most beneficial, both for business but also for the brand. I would start from a more of a customer relationship management perspective on it, rather than just a loyalty. Loyalty, it can just become, if you're not careful, a fancy way of just discounting your product. What I would like to do is to use our size and scale.
McDonald's, I always think of, has an amazing convening power that, where we want to go out and reach for partners who can provide ways of adding value for our customer, other than having to do it through a reduced price. That is what I think customers are looking for from us. We've got some wonderful assets at our disposal, whether it's the Olympics, whether it's World Cup football, whether it's relationships with picture houses like DreamWorks. Music streaming partners who are very interested in business with. There's a lot of interest now that we've kind of announced ourselves in this space, of ways that we can add value to reward our customers, other than it necessarily just being a price game. Number four.
Okay. Hi, David Palmer.
Hi, Dave.
Hi, Steve. With regard to advertising returns-
A lot of the large companies that we see have talked about having those returns on investment diminish over the years, but it's still the best thing they got. In other words, they haven't found the big answer in digital yet to replace something else. It strikes me that McDonald's would be well-positioned to find that replacement, maybe not immediately, but eventually, if you test this out. Would you imagine that X% of dollars that you and your franchisees sign up for every year, some of those dollars perhaps being reallocated? Is that the way that this could work out in the future?
Reallocations across different media.
Well, and even more specifically to some of the mobile platforms, and there's a lot of things you can do in terms of engagements, even if it's the couponing stuff. That effectively is marketing. Frankly, a lot of the CPG companies are doing more promotions in the supermarkets to replace that TV stuff. You yourself could do more of that. Yes, it could be deals, but it could have a much higher return than something else you could that's simply not going to be reaching the millennials, is my point.
Sure. Okay, there's another couple of points I think in there. Yeah, ROMS in itself is a measure. It's not the measure. It has helped us in the markets that have really employed it effectively over a sustaining period of time. It helps us manage where we spend, where we put our weight, day parts, which times of day do we support certain promotions, how long do we run certain promotions, whether it's a limited time offer or core favorites and brand ads. It really helps us manage around the margins, but it's working those margins, which makes it more effective. ROMS is great. We'll look at share of voice, but then that's predominantly TV. You're right, digital is redefining some of the measures and tools that help us be effective, but we'll be involved in that.
With regards to the investment and the infrastructure, the one point I would like to emphasize is why it gives me a really high level of confidence that we're going to do this and do this well, is that we have invested with our franchisees, significant but appropriate amounts of money over the last number of years in coming onto a common new POS system. It's not just point of sale for the customer. It interacts with our kitchen, but also into our back office system. That's the platform that we need to be able to unleash sort of the power of digital for us. We have way over 20,000 of our restaurants already on that, and it's still rolling out quickly. Other investments that, again, we have kind of shared with our franchisees. We've rolled out free Wi-Fi.
Two-thirds of our system's offering free Wi-Fi, which then gives you a lot more capability in the restaurant to bring the digital experience to life for the customer and add value. We've invested shoulder-to-shoulder with the franchisees. We'll continue to do so. If we come up with some good ideas I can tell you they're with us because the pull from the markets for this is enormous. They're just looking for some direction, some leadership from the center, which obviously we're going to step up and do. Thanks for the question. Number three.
Hi, Steve. It's John Glass.
If this is digital, you're sat next to our chief.
I know. I already met him. Thank you.
Good. Okay.
Maybe we can just pass the mic to him. The question is, when will consumers start to see this in a more concrete way? Specifically, when can I pay at McDonald's using my phone? When will you send me a coupon via my phone or other device? Does it have to be all at once globally? Will you launch this in the U.S., for example, or will this come out in other places in the world? Does it have to all look the same, I guess, globally?
Well, first of all, you can do all those things, but you may have to get on a few airplanes to do it. That's the problem. What we want to do is be able to roll those out and get scale to it, because consumer demand is there. One of the benefits we have in McDonald's is we've got way over 100 different markets. We can actually roll out tests and try different things in different markets. Could that be the U.S.? Absolutely. U.S. is a big market. Maybe they can offer up some regions, we can test it in a region. There will be different solutions that are being driven out, different areas of the world. We're kind of geographically neutral on this. What we want is those leading, sort of the earlier adopter markets. Somewhere the consumer is so digitally savvy.
If I take Scandinavia, for example, where the level of digital usage just in everyday life is so significant, that's a great testing bed for us because we can work out how well we connect. Other markets are less so, and therefore, there's not such a rush to it. No, when will you start to see stuff? You'll start to see some impact on our digital ideas by as early as by 2014.
In the U.S., you'll be able to use phones for these four reasons.
That wasn't what I said. Thank you for following up.
Thank you.
Oh, sorry, where are we? Number two.
Hi, it's Sara Senatore from Bernstein again. You actually touched on what I was going to ask, which is to the extent that I think you have tested this kind of stuff, I think maybe also in Asia, I feel like there's more digital couponing, that kind of thing, at least. Can you talk a little bit about what you have seen with respect to frequency and the thing that we're all trying to measure, which is comp? Also, you mentioned this as well, are there limitations? Are some markets more savvy, and is that because of just the market overall? Is it the nature of your customer who might be younger in some places than others? Just trying to get a sense of what the impact could be, best case, and then what are the limitations across different markets. Thank you.
Thank you. Thanks for the question. To cut to the chase, and the honesty of the answer is, we haven't put a number on this ourselves. We haven't set ourselves a target. What we do know is if we can make the customer experience smooth in the restaurant, we can make it more fun and make their lives a little easier, they reward us. We see that in some of the programs we actually run in the existing markets, which are pretty advanced in this. Part of the reason why, very pertinent to your question, for certain markets are way further ahead, not McDonald's markets, just certain markets generally. That's why it's not necessarily a race to be first, and that's not something we've tried to do.
What we're trying to do is be best at it and then to roll out these platforms and just have them full end-to-end customer experience. There are certain businesses out there who do fairly good jobs at certain elements of digital interaction, but not necessarily the whole piece, and that's what our aspirations are. We know that we will attract more customers, so we'll get the penetration piece by being more convenient, more fun, more engaging in the frequency piece, because if we make people's lives easier, that's what I think what they're looking for, and they'll come back and reward us for that. Is that time? Okay, right, my time's up. I'm getting hauled off. Let me invite Kathy back up to then just run through some logistics for us across lunch. Thank you.
The information in this presentation contains certain forward-looking statements, which reflect management's expectations regarding future events and operating performance and speak only as of November 14, 2013. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to differ materially from those expressed in or underlying our forward-looking statements is detailed in the company's filings with the SEC, such as its annual and quarterly reports. Access our SEC filings by going to www.aboutmcdonalds.com/mcd/investors. Our website also includes reconciliations of non-GAAP financial measures we mention in our presentation, if any, to its corresponding GAAP measures. Those reconciliations may be found at www.investor.mcdonalds.com.
All right. Welcome back, everyone, and welcome back to our webcast audience. Hopefully, everyone had a wonderful lunch. I know there were some great things there today. We're going to kick off with our Chief Operating Officer. I am very pleased to introduce Tim Fenton.
Well, good afternoon, and welcome back. I love that commercial because it's a great representation of what I've been doing the last 21 years. I have worked McDonald's my way around the world. Also, I hope everybody enjoyed lunch and tasting some of our latest products around the world. I know many of you are asking, why did Fenton choose to present after everybody ate the big lunch? I didn't. It's called the short straw. Here I am. Anyway, I'll try to keep it engaging and I know our international friends, hopefully, we won't let the jet lag get into them. We're into the second half of our day. We have a lot of great material to share. We have the area of the worlds that are ready to showcase some of the terrific things that are happening in their markets.
We have built in plenty of time. I know we've kind of short on the last time, but we've built in plenty of time for Q&A. Let's get started on some of the remarks on the global business and what we see. By way of a little background, I have been the Chief Operating Officer role now for about 18 months. This is my 40th year with McDonald's. Actually, tomorrow, November 15, will be my 40th anniversary with McDonald's from November 15, 1973. Okay, thank you. I know many of you that know me over the years, you're seeing that jet lag. That international years are like dog years, right? I know. I feel it.
I did start in the restaurants and worked across all the many areas of the business, in many markets from Europe to Asia to the Middle East, and of course, back to the U.S. I am excited to bring my global experience to help strengthen our brand around the world. I want to spend some time going a little deep on what you heard this morning, a little deeper about the growth opportunities that we see ahead for McDonald's. I think first and foremost, it starts with improving our focus and execution on running better restaurants and delivering the best food and beverage offerings that we can. At the same time, expanding our connection with consumers by extending our assets from McCafé to drive-throughs, broadening our digital engagement, and increasing our pace of new restaurant development.
It's being even better and bigger, which is our opportunity, and it's our challenge. What it takes is greater innovation, more modern tools and processes, stronger market analytics, quicker sharing and quicker scaling, and ultimately, bigger and bolder thinking. All of this is what we focused on to build our future, and you'll see it come to life with the presentations that follow me. I'll quickly comment on the macro level on the big opportunities before us and how we're seizing them. Starting with optimizing the menu. Menu will always be a key component of our growth, as above everything else, we are a restaurant company first. As we mentioned this morning, our menu growth will primarily come from 4 categories, beef, chicken, breakfast, and beverage. Each one of these product categories represents a $2 billion plus opportunity over the next three years.
We'll seize on this growth by first continuing to put our core menu front and center. Products like Big Mac, our world-famous french fries, hamburger, cheeseburger, Chicken McNuggets, are a key part of our menu that continue to account for more than 25% of our total sales and are one of the largest drivers of profitability. Our marketing plans fully engage these brands. At the same time, we're stepping up innovation around the core and finding ways to energize and modernize these brands for our customers. You'll see us doing more of this with our Chicken McNugget sharing boxes in various markets, our new Quarter Pounder toppers that we introduced this summer in the U.S., and our Shake Shake Fries across Asia. I hope you had a chance to try this new twist, if you will, on our iconic french fries at lunch.
We have an incredible equity in these billion-dollar core brands, and by modernizing and stretching them, we can do more to excite our loyal customers and attract new customers. Jeff Stratton and the U.S. team will discuss their approach later this afternoon on this subject. In the same vein, we'll continue to make our entire menu more modern and dynamic, from premium to value offerings. We're leveraging greater consumer insights to incorporate more freshness, customization, portability, and compelling new news that our customers tell us that they want. In addition, we plan to continue making greater inroads into still untapped day parts, including breakfast in many places outside the U.S. For perspective, breakfast represents about a quarter of our total sales in the U.S. compared to about 12% in APMEA and just 5% in Europe.
Across APMEA this past March, 30 countries recently participated in a National Breakfast Day promotion. 5,000 restaurants gave away over 5 million of our great-tasting and nutritious Egg McMuffins in a single day. We significantly increased the awareness and the trial for our products and helped drive sustaining growth at breakfast. In the end, we leveraged our size and our alignment to deliver the kind of disruptive engagement experience that only McDonald's can do. Why is this important? The toughest part to grow breakfast is to get to 10%. Once you get to 10%, after 10%, it's a little bit easier, and we know we've done this around the world. We know that in many of the markets in Asia where they did this, breakfast is one of the largest day parts.
They don't want to wait 40 years to get to the breakfast percentage that the U.S. has. They've come up with some exciting, engaging, and disruptive concepts. I believe Hoffmann will talk a little bit about it later as they go through National Breakfast Day 2.0. We're also focusing on dinner, snacking, and late-night occasions. This summer in the U.S., for example, they introduced McDonald's After Midnight menu, which combines the most popular selection of breakfast with our regular menu items. Finally, on menu, we see much more runway still ahead with beverages. You've heard this several times today. From blended ice to coffees to potential new platforms such as teas. Our blended ice line alone is on pace to deliver $1 billion in sales this year in the U.S., which represents just a fraction of the opportunity that we feel is out there.
Outside the U.S., sales this year is expected to grow to $400 million, with further growth ahead as additional markets around the world prepare to launch this platform. Doug Goare will provide more details around Europe's plans for leveraging blended ice in 2014 and beyond later on. We're also planning more expansion of McCafé in Asia and in Europe, as well as in the U.S. We also have a potential for McCafé-branded kiosks and even a package presence in grocery stores. We have built a strong global brand in McCafé, and we know we can leverage it in bigger ways to take even larger share in the growing coffee market. Now shifting to modernizing the customer experience. This is about ensuring we keep pace with our customers in the ways they interact with our brand. First and foremost is having contemporary restaurants, which is foundational to our future growth.
It enhances our ability to broaden our product offerings and our convenience amenities in order to deliver a better overall dining experience. We've been progressing well on this journey, and today, McDonald's reimage look is reflected in more than 60% of our interiors and 50% of our exteriors globally. Europe is the leader in having the most restaurants reflect our contemporary look. This is one of the reasons the premium food events continue to be a significant contributor to overall sales in markets like France and the U.K. As more markets become substantially modernized, our pace of reimaging will naturally slow down. That's why it's important to note that modernization goes beyond reimaging to include the many other ways that customers interact with our brand.
Our expansion of web ordering in APMEA, our service enhancements in Europe, and our growing presence across the digital arena, which I know Steve talked a little bit about earlier. Lastly on modernization is our continued commitment to quality, service, and cleanliness, or QSC, which is foundational to everything we do in the restaurants. As we modernize our brand, we can't, we won't take our eyes off strengthening our tradition of operations and service excellence, which not only greases, but growth opportunities in and of themselves. There is a clear correlation between our customer satisfaction scores and greater visits and greater sales. We know that continuing to get better at the basics, from speed to accuracy to friendliness, is what connects our brand to consumers, and it drives gains. We're making progress in what we call our customer satisfaction opportunities, or CSO. 0% CSO means 100% satisfaction.
You can see that we continue to lower our global CSO score, which is the direction we want to go. That said, we're never satisfied, and we know we have a lot more that we can do to improve this. Our goal over the next few years is to get our average down below 20%. This is a part of the business that's always been a special passion of mine. We'll be focused hard on continuing to improve the service that we deliver around the world by leveraging new tools, training, and techniques to help our management and crews continue to deliver the best service experience they can. Finally, broadening accessibility, reaching more customers more often. Here's where we really are looking to be even better and bigger.
We're driving greater convenience with more delivery and kiosks, extended hours in more restaurants across the system, and better and faster drive-throughs with tandem and side-by-side ordering and handheld order taking. Right now, for example, one out of two restaurants in the U.S. employ one of these multiple ordering points. We'll continue increasing that number to drive more cars and throughput because restaurants with multiple ordering points outperform those restaurants that do not have them. Then there's affordability, a key to accessibility and what the industry is focused on in the near term, given the challenging environment that we're in. Compelling value at all price levels is crucial as consumers grow more discerning and look to more non-traditional outlets like bakeries, grocery stores in their eating-out decisions.
Across all our markets, we are focused on better understanding what is motivating our customers when it comes to affordability, sharing and scaling solutions at the entry-level price and across our mid, our core, and our premium tiers. You'll hear a little bit more about this focus as the Area of the World presentations come on later this afternoon. Finally, in the area of accessibility, we will grow to the opportunity. By the end of 2013, we'll have opened about 1,500 new restaurants globally, in both established markets like the U.S., France, Germany, Canada, Australia, as well as emerging markets with China, India, and Russia. We will continue a similar growth pattern in the years ahead. What we like to say is we've gotten better at getting bigger.
We've gotten smarter and more strategic about how, where, and when to open new restaurants and growing to this opportunity in the right way. In a moment, you'll hear about the stronger development efforts in emerging markets like China, but we're also focusing on established markets and using advanced technology and processes to help unlock further growth in these areas. Through our gap trade analysis, we are leveraging the most advanced proprietary tools and software to pinpoint where we can still grow in more developed markets. A quick example of this is the work we're doing in Calgary, Canada. If you look at a map of Calgary and all the places are in red, it appears that we have much of the area covered.
Using our analysis tools, which involves things like centroid plotting, demographic, and retail synthesis, we can see in yellow all the areas where we are still under-penetrated given our screens. If we zoom down further to just a section of the city, our analysis and mapping tells us that by utilizing a variety of tools from reimaging, relocation, and new store development, we could potentially double the number of restaurants and increase our sales from $27 million-$61 million. Today, we have the tools, the technology, and the expertise that really were not available 10 years ago. We're better equipped to understand the right number and the right location of restaurants in any market from emerging to established.
We're also looking at different configurations and footprints, especially in dense urban areas where our space needs may be limited or where we need to leverage new thinking on space utilization, like kitchens on a second floor or in a basement connected by a vertical transporter. You'll hear more about this, especially from APMEA, but the idea is that we are employing the best tools and most dynamic and innovative thinking to further penetrate our global markets and reach more customers. In closing, I want to reiterate my confidence about where we're taking our business and how thoughtfully and strategically we're going after sizable opportunities that are in front of us. We have a strong, experienced, and talented management team, and we continue to have the best owner-operators and suppliers in the industry.
Together, we are aligned, we are focused, we are committed to building an even stronger future with a strategy of even better and bigger. With that, I'd like to take the opportunity to bring up Dave Hoffmann, who is our President of APMEA, and start with the Area of the World presentations. Dave.
Thanks, Tim. Good afternoon, everyone. It's a privilege for me to be here today with all of you. As you may know, I've been leading McDonald's Asia, Pacific, Middle East, and Africa business, known as APMEA, for about 16 months now. Prior to my current role, I held various roles within McDonald's during my 20 years, including serving as CEO of McDonald's for Japan for four years. Here with me today is CEO of McDonald's China and Division President of Greater China, Kenneth Chan, and our CFO of APMEA, Dave Garland. Before I get started, some headlines about APMEA. We have nearly 10,000 restaurants and serve approximately 19 million customers a day. It is the broadest area of the world in the McDonald's system, comprising 37, soon to be 38 countries, 16 time zones, and more than 800 languages and dialects.
We are also the system's fastest-growing region today. We represent 28% of the company's total restaurants, generate about 23% of total revenues, and account for approximately 17% of consolidated operating income through year to date September. This represents significant growth over where we were just five years ago. Today, our markets are executing initiatives that balance near-term performance with long-term growth opportunities. Our plans align with our three global growth priorities to optimize our menu, modernize the customer experience, and broaden accessibility for our brand. Before I delve into these in more detail, let me share some context on our current performance and business environment. Since we last met in 2011, APMEA has grown revenue in the mid-single to low-double-digit range in 2011 and 2012. More recently, this growth was largely driven by the 775-plus restaurants we added in 2012.
Through third quarter this year, APMEA revenues are up 2%, while operating income is relatively flat, both in constant currencies. Over the past several years, franchise margin dollars have grown and surpassed McOpCo margins, starting in 2012. This momentum underscores the importance of accelerating our franchising model in APMEA, which I'll talk more about later. APMEA's year-to-date September franchise margin percentage of 87.8% has declined 100 basis points compared to September 2012, primarily due to results in Australia and the impact of a weaker yen. APMEA's company-operated margins are driven primarily by Australia and China. Year-to-date September, the company operated margin percentage of 14.7%, declined 160 basis points compared to that of September 2012. At the outset of the fourth quarter, comparable sales year-to-date October were down 1.8%, driven primarily by weak performance across the top three markets.
We experienced strong performance in other markets that obviously helped mitigate the overall segment's decline. These financial results reflect the significant headwinds we faced this year, including external challenges like avian flu, rising food and labor costs, and slowing economic conditions, as well as more intense competition that is focused primarily on value. Our results also reflect softer than expected performance of recent new products and promotions that were not strong enough to overcome our negative guest count momentum. For example, in Australia, results from recent promotional activities were dampened by stronger than expected trade-off from other products. In Japan, our continued efforts to evolve our value platform have not effectively balanced discount-driven promotions with longer term, more consistent affordability options.
Of course, we're not satisfied with these results, our markets are adapting their plans to ensure we have the right initiatives in place to navigate the near-term challenges. In Australia, our near-term focus is to drive value across all price tiers, including exploring the launch of meal bundling options to make meal creation easier for our customers. We're also focused on building the top tiers of our pricing platform through the launch of more premium menu items. In Japan, we remain committed to balancing a consistent value platform with promotional offers to appeal to price-sensitive consumers. At the same time, we'll be introducing more limited time offers, including seasonal products, to encourage trade up and build average check. Kenneth will talk a little later about the near and long-term opportunities to grow the business in China as well.
I'm confident in the opportunities that exist within our three global growth priorities to grow the business profitably over the long term. I'd like to now share more insight into each, starting with broadening accessibility, which is our biggest opportunity in APMEA, of course. We have a sizable opportunity across the globe to capture our share of the $30 trillion of consumer wealth that will be created in emerging markets. For APMEA's emerging markets, over $18 trillion of consumer wealth is estimated to be created over the next 10 years, representing a significant potential for our business. China is our biggest opportunity, but it's not our only one. As you'll hear from Kenneth, the estimates for wealth creation in China alone over the next 10 years is over $9 trillion, with another $9 trillion coming from India, the Middle East, and Southeast Asia combined.
You could say that the total emerging market potential within APMEA is the equivalent of two Chinas, and we believe we're well positioned to pursue both of those. We are targeting development opportunities in our established markets too, but the more significant growth exists in emerging markets. In 2014, we expect to open about 840 restaurants. This includes over 450 that are in affiliated and developmental licensees or what we like to call DL markets, where no capital investment is required for McDonald's. Of the 840 planned openings, China will still represent the largest single market with 300 restaurant openings planned, we'll also have over 250 combined openings in other emerging markets such as Korea, Philippines, Malaysia, India, and Thailand. Of course, we'll also open up Vietnam, our newest market, in 2014.
We've recently enhanced our restaurant development model to optimally balance future expansion with profitable growth. Our go-to-market approach recognizes that our franchising, real estate, and restaurant development strategies in emerging markets have to be different than in more developed markets to adapt to the different dynamics that exist in Asia compared to our counterparts in the Western world. Let me first talk about franchising. Today, across APMEA, as you heard from Tim earlier, we are 71% franchised, but our ownership profile varies by market and is lower in markets like China. We are evolving our franchising strategy in many markets to include more conventional and developmental licensees. Doing so allows us to effectively increase our pace of development to target the significant opportunity that exists within the growing middle class population while also allowing us to further diversify our revenue stream and optimize capital investments and returns.
Our real estate strategies are also evolving in our emerging markets. We know each market is different, we must adapt our strategies to align with different city structures and dynamics. In APMEA, we divide our cities into 3 different categories. First, metro, which is the highest density central business district or the heart of the city. Urban, the area surrounding the metro that is comprised of the new middle class with expanding disposable incomes, where most of our customers reside today. Finally, suburban, the low density outlying areas with lower purchasing power and lower disposable income. In many areas, space is limited, so our development strategies must be flexible to allow us to modify our restaurant designs to fit our real estate locations within the different city categories.
Doing so allows us to build to the potential that exists and penetrate areas where we had previously not considered possible using an optimized size and cost structure. I'm going to show you one here in just a second. Here's an example from South Korea on a flexible building design we've developed that provides us with the ability to build on a smaller lot size. In the past, we would have walked away from this type of location. Now this is a key part of our growth strategy for the future. Let's take a look.
The meeting will resume after this commercial break.
Okay. Video today, this site's slated to open up in the next couple of weeks. Now let's talk about affordability, which also falls under broadened accessibility. In 2014, many markets will continue to evolve toward more compelling offers that resonate with customers and generate incremental visits. In some markets, this means adding a mid-tier to fill the gap between entry-level options and Extra Value Meals. Australia is a great example. We are focused on reframing our value offers to close some gaps we've identified within our mid-tier price points. Kenneth will talk a little bit about the near-term plans they are pursuing in China to evolve the value platform as well. Moving to modernizing the customer experience, we are focused on making it even more convenient for our customers to order what they want, when, and how they want it.
Our brand extensions, including McDelivery or MDS, dessert kiosks, McCafé, and drive-thrus, are additional sales layers that have significant runway to contribute to our future growth. MDS will be a $1 billion business for us over the next several years, web ordering represents the biggest contributor to MDS growth. Drive-thrus represent another layer for growth. Drive-thru sales represent about 35% of total sales in drive-thru locations. This year, we opened more than 300 new restaurants with drive-thrus, and we expect to have over 3,800 across the zone by the end of the year. In 2014, our plans reflect half of total restaurant openings will include drive-thrus. Moving forward, we will continue to grow drive-thrus at an even faster pace, given the significant growth in transportation throughout the region.
As we look to strengthen the consumer offer, optimizing our menu is about how we balance our global core menu with locally relevant food and beverage choices across all day parts and price points. We are focused on a few areas to drive performance through our menu. First, drive our dinner day part by introducing platters, bundling, and new packaging options, as well as introducing new food items such as rice wraps and rice bowls. Next, offer new flavor profiles designed to match local tastes, like the McSpicy platform. And finally, introduce or expand breakfast across our markets, balancing our core brands, such as the Egg McMuffin, with local market tastes, like the Chicken Muffin. Breakfast currently represents approximately 13% of sales across the zone, so significant opportunity remains to further develop this day part, especially given the large percent of the Asian population who eat breakfast away from home.
Tim mentioned National Breakfast Day earlier. Almost all markets will participate in what we call NBD 2.0 in 2014, and we fully expect this day to be even bigger and better in driving this day part strategy. Okay. Let me turn it over to Kenneth to give you an overview of the China business and the focus that we're going to have on development opportunities that exist in the market today. With that, Kenneth.
Thanks, Dave. Before I get into the development potential we are pursuing in China, I just wanted to spend a few minutes talking about our plans to fuel growth in the near term in a challenging environment. China's economy remains fragile and consumer confidence is soft. We know that providing customers with a consistent and affordable value offering is important to driving guest counts, especially in this environment. We are focused on evolving our value platform to resonate more strongly with customers. We recently launched a tiered value menu offering Extra Value Meals all day, starting at RMB 15 or about $2.50 US. A la carte extra value items with small fries and small drinks start at RMB 5, the popular Spicy Chicken Fillet Burger is being offered at an a la carte price of RMB 10.
Customer favorites like the small McCafé cappuccino will continue to be kept at RMB 12. The evolution of our value platform allows us to create a pricing structure that anchors affordable entry price points while providing opportunities to trade up to more premium products at the other end of our menu. Now, we are also focused in China on growing our family business and becoming a family destination in addition to just a convenient option. Our goal is to build a Happy Meal brand that kids love while winning mom's permission by offering food that they feel good about from a brand that they trust. We will build on Children's Day in June, which is traditionally the highest sales day in China, by taking a holistic approach to enhance our family offerings that encompasses our marketing, our merchandising, and menu to strengthen our appeal to children and moms alike.
I'd like to shift now to talk about the long-term opportunity before us to broaden our accessibility in this market. China continues to be the major consumer growth story of our lifetime. With the backdrop of the mega trend of urbanization and a rising middle class, we are confident in China's long-term potential for McDonald's. We are aggressively pursuing this opportunity and have a disciplined plan in place, including double-digit growth in new restaurants. Now, after 18 years, we got to our 1,000th restaurant in China in 2008, and we will get to 2,000 restaurants in quarter one 2014, about five years later. Clearly, the pace has accelerated. Most importantly, our unit economics and foundation are strong, and they reflect our thoughtful approach to broadening accessibility in China. More profitable since 2006 with double-digit increases.
Average store sales by 17%, average store cash flow by 76%, and average check by 10%. As Pete mentioned this morning, in many markets, new restaurant returns grow over time, and China's new store returns reflect this. While new restaurant economics start out slower as we expand in areas that are still urbanizing, we ultimately experience growth, and in three to four years, results approximate the overall market average. We will open about 275 restaurants in 2013, and going forward, we believe an opening pace of about 300 restaurants per year is sustainable and will fuel long-term growth. Now today, our restaurants cover between 50% and 60% of the urban population. Going forward, our restaurant coverage will reach over 200 cities to give us a cumulative mass of 80% of the urban population. Supporting our opening plans is a go-to-market or GTM approach, which Dave just mentioned.
We are leveraging this approach in China to broaden our accessibility through franchising, real estate, and our development strategies, which includes cost efficiencies. Let's first touch on our GTM franchising strategy. The main focus here is to accelerate franchising. We have tested and now are moving forward with our franchising efforts. The quality of our strong franchisees and proven unit economics underscore why we are confident in our franchising efforts. We have made a lot of progress in this area over the past five years. In 2008, we had three conventional licensees. By the end of 2013, we will have 38. Our conventional licensees are young, energized, and between late 20s and 30s. While we have 38 CLs in China system today, we have another 27 registered applicants in training.
With our DLs, our development licensees, the licensees provide the capital for the entire business, including the real estate interest. No capital is required from McDonald's. In 2008, there were no DLs in China, but we're expecting to have 10 by the end of this year. Our DLs have strong local relationships. They understand the landscape, and through them, we will have even greater success with restaurant openings in the lower tier cities. In total, conventional licensees and DLs will make up about 15% of our restaurant base by the end of 2013, and we plan to accelerate that to 20%-25% of the base by 2015. The second area in our GTM approach, our go-to-market approach, is our real estate strategy, getting the right restaurant portfolios in the right locations.
As we expand, whether as company-owned or through franchising, the discipline of expansion must be governed by an optimized site selection process. Earlier, Tim showed an example in Calgary of using GPS technology to maximize McDonald's penetration in that market. Similarly, in China, we have a strong system of city mapping and using profitable market optimization tools to identify and manage our real estate portfolio. We are also looking at our development strategy as part of the GTM process to build different restaurant models for our metro, urban, and suburban areas. These flexible models are designed to suit the differing real estate and construction dynamics in each of these zones. The models reduce fixed investment costs, such as real estate footprint, equipment, and design specs, while still providing the best brand and customer experience.
The metro restaurant models are fully optimized with brand extensions like McCafés and dessert kiosks. Given their location in high-density commercial areas, drive-thru is a rare possibility, and rising rental costs pressure our model. By leveraging technology, we are able to move production facilities away from the prime retail space while positioning dessert kiosks and a full menu front counter as close as possible to the customer footfall. Let's take a look at this.
The meeting will resume after this commercial break.
This GTM approach, or go-to-market approach, allows us to achieve our restaurant expansion targets using a flexible and disciplined process that also produces cost reductions and improves portfolio returns. Our early results with go-to-market give us a lot of confidence, and we are still fine-tuning the process for the future. With that, I'll turn it back to Dave. Dave?
Okay, thanks, Kenneth. The future in APMEA is bright. We are focused on capturing the significant opportunity that exists to grow the business in the near and long term across our portfolio of both established and emerging markets. We are committed to further building a brand that connects with people and satisfies the needs of our diverse and rapidly growing consumer base, from those who are new to the brand to those who are familiar but maybe not emotionally connected. We will do this by offering them what they want, when, where, and how they want it at the speed and convenience they've come to expect from McDonald's. I am absolutely confident that the plans we have in place will solidify the strong foundation that exists today while positioning us to grow the business to achieve our full potential.
Like we like to say in APMEA, winning the present and building the future, that is APMEA. Thank you. Now I'd like to bring up Dave Garland to join us for a bit of Q&A. Okay, I'm going to be the traffic cop here.
Hi. Thank you. This is John Ivankoe from JPMorgan. China, obviously the comp was negative in 2013. I think there are a lot of reasons that you said why, there was a little bit of a softening in development relative to what you thought earlier in the year, maybe last year, yet there's a slight uptick in development in 2014. Those events aren't necessarily sequential as we would normally see it. In fact, it could have been logically assumed that 2014 would be an even lower development than 2013, given that you had same store sales. I just wanted you to kind of shed a little bit more light on that decision and make us comfortable that the new units won't affect existing unit performance in any way.
If it's possible to talk about maybe new market opening versus existing market opening, just so we're not in a situation where new unit returns are declining and I guess, worse yet, even affect existing unit returns.
Yep. Steve?
Yeah.
Yeah. Clearly, our ambition to grow continues in China for the long-term opportunity with urbanization and the middle class growing. In 2013, we took a call to say we were going to be opening at the lower end of our earlier guidance of between 275 and 300, and probably opening around 275. A lot of these sites, again, in our pipeline today, we have thousands of restaurants down the pipeline in the different markets today. What we've been able to do then is to be able to have choice in the site that we choose. While we do have a lot of choice going on, we decided that some of them are a little bit more green.
Again, to your point, this year, when the results are a little bit softer, we decided to push them over to 2014 or to the later years as well. That's a decision for this year. Going forward, again, as I mentioned in my statements that we're looking at a pace of about 300 or so. Again, the color to that pace will be a lot of movement going into some of the lower tier cities. Not just staying as in the coastal tier 1 and 2 cities. Another piece of that pace will be working with our franchisees, especially our development licensees, to open a portion of those stores as well. Primarily, these deals are also within some of the lower tier markets and the opportunities there. I think it's a very healthy pace.
It all goes well for our organization and also the rest of the training needs that needs to take place in our expansion growth. The other color I would say there is that we have a good mix as we talked about today, about building not just the traditional metro retail stores, but the real blue ocean for us, which is drive-throughs, and that will augur well for our future.
I would say for across all of APMEA, for 2014, we're going to open up 80 more restaurants on a similar capital envelope in 2014 as 2013. The variation, though, as Kenneth mentioned, would come down to three things. First, drive-throughs have a longer gestation period. But over time, it doesn't matter, developed market or emerging market, drive-through is the best performing part of the portfolio. The second thing is you heard about go-to-market. Our pipeline in China is thousands. To get the benefits of go-to-market into the pipeline, you have to slow down a little bit to make those improvements. We're excited about what go-to-market is going to do. Cost avoidance, cost savings, the ownership piece, some of the things you saw around split kitchens, et cetera.
Then lastly, Don said this, and Tim said it, we're not going to chase the number, we're going to chase the opportunity. So where we believe we're going to cull a certain amount of sites that we don't think are the right sites in the portfolio and other ones, we're not trying to jam a number in by year-end. If the traffic generator hasn't arrived, which in China's case, we've got some that we're pushing in the first quarter, second quarter, because the traffic generator just hasn't opened up for us yet. So I think those all are all part of that variation between 2013 and 2014. Thanks.
Yes. Hi, Andy Topps with Holland Capital. I just wanted to touch on the incremental ROIC as it relates to the developmental license approach in China, in the sense that it's about 50% of new units. And how much logistics has to be added to accommodate for most likely a lower profit per restaurant in a development license scenario?
Logistics as in distribution. Today, actually, in China, we're in about 150 different cities already. We have restaurants in those areas where our development licensees are. Clearly, with more scale, that's going to drive our efficiencies even further.
Just maybe one follow-up. Is there anything you're doing to reduce your dependence on chicken for the overall China market in terms of new products?
We've actually got a really good balance of protein. Clearly, chicken is there. We're building our beef brand through Big Macs. As you know, there's pork is the biggest protein in China, and that's something we're looking at as well. Chicken remains one of our core products. It drives a lot of efficiencies and margins for us, and we'll continue to focus in all those areas while varying some of our protein mix as well.
Just back on the supply chain question. You've heard a lot about rivals going into tier 3 and tier 4. For us, we had to establish the footprint in, as Kenneth would call it, key and core cities, and then take a more of an ink blot approach, and we think that's the best way to maximize our supply chain. That's going to be how we tackle China. Yeah, please.
Joe Buckley, Bank of America Merrill Lynch. Ken, the question, the Western QSR brands, KFC and McDonald's, you're both down this year in same-store sales. How does that fit in within the broader informal eating out market in China? Is that down as well, do you think, or is there a mix shift going on away from Western for some reason?
Yeah, I think if you look at Euromonitor, it shows that the IEO is growing. In our tracking, where we look at where urbanization is, where the coastal areas and the markets where most of the brands play right now, we see that the IEO is flat to declining. If you take that in context of flat to declining IEO together with the continued unique expansion that's still happening, clearly there's pressure on organic growth. It's a real fight for market share right now. For us, we're clearly looking and focused on the long term and the confidence in China, rising middle class, wealth creation and we continue with our strategies to not just be accessible, but also be an aspirational brand so that we capture the opportunity today with our accessibility, new stores, value programs, brand trust.
We also ensure that we are an aspirational brand so that as wealth creation happens, more and more consumers come and aspire to enter our category and our brand as well.
One broader one. The other countries in APMEA are counting up low single digits. Are there any real standout performers in that group that you'd highlight for us in terms of maybe breaking out into more significant earnings?
Yeah. You know we're heavily vested with the big three, Japan, China and Australia. If you go beyond that, Southeast Asia, tremendous. Middle East, Africa, tremendous. India has been a high mark. All of those. As we talk about our growth, this isn't just diversifying our revenue stream for the sake of diversifying it. Having more exposure to those emerging markets would be tremendous. 27 of our markets are positive year-to-date out of our 37, and 20 of them are over 4% comps. There's a great story. Again, for us, it's about making sure that we've got a nice balanced approach, and the big three is where the majority of our comp and our income comes from, and getting those right is job one. Yes.
Hi.
Hi.
Sara Senatore at Bernstein. I wanted to go back to some of the comments you made about the ink blot in those tier 3 and plus cities. What we've heard from other QSRs is that's where the profitability is really the highest. I'm just trying to get a sense of, are you foregoing some of the higher returns in profit dollars by outsourcing that development? Particularly in light of Ken's comment about the competition being really intense in the tier 1 and 2 cities.
I think the majority of our openings right now, while we continue opening the tier 1, tier 2 cities, we've already gone out into the tier 3 and tier 4 cities ourselves already right now. We're taking advantage of that model that you talk about. At the same time, we know that there's still a lot of opportunities in the other cities, which we're probably not going to be able to get to in the next five years, That's why we're employing the use of development licensees to be able to capture those white spaces still, while we continue to get into the lower tier cities as well. I think we're doing both at the same time.
Yes.
Thanks. It's John Glass. Kenneth, can you go back to talk about the menu strategy, the menu pricing strategy you're changing, and why you're changing it? McDonald's was think early on in putting value platforms in place in China, That really worked very well. Then your biggest competitor copied that. Now you're moving a little bit away from it. Two questions. One is, do you risk losing some customers because they perceive you've changed your value there? Secondly, can you talk about KFC's, what they've been like recently as a competitor? They've been more irrational as a competitor from a price standpoint as they try to regain comp transaction. How has that impacted your business?
Two parts. I'll take the first one. Back in 2009, when the first recession happened in China, when the last recession happened in China, really, we actually restructured our pricing, again, listening to where consumers were. We looked at the entry price point for breakfast, and we look at the entry price points for meals, for example. Given where our position was, we weren't able to take a position of changing our overall meal structure. We went into certain day parts like value lunch, where our biggest size up price was. We did our value lunch starting at RMB 15, which was from our customer research, was where the most competitive, accessible, affordable price points were. That, together with breakfast and value dinners, helped driven baseline for the last couple of years.
As we get into the next series and also to this climate, listening to our customers again, what's clear is that they want value and they want value all day. At the same time, they want the same price point. What we've done is we've not actually changed those entry price points. Those remain the same today. What we've done is we've managed to deliver those price points all day. One of the most popular items, the Spicy Chicken Fillet Burger, we've moved that meal price point up, but at the same time, we're mitigating it by allowing it to be at a very attractive mid-tier à la carte price point as we move through this transition. Right.
I think what we're going to see is stronger value all day, number one, and we hope that this helps us deliver the baseline for the forthcoming years. What this also helps us do is that by putting the most popular products and moving that up a little bit on the price scale, it allows us to put relativity into our pricing ladder and later on allows us to also then price our future products or our LTOs at a price point which favors a lot of our margins better. It's necessary for us to do this, as it's difficult for us to take pricing all the time in a market like China, where affordability is key. Using this and allowing our product mix to be able to play out through our pricing ladder is going to be critical for us.
As for Yum!, I can't comment on them, I think we're focused on what we do, and we'll see where they go.
Yeah. Right.
Robert Schweich, Burnham Asset Management. You mentioned that drive-throughs have the best economics. What percentage of your new stores as you look out, say, next year, are going to be drive-throughs?
50% for all of APMEA. Then China?
What about in China?
Anywhere between 20%-25%, depending on where the pipeline stands.
Anywhere between?
20%-25%.
Why is it so low?
Gestation period in terms of where we have a lot of drive-through pipelines right now. Gestation period in terms of where drive-throughs are going to be. We also spend a lot of time now communicating to the developers who own these plots of land what a drive-through is. We're doing a lot of road shows today in terms of communicating with them what a drive-through is, how they build a drive-through, why is it beneficial for them to put a drive-through on their plots. That ongoing communication continues.
When do you think it will be when you're able to have 50% of your new stores in China in drive-through and maybe double drive-throughs?
I think that's the aspiration. I think the point for us is that we need to site our stores where consumers are. If you look at the way Asia and China develops, it always starts from a focus of the metro, then out to the urban, then out to suburban, right? Where the consumers are today, mostly populated around the metro and the urban areas, and difficult to get our traditional drive-throughs in those areas. As we discussed today with the go-to-market strategy, one of the ideas we're trying to put in place, like the Korean model that you've seen, is how do we get more of these smaller footprint drive-throughs in these urban areas so that we can unlock more real estate sites to be able to deploy more drive-throughs.
One last question.
Sure.
Going out five years, do you think we'll get to a point where in a country like China, a great percentage of the stores will be in drive-through type locations?
I think that's the aspiration for us. If you look at drive-throughs for China, we're probably the only ones really aggressively driving this model. It is blue ocean for us because we have. While some other brands might do it, we have the technology and we have the know-how to operate drive-throughs. If you look at where our comps are today, the comps in drive-throughs outpaces the comps for retail stores where there's a lot more competition as well. Certainly your point is very good.
Just a bit of perspective. Drive-throughs are best, and that's going to be our competitive advantage. As a frame of reference, Hong Kong is one of our best-performing markets and doesn't have one drive-through. It's not that non-drive-throughs are bad, but we know that's our competitive advantage. Nobody's matching us on that. We're going to drive that home. I think Kenneth mentioned that's our aspiration. That ring strategy doesn't look earth-shattering, but what we're doing in Korea around that urban ring is exactly what we're going to apply to China as well.
Thank you.
Okay. That's it on Q&A, but we'll be here later. I just wanted to leave you with one final comment on APMEA. When we talk about what we're excited about in APMEA, clearly we're going to be defined as the growth engine for McDonald's. You may have heard us talk about two Chinas. It's not just the one China that we're looking at, it's the two Chinas that is really the real opportunity, and Vietnam is a step in that journey. Our personality is one of leveraging disruption and our scale to be disruptive, and we're excited about what we're doing around National Breakfast Day next year, World Cup, Ronald McDonald House 40th anniversary to be disruptive based on our scale and alignment. The last thing is, as I would say to our folks internally, we're going to win long term because of our talent.
We have a significant talent advantage over anybody else in the industry, and we spend a lot of time on that. We're proud of our 40 Best Employer awards that we won over the last three years. Kenneth didn't mention it, but China has won Best Employer three years in a row. It's the first time ever by a foreign firm in China. Again, talent is our competitive advantage, and we're going to only enhance that going forward. Again, thank you for the questions. For those of you that I've talked to, I just wanted to thank you for coming to China on our recent investor meeting. Again, we look forward to speaking more at the reception later on. Thanks very much. Now let me introduce Doug Goare from Europe.
All right. Thanks, Dave, for the warm welcome that I got. Anyway, thanks to all of you for joining us today, and again, it's always a privilege to have the great discussions and also I know some hard questions. I'm joined today on our panel that we'll all be coming up here for question and answer, Jean-Pierre Petit, Khamzat Khasbulatov, and Jill McDonald, our three division presidents. Also in the audience today, we have several of our European leaders. Patricia Abril, our managing director in Spain, João Noronha Lopes, our regional vice president of Southern Europe, and Piotr Jucha, our VP of development, and actually effective January of 2014, he will become the regional VP of Central Europe. Excuse me. Together, this seasoned group of individuals represents the segment's leadership as well as representatives from some of our major as well as our mid-tier markets.
Before we begin with some of the formal comments, I want to provide you with an update on some leadership and structural changes that we are making in our business in Europe in 2014. Two weeks ago, we announced that McDonald's European business would be restructured into three divisions from the current four, and that would start January 1st. Jill will assume the role of division president of what we're calling now the new Northwest Division. In this expanded role, she adds Germany, our largest market by restaurant count, to her previous responsibilities. Additionally, Mark Hawthorne, who currently serves in Dave's organization in APMEA as the regional vice president covering a number of markets across the Middle East and Africa and Asia. We join in celebrating his recognition as becoming the new managing director in the U.K., working with Jill. Mark is also here with us today.
Again, welcome, Mark, and we're excited to have you join us in Europe. Khamzat and Piotr Jucha will be working together. He will be responsible for the new Central Division, which is adding all the Central European markets to his existing Eastern European responsibilities. Our Southern Division, which is our biggest division, will continue under the strong leadership of Jean-Pierre Petit. You may ask about the change. Let me give you several thoughts. The current model served us very well. It's done so for many years. What I've seen as I've traveled Europe over the last really seven or eight years and living now in my third year in Europe, I see continuous innovation. I see a wide variety of great initiatives and tremendous impact and some tremendous consumer-focused results that are really impactful.
I can also tell you there's opportunities for our team to more effectively engage and interact. The changes I've outlined are designed to help us work smarter and align our resources in a manner that enables us to continue to improve results. In addition, under the new structure, we can continue to build our talent base for the system, allowing our people to grow and create even greater synergy across the markets. Against this backdrop, over the next 20 minutes, I've asked Jill McDonald to join me in providing our perspective on the economic landscape in Europe, headlines on our financial performance, insights into Europe's biggest opportunities, and a few details on the key initiatives that we're pursuing. I should also say that doesn't leave Khamzat and Jean-Pierre Petit off the hook.
We decided to take the native English speakers to go through the script. They will jump in on the Q&A. The question that remains for all of us will be, will they speak in French or in Russian or in English? We will see what happens. The current landscape, Europe remains a significant contributor to McDonald's consolidated results. McDonald's Europe has nearly 7,500 restaurants in 38 markets and serves more than 15 million customers a day. With about 21% of McDonald's worldwide restaurants, we contribute approximately 40% of system revenues and 38% of consolidated operating income. We're a leading player in the region. While we have strong local competitors in many markets, overall, we enjoy a tremendous size and scale advantage by being larger than our next nine competitors combined.
In the last few years, the Eurozone's economic outlook has impacted the entire segment's performance as consumers have been more cautious in their spending and the IEO has contracted. In Europe's top three markets, IEO visits for the overall industry have declined in three of the last four years. For the trailing 12 months through September of this year, Europe's overall IEO industry visits are down another 1%. As you can see throughout this same period, Europe's top three markets combined have managed to grow or maintain market share. While the economic situation remains difficult, there are signs that there are some things that are starting to turn. During the last several months, the governance in the Eurozone has improved, allowing for better organized response to some of the deep-seated problems that exist.
Many commentators are pointing out to better balance between austerity and structural reform, rather than just simply austerity as a method of stimulating growth. While this is positive news, it doesn't automatically translate into a reduction of headwinds in Europe. Public deficit concerns remain very real. Unemployment continues to climb. Consumer confidence, while improving, is still very low, and we don't foresee a swift economic recovery. To quote Mario Draghi, the President of the European Central Bank, he said, "I can't share enthusiasm about recovery. The recovery shoots are still very green." Despite the near-term circumstances, I continue to see real opportunity for McDonald's Europe over the long term, and our team remains committed to excellence in any environment. As such, we continue to invest in our restaurants, in our technology, in our people, and in our food.
Before I discuss our strategies and growth platforms, I'd like to cover a few brief highlights of our recent business performance. Since we met the last time two years ago, Europe's ability to grow top-line sales while managing expenses has translated into revenue and operating income growth, despite the economic challenges we just talked about. Through the third quarter this year, McDonald's Europe's revenues and operating income are up 3% and 5% respectively in constant currency over the same period the prior year. Much of this growth can be attributed to the additional operating months from last year's opening, as well as the 170 openings so far this year. With over 70% of our restaurants owned and operated by franchisees, Europe's franchise margin is our primary profit contributor, representing more than 60% of the segment's restaurant margin dollars.
Since McDonald's last investor meeting as well two years ago, Europe franchise margins are down 70 basis points to 78.4% year-to-date, reflecting soft top-line performance. Over the same period, segment's company-operated margins have remained relatively resilient. Through year-to-date, September 2013 company-operated margins have remained strong at 19.2%, down just 10 basis points from the 19.3% performance in 2011 when we last met. For perspective, U.K. and Russia comprise nearly 50% of the segment's company-operated margins. At the outset of the fourth quarter, comparable sales year-to-date are essentially flat, impacted primarily by Germany's year-to-date negative performance being offset by positive results in the U.K. and Russia. Since mid-2012, we haven't been satisfied with our results in Germany. Over the last 16 months, we've reported negative sales and guest counts, we haven't stood still.
We've performed a deep analysis to try to understand consumer behavior and have developed a plan to address the challenges in the market. We've aligned operator leadership. We've reset our value platform. We've revisited our marketing calendar, and we've made some management changes. Going forward, I've got great confidence in our team, I believe we're on the right path to build frequency and market share and compete more effectively, particularly against the bakery and cafe competition, which is the key competitor that's growing in the marketplace. With that as a quick snapshot of our recent financial performance across Europe, let's now take a look at the opportunities for future growth in the context of Europe's overall economic outlook. We've seen, what I would say, three trends that have emerged throughout Europe that illustrate the dynamics of the current environment.
First off, consumers are choosing to eat home more often. We've seen this manifest itself with negative guest count trends in a number of markets in the past two years. Second, consumers have raised expectations. When they choose to eat out, they expect more, but they don't expect to pay more. Finally, the competitive set continues to aggressively evolve to meet the changing preferences of today's consumer base. No one is sitting idle for the economy to improve. In fact, the competitive environment is becoming very fierce. Given these market dynamics, we're focused on finding more ways and reasons for customers to choose McDonald's. The good news is we've maintained our overall market share, and we're well-positioned to address these marketplace realities by further advancing our work under McDonald's three global growth priorities. I'd like to start first with modernizing the experience.
First is re-imaging, and you've heard it throughout the day. We've made tremendous investment in Europe in recent years. Today, nearly 100% of our interiors and almost 80% of our exteriors reflect a more relevant and contemporary look. Our customers have acknowledged the changes and give us credit for the enhanced ambiance in our restaurants. Beyond re-imaging, we also know that it's critical to complement our modern restaurants with meaningful service enhancements. This is about expanding our use of mobile and web ordering, along with self-order kiosks. In fact, we have them now in 1,800 restaurants. All of which, when combined with a renewed focus on hospitality, provide customers with a modern, enjoyable experience. We're also taking steps to enhance our ability to offer the broad range of menu options and the customization that customers increasingly expect.
In order to do this, we've begun deployment of the Made for You kitchen platform across Europe, along with the service platform enhancements. The Made for You kitchen platform provides a smoother, faster, and more flexible operating system that enables us to build capacity, offer a wider selection of beef products, be more efficient at completing made-to-order requests, and provide our customers the opportunity to truly personalize their entrée. As Steve mentioned, we're also encouraging and engaging our customers with promotions and other activities through mobile applications, such as Sweden's coffee loyalty program. In addition, we recently completed Europe's largest ever interactive digital book launch. The family experience for us is fundamental to our continued growth and our customer outreach. Already as Europe's leading distributor of children's books, we're now able to magnify this using digital capabilities, further demonstrating our commitment to children and families.
We're excited about the potential of further expanding our use of digital in many areas throughout Europe as the system's global digital capabilities are enhanced. Now let's take a little look at our food and optimizing our menu. As you all know, our food is and always will be the number one driver of our business and our brand image. Europe has a strong track record for successful menu innovation in key growth categories, including beef, chicken, beverages, and breakfast. In the area of beef, we've had many successes and we have many in the pipeline. Past successes and current successes because they continue to resonate with our consumers, including 1955 Burger, the Big Tasty, and Le M. In the area of chicken, it accounts for nearly 25% of our protein sales. We have chicken options at all tiers of the menu.
Chicken also works well in our wrap platform, which now is expanding around the world, it's actually in nearly 30 markets in Europe. In the beverage category, we're building a great foundation in coffee. Jill will speak to this in a moment. As Don said earlier, there's still tremendous runway for McDonald's to grow breakfast. At the global level, breakfast is a bigger category within the overall IEO than either chicken or beef. In Europe, we under-index the market on breakfast servings, as it's the least penetrated breakfast market in McDonald's system, with only about 50% of our restaurants open for breakfast. Today, many of our European markets are still in the early stages of developing their breakfast model and the breakfast business.
In the markets that offer breakfast, it represents anywhere from 1% of sales in France to 14% of sales in the U.K., our most established market. In comparison, breakfast represents from 20%-25% of sales in markets like Australia, Singapore, and the U.S. Overall, our European breakfast sales represent just 5% of total sales. Given the size of the opportunity, we're placing strong emphasis on the development of the breakfast day part across the segment, leveraging our strong foundation in coffee. With that, it leads me to our next global priority of broadening accessibility. Our future long term is dependent on us meeting consumer needs, being available when, where, and how our customers want to enjoy the McDonald's experience.
Our restaurant development is part of this growth, we're well-positioned to meet our new restaurant growth targets this year, we've got a great pipeline into the future, our returns continue to be very strong. Turning to existing restaurants, while breakfast expands the meal occasions available to our customers, it's also an enabler to our coffee business and optimizes cost and staffing levels. Currently, about 2,000 of our restaurants are open 24 hours, at least once a week. Majority of those are actually open 24/7. Overall, we continue to expand operators across the zone, recognizing there's tremendous opportunity to capture more customer visits. Drive-thru is another significant opportunity to broaden accessibility, particularly as we expand our presence across the day parts. Where we operate drive-through, approximately 45% of the sales occur in the drive-through, I know that's compared to 65% in the U.S.
This truly is an opportunity to be a differentiator for us in Europe, we'll accelerate our efforts in this area. With consumers increasingly looking for convenience, we're capitalizing on this major competitive advantage and opportunity. In 2013, we expect over two-thirds of our new restaurant openings to be drive-throughs. Europe's drive-through optimization program, which includes retrofitting of side-by-side drive-through lanes in our busiest restaurants, has been very successful and will continue, most notably in the U.K., France, Poland and Russia. Our approach to accessibility certainly wouldn't be complete without making sure our menu and our price points are appealing to a broad range of customers. Our everyday value platforms are critical, very critical component to making sure that we deliver compelling value to our customers. Right now it only accounts for about 13% of sales on average across Europe.
In our markets where the economic downturn has been most pronounced, we've expanded our value options to address consumer needs. For example, in Spain, we ran a €1 beverage promotion over the summer, which was very successful, particularly against major competitors, with drinks sales increasing by more than 50%. We also continued to introduce some great tasting mid-tier products such as McBifana in Portugal, a sandwich based on a local pork dish, but with a McDonald's twist and the meal priced at under €5. One of our key learnings in France was the importance of competing below €5 at the lunchtime daypart. We responded with a Casse-Croûte, a two-item rather than our traditional three-item meal, and it's been a key contributor to our comp sales success in France.
What's important, it's enabled us to compete more effectively in the non-traditional bakery and cafe category with those competitors that were previously taking some of our business. Now this concept is being looked at and considered in a number of markets where we have a similar competitive set. Hopefully today you had the opportunity to taste a Casse-Croûte, a very exciting sandwich, and we've got a number of variations that continue to evolve. We've also seen much success with sharing concepts such as our 20-piece Chicken McNuggets share box in the U.K. and similar share box concepts across other markets. Chicken McBites have also been launched in many European markets and part of the sharing bundles as we continue to evolve value to our consumer.
We believe that sharing can be a significant part of our Pan European focus on dinner as we design it to offer today's value seekers even more ways to enjoy McDonald's. As you can see, we're focusing our attention on areas of the business that directly address what we've learned from our customers during Europe's economic downturn. In particular, our U.K. market, I can tell you, has recognized and responded very well to these consumer dynamics. Now Jill is going to provide some background on our overall success in two of Europe's key growth areas, breakfast and beverage. Jill, all yours.
Thanks, Doug. Good afternoon, everyone. As the competitive environment intensifies, we know that our customers have more choices today than ever before. Our mantra of providing good food fast is as relevant today as it's always been, but we have to work harder to earn our customers' visits. Today, building incremental business is more challenging and requires a much more targeted set of solutions. In the U.K., through this approach, we have increased the market's average restaurant sales volume to $3.6 million, and this represents a roughly 20% increase from the end of 2010 through year to date, September 2013, and breakfast and beverages have been strong contributors to this performance. Starting with breakfast, many of Europe's markets are still in the early stages of developing their breakfast business. In the U.K., breakfast represents approximately 14% of total sales and has doubled in the last five years.
Through year to date, September 2013, the U.K.'s breakfast sales are up almost 10% over the previous year. Our growth at breakfast has been achieved through McDonald's unique brand attributes, including our convenience, which enables us to tap into people's daily routines as they walk or drive to their destinations, and our strong coffee credentials. Our successes also come from having a selection of core breakfast favorites, including the Sausage McMuffin with Egg and Bacon & Egg McMuffin. Our breakfast variety also extends to locally relevant products such as Porridge and the Bacon Roll, both of which are very British. We've tapped into the customer desire for breakfast on the go by introducing the portable Big Breakfast Wrap that I hope you had the opportunity to sample earlier this morning.
The U.K. has recently launched a smaller breakfast wrap called the Snack Wrap, which offers a great tasting but smaller alternative at a very attractive entry level price point. Taken altogether, the U.K.'s breakfast has wide appeal from variety of the products to the emphasis on both quality and value. Doug mentioned coffee, and looking at the U.K., France, Germany, Italy, and Spain, we have grown coffee visits by nearly 10% over the last six years. In addition, McDonald's Europe has gained 1% market share over the last four years, while coffee sales in the overall IEO market have decreased. We continue to see meaningful growth potential with coffee, particularly with a strong value proposition based on taste, quality, and price, as well as the McCafé brand. McCafé helps us attract a broader customer base and drives positive perceptions about our brand.
Our offer of high-quality coffee at a price more affordable than our competitors and in a modern McDonald's atmosphere puts us in a unique position at breakfast, but also throughout the rest of the day. In some of our markets, the McCafé brand is used to denote a specific cafe-style area of our restaurant, and we're on track to add nearly 200 McCafés this year, taking us to approximately 1,875 in Europe by the year-end. Similar to the U.S., in the U.K., we use the McCafé brand to describe our range of specialty beverages. By learning from success here in the U.S., McCafé is helping us expand upon our vision of becoming a beverage destination. This goes way beyond coffee. Earlier this year, the U.K. and Ireland spearheaded the European launch of iced fruit smoothies and frappes.
By adding McCafé smoothies and frappes to our menu lineup, we've clearly signaled our intent to become a beverage destination. With a rich pipeline of flavor variations, the opportunity to further stretch the McCafé brand is significant. I'd like to show you how we used advertising to introduce the U.K. to these new blended iced beverages.
The meeting will resume after this commercial break.
By following a well-sequenced marketing plan, which focused on seeding in smoothies first and then introducing frappes through the first five months, sustaining sales have met our expectations. As with coffee, we believe that we've got the value proposition exactly right for our customers. The drinks really do taste fantastic, and the product quality and appearance score really highly. We launched with very competitive national price points of GBP 1.99 for smoothies and GBP 2.19 for frappes. Sales are impressive, but the source of these sales is even more encouraging, as they're delivering extra visits during non-peak day parts and taking some of those visits directly from competitors. Following the U.K.'s lead in the rollout of McCafé smoothies and frappes, other markets in Europe now plan to scale these beverages either as a full rollout or as a market test to over 4,200 restaurants by the end of 2014.
Thanks very much. I'll now turn it back to Doug.
Thanks, Jill. As you can see, against the backdrop of an economic downturn, some challenges out there. We've certainly invested in our customers' changing expectations and make sure we know what they're thinking and try to respond to their needs. At the same time, we've remained very diligent and focused on the areas that hold the significant growth potential for our European markets. Our confidence in McDonald's Europe and the competitive advantages that we enjoy are truly a reflection of our ability to build and learn from the past, to be purposeful and agile as we move forward, and strategically plan and evolve as our customers' needs change. With that, I'm going to invite Khamzat and Jean-Pierre, who absolutely need to get a question or two from you. Jill and I will also join to take those questions. Thank you very much. Number three.
Hi. Good afternoon. It is David Tarantino from Baird. My question is about Germany, which has been a soft spot this year. I was just wondering if you could maybe elaborate on what you think the key issues are there and what maybe some of the specific plans are to address those issues and get some positive momentum back in that market.
All right. Thanks, David. I bet you thought, "He would never get a question on Germany." That is okay. I will take that one here today. Next year or two years from now, Jill McDonald will take that question. Germany is an interesting market. As I have had the opportunity to travel Germany, literally, the last seven years, German consumer is a tremendously value-conscious consumer. I probably should not call the consumer cheap, but certainly frugal. I would say we made a couple blunders over the last several years, and we have to learn from them, and our system is learning from them right now. We made a price change on our everyday value proposition of EUR 1 cheeseburger last November and actually a little before that on the chicken burger price. Without giving our consumer a new proposition, certainly punished us in a very severe way.
We went back to the drawing board, and we are working through that, resetting the value proposition. We had held that EUR 1 cheeseburger price for nearly 10 years. Again, we have got the operators back on board, and I believe that we are making significant progress in resetting the value proposition. It is also more than that. As we reflected on the business, we did a deep dive to understand what the consumer was thinking, and we asked a lot of questions. In that analysis, we came back with a number of strategies to review and assess.
Clearly, our focus now is on the key opportunities, including growing peak hours, reconnecting with young adults, energizing our family business as we had started to lose some family business, addressing specifically the bakery and cafe competition that was taking, in particular, the lunch day part, and refreshing our value proposition. Obviously, along with that, we have made some management changes to try to bring some new energy and perspective into the marketplace. We have got a lot of hardworking operators that I can tell you that are aligned, fully embrace the plans moving forward, and are engaged in turning the trend in the business. To report to you, I think we made some mistakes. I think we are back on the right track, and the proof will be as we continue to battle in a marketplace that IEO continues to decline.
We need to get more than our fair share. Thanks, David.
Number two.
Thanks. Matthew DiFrisco. A question with respect to breakfast. It obviously looks like a tremendous opportunity, but it's not really a new region, and it's not a new issue. The gap's been there for a while. I'm curious, can you talk a little bit more about what is the difference in that market? Is it the low-price bakery option structurally that people go to? It's an opportunity, but I didn't really see how you're going to change or attack that. Is it going to be more marketing dollars? If so, are you concerned with that having a limited halo effect? In the past, I think you've spoken about focusing too much on beverages and advertising or focusing too much on a day part, advertising doesn't have a halo effect to your main burger business. I'm concerned about redirecting marketing dollars towards that opportunity.
Matt, thank you. Good question. I'll take the start of that, I've got three folks here that are very much engaged and committed in the breakfast business in different markets. First off, anything we do has to be done in a balanced way. We know we can't throw all of our marketing dollars to a day part where we do 5% of sales. We have to manage through that process. Yet at the same time, we have to understand what the consumer needs and opportunities are and also understand what the competitive set is. In terms of the markets, though, to generalize and say there's one solution would be very wrong for me to do so because the consumer is very different.
I think it'd be good to hear from each of the folks as they have went through that journey of breakfast. We've got Jill with U.K. with 14% leading in the geography, Khamzat in dollars, probably in Russia, leading the geography. Jean-Pierre, who has a couple of markets now that believe they can take a run at breakfast, the time is right. I'll start with Germany. I'm going to turn to each of you because it's a big topic for us. In Germany, we've had low energy in breakfast for many years.
The operators have committed this past year that we're going to make a long-run, serious effort to take the McCafé business, along with the breakfast proposition, make sure that we provide a differentiated McDonald's experience as well as meet the needs when it comes to their baked goods and use drive-through as a differentiator. Make sure we bring great value. In fact, we are now serving an Egg McMuffin and a coffee in a combo, a two-item combo, at €1.49 every day. In fact, it's the only daypart right now in Germany that we can say we see the light right now. It's not big numbers, it's going in the right direction. I think maybe we'll go Jill, Khamzat, Jean-Pierre, because it's a big topic for us. I thank you for asking again. Jill?
In the U.K., I talked a little bit about the role of menu variety. We found a number of other key drivers in helping us achieve that double-digit growth this year. I think the first thing to say is breakfast takes time. It takes time to build up. It takes time to break consumers' sort of rituals and habits in the morning. For us, the key kind of sequencing that really started to break in enabled us to reach 14% of sales was around coffee, as I talked about. People start their morning with a cup of coffee. It's pretty habitual behavior.
If you've got a strong proposition around coffee, for us, that's that combination of quality taste and value that makes us competitively differentiation with convenience. In the U.K., McDonald's really is the only major drive-through player. Breakfast on the go is a key opportunity. The other piece that really helped us accelerate breakfast was when we started moving to 24 hours, starting to open restaurants longer. Suddenly the day joins up. Being able to open earlier, we have the majority of our restaurants open at 6:00 A.M. Communicating that to consumers, there's certainty they know you're going to be open when they come to you, has been really key. I think the point that Doug is making about balance is very relevant. It's around 9% of the U.K. advertising money goes behind breakfast.
We do ongoing support breakfast. Some of the activities that APMEA were talking about in terms of being disruptive around breakfast to disrupt people's habits is actually quite a cost-effective way of getting cut through. We've got lots of learnings in terms of how we think that we've built that day part.
We did launch our breakfast in 2005, still the biggest and fast-growing day part in our market. Today, breakfast represents almost high single-digit sales and guest counts. Just to give you idea, when we launched breakfast, there was no business, no breakfast available in the country. Today, breakfast provided by McDonald's represents almost 20 million visitors per year. Huge potential. I believe that breakfast will play a significant role in our future. Having huge volume stores and almost 10% of guest counts, that represents huge, big and part of our business. Breakfast still have great opportunity.
Jean-Pierre, I think a little different scenario in Southern Europe, you guys have some great plans going forward. Anything you want to comment?
Yeah, I think we don't have great plans.
You have some great plans
in France.
Not in France, you got other markets that do.
Maybe what you can tell is your experience on the French breakfast when we walked.
Yeah
in Paris downtown to see there is no, for different reasons, there's a French mark, there is no breakfast market. People when they get out of home, they don't go, and breakfast is not a meal that we have in France. We have cup of coffee or something. There is some potential that we are looking at in a few restaurants, and we are making progress. The market doesn't exist yet, and I don't see that we are going to spend a lot of dollars to go after breakfast in France, which is not the case in other country, other Southern division, because as a source of growth, it's clear that in Spain, in Italy, in Switzerland, in Netherlands, I think it's the right potential that we are going to explore in the coming years.
Spain is going to launch breakfast next year, Italy as well, postponed a little bit in a few restaurants. I think it's clear there's growth, and even in France we are very looking after, but I think today it's difficult to see a return of investment on breakfast in France. As the market it is today, things may evolve in, when I say the market, as a whole. We may have some potential in Paris area, in the tourism zone.
Good. I think that, Matt, that's the key is we still have to go and look at the consumer proposition in each market, and we have very different cultures across the geography of Europe. Number 3.
Hi, it's R.J. Hottovy from Morningstar. Coming on the heels of the discussion about franchising opportunities in the last presentation in APMEA, just curious about what kind of long-term opportunities you saw on the franchising side, whether it be from conventional license or conventional franchisees or developmental licensees, particularly in context of what is still a difficult lending market in Europe right now.
Thanks, RJ. Khamzat might want to talk a little bit about what you see in Russia and Eastern Europe. I think first off, from a franchising standpoint, you see us at a little over 70% franchise compared to 90% in the U.S. You take Russia out of there, which is 100% McOpCo today, and we're closer to 80%. That number, sometimes averages lie. What we are continuing to do is to optimize portfolios in McOpCo and make sure that we're running the right restaurants, and we're running them well, and that we are putting restaurants in the hands of operators that can continue to grow the business where that fits. We continue to go through an optimization of the McOpCo portfolio, and that will continue in the coming years.
We also have, I think, some significant opportunity to take some green markets as well as some of our central European markets and begin to explore franchising in those markets. Khamzat, just a comment or two about we're actually going to have our first franchisee in Russia, an institutional franchisee opening a store. I don't know when.
Yeah. That will happen next month. That is not conventional franchisee model. We did start as a developmental licensee because that does protect brand legally and operationally. If that works perfectly, we do believe that we have huge geographies with a great potential to develop developmental licensees. That is our aim.
Yeah.
We do have about 13 markets in my division, fully ideal markets. Small markets, but proven that having this kind of relation works so well for company and for partners.
I think on top of that, as Hamza says, we've got great opportunity in Central Europe. We may not have the magnitude of what Dave and Kenneth Chan shared with you on APMEA, but we have some clear opportunities across Central Europe to significantly grow in those emerging markets. As we go through this restructure, one of our objective is to create good, sound strategies to take some of these existing deal markets and make them bigger and better. At the same time, as we continue to accelerate across Russia. Number 4.
Hey, Doug. Jeff Bernstein. Just two questions. One, on recent conference calls, people have talked about maybe Europe showing some early signs of improvement, I know Don on the call has said, "Be careful that we're not necessarily seeing that just yet." It seems like investors more recently are talking about looking to Europe as a recovery in 2014 and playing that trade, obviously McDonald's would fit well in there. I just want to make sure from your perspective that you would agree that McDonald's you think would be in a position to benefit from an improving macro, or whether you think there's something maybe brand, region, or something QSR specific where McDonald's might not necessarily rally or see the fundamental improvement similar to an improving macro in broader Europe.
Okay. Thanks, Jeff. I'll start with the macro, I think maybe one of those pieces you're referencing is in France. We see signs of some recovery, we all read the newspapers. Yet, at the same time, we also see some forecasts that IEO is going to continue to decline. While we've had some success in recent months, there's still many pockets of serious challenge. I believe we've got plans to address opportunities. Again, we see some signs, France being one of those that we've seen some signs of recovery, but we're cautiously optimistic. I know, Jean-Pierre, just a comment or two about France, because I think that's the one that everybody is looking at.
Yeah, we are pleased, of course, with the trend of the last few months. As you say, we have to be very prudent because the environment is still very delicate. We are going through a very big increase at the beginning of the year. Employment still increasing. GDP is still increasing. Confidence is very at the lowest. Let's see. The environment is going to be what it is. I think what we did also, we put in place and we focus on a few very simple strategy, like we reinforce the price platform with, for instance, Petits Plaisirs at EUR 2, with Happy Meal at EUR 4. We have Happy Meal the same price, EUR 4, for the last 10 years. The licensee are behind the strategy because they will accept to have EUR 4 for the next year in 2014.
Our price platform is very strong. It's a permanent platform. We also reinforce core in premium. That's something which has been very important. We also are very strong and Happy Meal absolute on the family platform. We reinforce the basic, and it seems paying off for the French consumer. As Steve talked this morning, we pursue the strategy in 2014. On the top of that, we will have a source of growth like McCafé. Even if I was prudent on the breakfast is also a source of growth in France, even it's on the long run. 24 hours is a source of growth. Combining the basic strategy with new source of growth and the digital, we have, as you know, kiosk in France in most of the restaurant.
We just launched last month the web order in our restaurant. The digital is going to play an important role in the coming years. I think we are in the good shape to face the business environment in which we are in 2014. I don't want to tell you the IEO is going to change. Nothing is going to change. I think we have the drive of what we are going to do is in our hands, it's not outside.
Number 1.
Hey, David Palmer, RBC. Over the years, particularly during some of the good times in Europe, it was a region that was very good at sharing best practices. For instance, some of the good reimaging stuff from France, U.K. did and added its own spin on things, and arguably that particular market might have gone from worst to first in terms of a country within Europe. Now it feels like the middle of Europe for you needs a little help in terms of best, maybe something to bring back to that. Are there some best ideas that you think that you're importing? You've mentioned breakfast, but aside from that?
David, I think it's a good question. I would tell you, I believe we are getting better at sharing and learning from each other and then trying to scale those ideas. We've got to do it in the context of what's important to the consumer in that market. Probably to give you just the most recent example, October 15th, I believe, was the kickoff or last half of October in Germany, that as we went through our consumer research, where we were getting hit at lunch was a very similar situation to what was happening in France, is that the bakery cafe, that little sandwich business was carving a piece out of us. We actually introduced a Casse-Croûte two-item combo with a McBaguette bread fit to the taste of the German consumer.
There again, not just to lift the idea from France, to understand what the consumer was telling us, what was happening in the marketplace. We had some similar activities. I think there's a lot of quality dialogue at the same time, grounded in our consumer research to understand what's happening. I think as I look at some of the other examples, while sometimes we are slow to scale those ideas, part of the challenge of this group is to continue to do things in a way that we explore those ideas, understand them in the context of the local environment. In fact, as you heard Jill talk about the frappe and smoothie business and the success that we had this summer in U.K. and Ireland. We'll have over 4,000 restaurants next year, and there again, that's driven through that exchange.
Not only did U.K. sell a whole bunch of smoothies and frappes, all of Europe and all of management in Europe was getting those same daily and weekly and monthly reports, doing research, doing testing, and trying to determine if it fit their marketplace. Clearly, I believe that exchange continues. While maybe you don't see it as evident, I think it happens in subtle ways. It will continue. Hopefully, as we evolve here through this change, that it will get even greater. Thanks. We're done. Kathy says we're done. Thank you very much.
Okay. We're going to take, especially for the webcast folks, just to know, we're going to take a 20-minute break. We'll be back at, my watch says 3:40. Okay? All right. We'll see you in a bit. Okay. Thanks for coming back on time. Appreciate that. We're ready to begin the last-- Feel like the teacher up here. We're ready to begin our last two sessions of the day. We're going to start with our U.S. president, Jeff Stratton, and then we'll go into our final Q&A, and Jeff will turn it over to Don. We'll have our final senior management panel with Don, Tim, and Pete, and Steve Easterbrook. I am going to say it is my pleasure to introduce, and it truly is, Jeff Stratton, our U.S. president.
Thanks, Cath. Good afternoon, everyone. Good afternoon. How's everybody doing? Good. Good. Thank you, Kathy. I appreciate it. I'm proud to be here today to represent the U.S. business, along with Kevin Newell. Several members of our U.S. management team are also in the audience, including several of our field leaders that are here that I'm very proud of. Our Central Division President, Lee Renz, is here, along with our McOpCo Central Division General Manager, Jim Floyd. We've got Charlie Strong, our Division President, who handles all of our company-operated restaurants from around the country. We have four of our best from the country that run four of our most important regions. We have Karen Garcia in Florida. We have Mark Moreno out of Houston, we have Pancho Gonzales out of Michigan, and we have Debbie Stroud out of Raleigh.
I'm very proud of each and every one of those folks. For those of you I haven't had the opportunity to meet, I want to start by saying that it's a privilege for me to lead our U.S. business. I started at McDonald's, as Tim did, as a crew person 40 years ago in Detroit, Michigan. Throughout my career, I've managed various aspects of restaurant operations in the field, as well as at our global headquarters. Prior to being named President of the U.S., I served as our Worldwide Chief Restaurant Officer in the corporate side of the business for the last eight years. Today, I'll share a perspective on the current environment, briefly highlight our U.S. results, and spend the majority of our time talking about the strategies that we've put in place to solidify our business and write the next chapter of our growth story.
McDonald's U.S. is the largest economic engine of our global business, representing 41% of the company's total restaurants, generating 32% of total revenue, and accounting for approximately 43% of consolidated operating income year-to-date, September. We manage and support our 14,000-plus restaurants through an organizational structure that spans three divisions and 22 regions. Our traditional restaurants now achieve industry-leading average annual unit sales of $2.7 million and cash flows of approximately $330,000 U.S. While the average sales volume is higher this year, average cash flow has declined compared to 2012 levels. The U.S. continues to grow both revenues and operating income. Since we last met, we've achieved revenue and operating income growth in the low to mid-single digits for 2011 and 2012. Through the third quarter of this year, McDonald's U.S. revenues and operating income are both up 1% over the same period in the prior year.
Given modest comparable sales performance of 20 basis points, the majority of the increase was driven by net restaurant additions, including additional operating months from last year's openings, along with the contribution to system-wide sales from the 140 new openings so far this year. With almost 90% of our restaurants owned and operated by franchisees, our profitability is driven primarily by the franchise margin. Our franchise margins have been strong despite soft comps. Year-to-date September 2013, our franchise margin dollars have increased, although the margin percentage of 83.7 is down 30 basis points compared to the same time last year. Our company-operated margins, which represent less than 20% of total margin dollars, have declined. Through year-to-date September 2013, our company-operated margin of 18.2 is down 130 basis points compared to the prior year due to softer comp sales along with higher operating and commodity costs.
At the outset of the fourth quarter, comparable sales year-to-date October were up 20 basis points. Challenges that we face today are clearly reflected in these results. From an external standpoint, as Kevin will discuss in a moment, the IEO industry remains stagnant in the U.S. Competitive activity has become more aggressive as the battle for fewer customer visits continues. This slide depicts actual competitor activity that we experienced in our very own Central Division alone this year. This level of competitive activity has pressured our sales and our guest count trends. Our results also reflect internal challenges. During 2013, we introduced a number of significant new products and limited-time offers to provide more variety and flavor options to our customers. While the balance between our core products and new menu news was right, the pace of product introduction, in my opinion, too fast.
This created challenges for our restaurants from a training and staffing standpoint that limited the product's contribution to top-line performance. In addition, the adjustments we made in June to pull Angus and Chicken Selects from our menu also impacted performance. However, these were the right decisions to support our long-term menu pipeline, allowing us to expand our core lineup even further to fuel future growth. For example, removing Angus, which was always intended to be a limited-time offer only, sets us up for new items like the Clubhouse Burger, which you hopefully had the opportunity to try at lunch today, and I hope you enjoyed it. We're learning from 2013 and making adjustments to areas like pricing, advertising, and media support, as well as product sequencing in order to bring new products and limited-time offers to market in more compelling ways in the future.
As we've reevaluated our plans, the entire U.S. system remains focused on aggressively pursuing the opportunities that exist within our three global priorities. At the same time, within these global priorities, we've established more specific goals to drive near-term growth in the U.S. business. They are as follows. One, develop and execute an aggressive food and beverage pipeline. This is where we'll optimize the menu. Two, bolster our already powerful brand through greater customer engagement, broadening our accessibility. Three, reinforce our foundation of people and service and modernize the customer experience. I'll turn it over to Kevin Newell, our Chief Brand and Strategy Officer for McDonald's U.S., who will discuss our menu innovations and strategies. Kevin, I think most of you know, is responsible for menu, marketing, strategy, and insights. Kevin.
Thanks, Jeff. Good afternoon, everybody. As Jeff indicated, we continue to operate in a very challenging environment. The U.S. IEO market remains pressured, with current forecasts projecting the industry to be down in 2013 and relatively flat through 2015. Our IEO market share performance in the U.S. over the last 18 months has been relatively flat, and most recently, we have experienced some slight declines. To better understand our customers' behavior in this environment, and more importantly, to obtain insights into what they want from and what they think of McDonald's, we recently held pulse groups throughout the country. I want to share some of those key learnings with you from those groups right now. Customer IEO visits continue to be driven by three main factors: convenience and speed, value, and taste variety.
However, in addition to these green Cs, customers are rewarding those restaurants that deliver on the promise of better service, food quality and nutrition, and restaurant ambiance. The good news is that the primary drivers reflect some of our key competitive strengths. Customers value and they give us credit for our fast service, affordability, and accessibility, they also share a lot of very positive feedback on our ongoing modernization efforts. The pulse groups also confirm that lunch remains the primary IEO dining occasion for the industry, that affordability continues to be a critical component of the IEO offering. Customers never forget the essential affordability proposition: getting something you want for a price you're willing to pay. With our consumer today being more stressed and strapped for cash, it will continue to be important that we work on how to best meet this and other consumer needs.
These insights provide the foundation for our comprehensive plans that will allow us to grow our business in the near and longer term. I'll first start with building an aggressive food and beverage pipeline, which is part of optimizing our menu. When it comes to our menu, our core products remain front and center because these products truly are their own iconic brands. Classic favorites. You know them all. The Big Mac, the Quarter Pounder with cheese, our world-famous french fries, and Chicken McNuggets. These make up about 30% of our U.S. sales and will continue to be strongly marketed in 2014 and beyond. We must continue to energize the core by offering innovative new products and exciting limited time offers to create a relevant customer eating-out experience that drives the business and continues to build the brand.
We are focused on building a strong product pipeline, targeting those areas that we believe have the most potential. Two examples of those will be beverages and customization. Let's start with beverages, in particular, McCafé. Coffee, quite frankly, has been part of our strategy from the very beginning. If you look at our operations and training manual from 1958, you'll see that we've taken coffee seriously for more than 55 years now. The evolution of our coffee business over time has contributed significantly to the growth of our business. From the launch of McCafé in 2009 through 2012, sales of our total coffee line, including drip, ice, espresso, and frappes, have increased 70%. Despite our growth in the category, we know there's even more opportunity to increase our share of the coffee market.
Today, we only capture 12.8% of IEO coffee service in the U.S., significant potential still exists for us. To capture that potential, we're elevating our focus on the coffee business, treating coffee, quite frankly, as critically important as we do our iconic fries. Our goal is to enhance our coffee culture at McDonald's. We know that we have a very high-quality coffee product, and we need to be very proud of that. We know we need to further enhance the customer coffee experience at breakfast but also throughout the day. Our coffee strategy includes leveraging brand McCafé, enhancing the marketing calendar to support coffee, introducing new flavors, always positioning coffee as coffee and, so that we can sell more of our delicious food. As you probably heard, we will be providing consumers with a new way to enjoy McCafé coffee at home.
The fact of the matter is, more than 70% of coffee consumption in the U.S. takes place at home. In collaboration with Kraft Foods Group, next year, we will be testing the retail sales of our premium roast coffee, including packaged ground, whole bean, and single-serve options. This test will allow us to tap into the demand that exists for home coffee, and it highlights how serious we are about leveraging the McCafé brand potential. At the end of the day, this retail test is about driving greater awareness of the McCafé brand and therefore selling more coffee in our restaurants. Hopefully, you guys had a chance to try the Pumpkin Spice Latte this morning. You did, right? Pretty good? This is just one example of how we're adding more variety to the McCafé lineup. Customization represents another important opportunity for our business.
We are focused on elevating our menu and ingredients to satisfy our customers' changing tastes and preferences. For example, we are going to be introducing bold new flavor extensions that will allow us to enhance our core equities and set us up for future innovations. We are ensuring that our kitchens are ready to deliver. The U.S. system will have new assembly tables in all restaurants by 2014. These tables will allow us to do two very important things: offer greater customization by accommodating more ingredients, including fresh toppings, and improve overall speed of service by improving the overall design and efficiency of the prep table. Our second area of focus is to bolster our already powerful brand through greater customer engagement. This falls within broadening our accessibility.
McDonald's is one of the 10 most valuable brands in the world, we’re never satisfied, and we are always looking for ways to improve even more. Let’s begin with affordability, which is foundational to our brand identity. Our goal is simple: to make sure our value offerings satisfy our customers’ broad tastes and preferences, both in terms of products and in price points. This month, really just Monday, we introduced the Dollar Menu & More nationally. This platform is designed to continue to attract guests into our restaurants by providing them with greater taste, variety, and choice at compelling price points across the menu. For example, the new BBQ Ranch Burger and Buffalo Ranch McChicken will be available for $1, in addition to some of our current Dollar Menu & More offerings, like the Grilled Onion Cheddar Burger and Fruit 'n Yogurt Parfait.
For $2, customers can choose from the Bacon McDouble, Bacon Buffalo Ranch McChicken, my personal favorite, and Bacon Cheddar McChicken, and we’ll be also featuring our 20-piece McNuggets at $5. Customers are in our restaurants. When they get there, we’re going to be focused on providing them with appealing choices for add-on purchases or even trading them up to more premium items to build the average check. I’d like to show you one of our new commercials for the Dollar Menu & More menu.
The meeting will resume after this commercial break.
It’s okay. We are closely monitoring the early results, but we have solid expectations based on the performance of the test markets. Hopefully, you guys will get a chance to go by your local McDonald’s. Maybe you want to go to the one over here by Spring Road, just a couple blocks up the road. Right, Charlie? Stop by and try one of these great new items. I’m sure you’ll love them just as we do. Another important element of our brand strategy is our family business. We know that families have grown up with McDonald’s for generations, today’s families have different needs and expectations than they had when we started. Happy Meals.
Happy Meals are foundational to our family business, we are focused on several key areas to enhance our Happy Meal offerings, including providing more fruit or vegetables or low-fat dairy options, evaluating alternatives to toys with items such as books, and evolving our food offerings beyond hamburgers, cheeseburgers, and Chicken McNuggets. From our system-wide support of RMHC, our current nutritional commitments, or our new global partnership with the Clinton Foundation and the Alliance for a Healthier Generation that Steve talked about earlier in his presentation, McDonald’s is committed to doing what is right and supporting the well-being of kids everywhere. With that, I’ll turn it back over to Jeff.
Thanks, Kevin. Under modernizing the customer experience, our third area of focus is reinforcing our foundation of people and service, particularly at lunch. Customers have told us that we must improve here, we’ve listened. You’ve heard us talk before about the moment of truth. This is the point at the front counter and the drive-thru that really defines the customer experience. Our goal is to consistently deliver a positive moment of truth across our more than 14,000+ restaurants with all 28 million customers who visit us every day. We know our crew is critical to this effort, since they are the face of the brand. They keep our restaurants clean, and they execute the service experience for the customer. We are going to focus intently on improving the overall crew experience to ultimately lead to a better customer experience.
We've also defined some very clear priorities for improving the customer experience, focused on being clean, fast, and accurate. We're using simple, customer-focused language that's easy for our crew to understand and deliver on. In addition, we know that the best, most actionable feedback we can get is from our customers themselves. As a result, beginning early next year, we'll be rolling out a new customer feedback system to all 14,000 restaurants in the U.S. This tool allows customers to provide more robust, timely feedback directly to our restaurants, enabling us to quickly address and fix any service-related issue. Moving forward, we're also building our capacity to build volume during peak periods. We know that today there's more demand in the market than we're capturing, especially during peak periods like lunch.
We know it's there because we see it every day, whether it's cars that drive past our restaurants due to long drive-thru lines, or customers who stand in line and leave because of the wait. We are committed to capturing the demand that exists by building capacity within the restaurant, and it's all about combined solutions. Our kitchens are built to handle even more volume than they do today. It's about ensuring our restaurants are using all the tools available to help them improve speed of service at the front counter, as well as the drive-thru. We're increasing our training efforts so that our restaurants have the right people in the right places, serving more customers each and every day. We're also making improvements to the order assembly process, including the new, more organized prep table that Kevin mentioned earlier.
Finally, I'd like to discuss the investments that we're making to continue to modernize our restaurants. Our modernization efforts change the way the customers think and feel about their local McDonald's, and as a result, customers change their behavior, and they visit more often. We know sales in re-imaged restaurants outperform the market by 6%-7% after one year. As a result, we continue to focus on re-imaging our restaurants to ensure that they're relevant and appealing to all of our customers. In 2014, we plan to re-image approximately 300 restaurants, reflecting a reduction from 2013 levels as we and our franchisees prioritize investments in our kitchen to deliver enhanced menu choice and speed of service to the customer. In addition to re-imaging, our modernization efforts also include new restaurants and rebuilds. Between these three areas, we'll touch over 700 of our locations in 2014.
By the end of 2013, close to 50% of all of our restaurants will reflect our current contemporary look, both inside and out. Going forward, our plan is to have about two-thirds of our restaurants complete within the next few years. For a system as large as ours, that's a remarkable change, and it's a change that our customers have noticed. They've praised us in the pulse surveys that Kevin talked about earlier. A hallmark of successful companies is that they are never satisfied, and we certainly are not satisfied with our current results. At the same time, we're in a strong position. Our franchisees, our suppliers, and our company employees are aligned and focused on what matters most: our customers.
With a strong collective focus on the following: developing and executing a strong menu pipeline, engaging our customers more actively, elevating our brand, and reinforcing the importance of our people and service. We're confident as a team that we can deliver on these issues. Our customers are looking for a meal that satisfies at an affordable price from a world-class brand. They're asking for great-tasting food and beverages that we're known for, delivered quickly and with a smile. These things are at the heart of our Plan to Win, and they're well within our reach. By continuing to evolve, we will remain relevant in all of our customers' lives, and we'll satisfy them with quality products at the speed, price, and convenience that only McDonald's can offer.
I thank you for your time today, and now I'm going to ask our leadership team to join me on stage, and we'll handle your Q&A. Thanks, everyone. With me is Heather Smedstad. Heather is our Senior VP, Chief HR Officer. Jim Johannesen, our Chief Operations and Support Officer, and Pete Bensen is our CFO. Okay.
Hi, Nicole Miller from Piper here.
Oh, hi, Nicole.
Hi, how are you?
Good.
Can you talk about the retail test on the whole bean or baked coffee with Kraft? Do you know about how many markets, where you'll test, how many SKUs, price points, flavor, plain, et cetera? Thank you.
I'll finish all the rest of those, too?
Yes.
I think I'll hand this to Jimmy J, and he can give you our thoughts on this.
Nicole, I'm not going to be able to be as forthcoming as you might hope. We have some confidentiality restrictions with our partner on this. We will be testing this in 2014. Those tests will take place in multiple markets around the U.S. that are diverse in all the material respects that we need to understand our customers and how they think about things. At the end of the day, for us, this test with Kraft is all about driving coffee sales in our restaurants. We believe that as our customers get a greater awareness of McDonald's coffee, they'll be reminded that three years ago, Consumer Reports said we were the best ones on the planet. They'll be reminded of why they helped contribute to that 70% increase in coffee sales that you saw since 2009.
We think that awareness that takes place in the grocery stores is going to manifest itself in the sales of greater levels of coffee in our restaurants.
Thanks. Okay. Hey, John.
Hi. Thank you. John Ivankoe, J.P. Morgan. The question is on re-images, this was obviously an important part of the strategy over the past couple of years.
Yeah.
According to your remarks, it is still a 6% to 7% sales lift versus kind of the market, and that would suggest that the ROI is still decent. It just seems to be some inconsistencies that, one, you would slow down as much as you are to 300 units in 2014, and it seems like you are suggesting that you need to re-ramp up to 1,000 plus a year in the next couple of years to get to that two-thirds of the system, whatever the next few years means. I do not know if that is three or four or what have you. To slow it down, to significantly take it up again, given those returns, and please put this in the context of what is going on with your competition that is ramping up their re-images in 2014.
Yeah. I do not mean to say that we are not real happy with what has been done already because I think it has changed the psyche of the customer in many of the markets that we have done it, and I know we have talked about this before. But we have made a conscious decision to redirect some of our CapEx, and part of that is engaging in greater capacity building in the kitchen. In order to do that and get where we want to go on the menu side, we have made a decision to kind of step back a little bit there and put kind of our money where our mouth is on making sure that we are building that capacity the right way. We are going to do that in lockstep with our operators. We are fully engaged in the conversation, but it is all about building capacity and offering the consumer more choice.
I am very excited about where we have come in a few short years on re-imaging, and we have every expectation that we are going to continue on that process. But I would point to really good returns also on our new restaurants and our rebuilds, and we are not taking a step back there. Okay?
If you do not mind me pushing-
Sure. Go ahead
If you don't mind me pushing on this topic.
Yeah, that's okay.
Why are the two mutually exclusive? In other words, why can't the re-images and the kitchens be done together? Because then it seems like you would have not only the restaurant that looks better, but from the back-of-the-house perspective, actually acts better. It seems like they would be great to be done together.
Sure.
Go ahead.
If I could just add to the answer so far. First of all, the systems enthusiasm, us and the owner-operators for the major remodel process continues unabated. Our owner-operators, especially our owner-operator leaders, understand that this is a break in the action, a slight pause, then in 2015, we'll be right back into it. Because the demand is there. People see that this hits on all cylinders for the customers. It's what they want. We are trying to be respectful of the pace of the reinvestments that our operators make. You saw the cash flow is down slightly this year. We're trying to be respectful of the investments that we're asking them to make in 2014.
As Jeff indicated, instead focusing on the high-density prep table that we believe is going to give us an immediate ability to satisfy our customers in a greater way than we currently are. It's just a movement of the emphasis of how we're going to spend those dollars in 2014.
John, I think I would also add, hitch on the number of hitting 700 different projects, okay, in terms of making a greater statement on the brand in the U.S., and that'll be done in all the regions across the country. That's a big number. Okay? At the same time, those 700 projects are going to go along with the change that we're going to be making in the kitchen. There's an awful lot of work to get done. My belief is get that capacity and foundational piece, get it right out of the box, get it done, okay? Offer the restaurants the opportunity to really execute the way that they need to execute.
We bring the new news, we continue on with our projects on re-imaging the brand and building new and rebuilding those that need to be rebuilt because of the aging of the system.
Thanks.
Got one over here?
Sure. Number one.
Hi.
Hello. It's David Tarantino.
Hi, David.
Jeff, you mentioned the pace of initiatives last year-
Yes
This year being a little too fast for the system to handle, and I was just wondering if you could elaborate on what the specific issues were in the restaurants, kind of how you identified that as an issue, and how easy it will be to fix, and whether you think you might have left some sales on the table as a result of some of the operating challenges related to that.
Yeah, I would point directly to the cadence of change. We went hard on new platform additions, but the pocket of time that you could point to on my comment would be, you're out of the box on introducing the new McWrap platform. You're following that up with Egg White Delight. You literally stop on focus. You go to Egg White Delight, you immediately went to Blueberry Pomegranate, and then we put in the new line of Quarter Pounders. We did all that between the end of March and middle of July. From there, we went right into Monopoly. There was no time, if you would, to seed appropriately over the long term, the platforms.
We've taken, we've learned a lot, okay, because we did that, in order to strengthen our look at the 2014 calendar and be able to give the folks in the field the time to vertigrade properly between 2013 and 2014 in a better way than we probably did vertigrading between 2012 and 2013. I was of the, I guess, look to a lot of change, let's get it out there, let's get going, kind of thing. In retrospect, I probably would've taken a little bit more time on that. That was what my comment was about.
Great. I guess, what does that mean for 2014? Do fewer new products, but longer promotional windows?
A lot of people have asked me that question today, Kevin, maybe you can take a look at it because Kevin's in the process right now of building the calendar throughout the year. In 2012, we had 16 limited time offers that were put into the U.S. business. We had four this year. We had a lot of new news on platforms and core, all right? I think the balance on that, we have to continue with limited time offers. We've got great products like McRib and you tasted the clubhouse sandwich this afternoon at lunch. We've got to have time and space in there, Kevin, some thoughts on this?
I think you hit upon it, Jeff, exactly right. What we're looking at is making sure that we have the proper balance between the billion-dollar brands that I talked about earlier, these iconic brands like Big Mac, Quarter Pounder with cheese, fries, and McNuggets. As well as continuing to bring our customers, because customers want new news, they want variety. Having the right balance between the two and ensure that we're providing the adequate support to get them excited and more engaged about whatever we're bringing to market. Something very interesting, the reason why I want to hit a little bit on this core platform, if you will, our core products, there are a number of customers out there within the millennial age range that we talk about often, who need to be better engaged with our products.
They know more of our new products, they're less familiar with, and have a less of an affinity, if you will, to our iconic brands like Big Mac and Quarter Pounder with cheese. We think the size of that demographic really makes a lot of sense for us to start engaging with them at a much stronger level related to those core products. We're looking at a better balance between the two. Obviously, limited time offers will always be part of our repertoire because customers are engaged, they're excited about them. We get nothing but, call it fan mail, if you will, about when is McRib coming back and those products like that. It has a cult following. We've learned that we need to be a little bit smarter about how we roll new products out.
We got to be smarter about following the insights that lead to some of the decisions we make relative to introducing new products and how we sequence and cadence the products into the restaurant so that, A, our customers are engaged, and they bring these products into their set as well as the restaurants are able to execute them at a high level.
Jimmy?
Just a caboose to that last piece about the restaurants executing at a high level. We have really talented people in our 14,000 restaurants, and we believe they can do anything. We also believe they can't do everything. For the last six months, we've put in place what we call the gatekeeping process to try and rationalize what the execution calendar looks like in the restaurants so we get into the cadence of new product implementation that Jeff and Kevin have both spoke to. We believe that in 2014, we have put in the necessary foundational work to have that make a lot more sense at the restaurant level.
Thank you. Number two?
Hi, Jason Craft from Cato Partners.
Hi, Jason.
Can you talk to menu board awareness and menu board confusion, really specifically to the recent high-profile LTO Mighty Wings and the decision to launch Mighty Wing when at $1 per wing on average, if you're a consumer going through the drive-through, you're a bit confused when you looked at a $5.20 McNugget sharing the same sauce packs. Is that something that you learned from this year as far as rolling out an LTO with that type of pricing, specifically when you talked about affordability and consumer weakness?
Sure. Kevin, you want to?
Yeah, sure. I'll take that. Let me start with the menu board, because you have identified an area that we clearly as well have identified as an area of opportunity for us in terms of being better able to connect with our customers, to make the ordering process easier for them, remove some of the confusion because, particularly at the drive-through, we find that the menu board has a lot going on, and we need to simplify that. We're going to engage in some consumer research to help us better design that menu board. As well, we're going to be moving into the digital age over the next few years as it relates to menu board, which will help in managing the message flow by day part, and by product, and what we want to sell.
A lot of work going on with the menu board, but the static board, as you accurately have identified, is an area of opportunity for us, and we are actively engaged in working at that. Regarding Mighty Wings, we tested Mighty Wings at a price point that appeared to be, and the results from the test came back, it was a price point the consumers were good with. I think going forward, we have to be smart about Mighty Wings in the context, or any of the limited time offerings and the price that we offer, in the context of the entire menu board and what they can get with other offerings versus the limited time offers. A lot of pricing work going on. We have a team, some of the folks here in the room, working on what pricing ought to look like.
Our goal is to provide affordability across the entire menu board, not just at the dollar menu level, if you will, but across the entire menu board, and being smart about where we bring out limited time offers at.
I think I'd add two things, price and spice, to the reasoning there. I think my partners that are here today would probably say the same thing. We make recommendations on pricing. All right? We don't stipulate to our licensees what to charge on the price. I think we did have, in certain pockets of the country, a bit of a pricing issue on the product. I was really proud of the product, though. The general consumer response that we get in all the time, the number 2 customer contact was praise for the product. Okay? The taste, the profile, the way it was executed in the restaurant. We actually, in my opinion, did a very good job with that. The spice. Learnings.
It is a spicier product. Maybe when we come back with a product like that, there needs to be another alternative. We need to talk about that right up front. If we stay with the existing product, we blend the spice message into the marketing. Price and spice would be my answer. Okay. Number one.
Thanks. It's Sara Senatore from Bernstein again. I had a question about throughput. If that's really the problem and people are leaving the line because it's too long, that's a high-quality problem to have and should be something where we would see the results right away. I guess I wanted you to put that in context of, first of all, I think you've been adding labor to the stores pretty consistently over time to address that. I'm wondering what's different or what should we see now? Then also, if you can maybe quantify it, what the improvement in throughput might be with transaction times or how many more-
Sure
people you can serve and what that translates into sales-wise.
Sure. Jim, do you want to start and then?
Sure. There are a lot of specific reasons why there is a greater demand for brand McDonald's than we are currently serving. Somebody mentioned earlier from the podium that we see it every day when we come to our restaurants and see the drive-aways and the drive-bys. Regrettably, we have about the same number of people on the floor today at lunch that we did 10 years ago when we were doing $1 million less in sales. We need, as a system, to do a more effective job of getting the right number of people at the restaurant, especially at lunch. To make it real for you, because I know you're all consumers, just like me as well, when you pull up to that drive-thru and the person isn't quite ready to take your order, it's because they're making cash for the person in front of you.
When you get to the point of payment and you're not able to get them to look you in the eye, it's because they're talking to the person behind you. When we do what we call split the functions of order taking and cash payment, we substantially improve the throughput in the restaurants. It's things like that. When we open both sides of the prep table, now the new high-density version with a greater level of throughput afforded to it, when we open both sides, we're able to produce a lot more out of the same size kitchen. What's going to be different going forward, I believe, is going to be a function of the relationship with the owner-operators and our ability to communicate with them well. In the U.S., we have 3,000 owner-operators, and we're getting better every year with how we're communicating with them.
They're as aligned as they've ever been. Two weeks ago, we had a system webcast talking about the 2014 through 2016 plan. In the old days, folks would have met in Oak Brook, talked about that with owner-operator leaders. Others would go out and present it to the divisions, to the regions, to the co-ops, et cetera, and it was almost like that game of telephone tag that we all played in school. By the time you got to the last person, maybe the message wasn't where it started. Today, it's a webcast. We had 4,500 lines participating. Don't know how many people were on, because obviously more than one person was on different lines, but literally 4,500 lines participating. There's a real hunger for information.
We see that as a system huddle, the ability to talk to everyone at the same time, bring them up to date on where we're going, and the why behind why they ought to make those kinds of investments in, for example, labor at lunch, and we think we'll be stronger because of it. I'd like, if I could, Sara, without adding math, there's also a way that we're looking more intently every region, so region by region, in a quintile way. We know the operators and the company restaurants that are winning in this environment. Additional comps, positive comps, positive cash flow are the ones that are staffing the restaurants right and staffing them at the peak.
Especially at lunch, especially in the drive-through, okay? On average, in our Central Division alone, the difference between the top and the bottom is seven people on the floor. Seven people, okay? They also have positive cash flow in this environment and positive movement on sales. We're really proud of them. We've got 40% of the system is really rocking on this. We're influencing now the other 60 through what we're trying to do with this people and service focus that we're putting into play in the U.S. It's really intense right now on what we're trying to do. Next, please. Number two?
Yes.
Thanks. Jason West with Deutsche Bank.
Hi, Jason.
Hey. On the Dollar Menu & More rollout that just happened, there was a bit of a breakdown in the testing on the Mighty Wings versus the sort of actual execution of that product. Just a little concerned rolling out a change to the Dollar Menu when you talked about how competitive it is out there.
Yeah.
removing, I believe, the McDouble from the $1 price point. Just your confidence that that's not going to have a more negative reaction than you might have predicted in the test markets.
Yeah.
Yes, go ahead.
Relative to confidence, high degree of confidence that we're going to be successful with the Dollar Menu & More. We tested in the 5 markets, and it performed to expectations in the 5 markets. The reason why we added the additional sandwiches to the menu was because we knew we were going to transition the McDouble to a higher price point, and we wanted to make sure that we still had a very compelling consumer offerings, at the $1 price point, as well as some additional new news at the $2 price point. If you think about Dollar Menu as a platform, we instituted this back in 2003. It's been foundational to our business for over 10 years. In fact, we have evolved it. The change that we recently made was not the first change.
We've evolved it a few times over the years, every evolution was designed to make sure that we stayed relevant with our customer base. Where we are right now is just a continuation of that evolution. It was tested. We feel confident coming out of the test that we're ready to go national with it. As I said in my remarks, we're going to continue to monitor it very closely to make sure that it does remain relevant. If we have to make some decisions along the way, as we have in the past, we'll do that with the Dollar Menu & More. We feel pretty good that the breadth of the offering with the 5 new sandwiches, which I got to tell you, they're dynamite. You got to go try them.
I think we have an offering that the consumers are going to be excited about, They demonstrated that in test markets. I think that's about it, right? If I could, just as Dave and Doug did, just a couple of closing comments, then I'll introduce Don. In the U.S. business, strong focus on the customer, energized by the strong alignment with our operators and our management teams throughout the business, focused on areas that we believe very strongly are going to deliver the greatest benefit to the customer and to the business. Confidence in the management team, a very high degree of confidence, it's all about creating the best overall experience for the customer. Everything we do is going to be with the customer in mind. Thank you for the time today.
We'll be around this evening, the entire team, and we'll see you at the cocktail party. Now it's my pleasure to bring back up our CEO, Don Thompson. Thanks.
All right. Home stretch. How was that for transparency? I mentioned to you all earlier, one of the things we wanted to make sure is that you all took the time and invested to come in and visit us. We have a number of learnings that we've had over the last couple of years, for us, those learnings have to pay off. I want to thank Jeff and his team, as well as thank Doug and the European team, also Dave and our team Asia. Asia, Pacific, Middle East, and Africa. I want to thank all of you again for taking the time to join us today.
We always appreciate the opportunity to demonstrate why we believe McDonald's is a solid investment, how our markets around the world are executing against our plans today, how they're preparing to execute against those plans for the future. Our optimism, my optimism, is grounded in the real opportunity that exists in the marketplaces. This is not pie in the sky. It's the real opportunities in the IEO category, the fact that we are built for growth. We have invested much. Our franchisees have invested much, our suppliers, our advertising agencies, our partners, We believe that our infrastructure is solid, that's why we say built for growth. We're evolving alongside our customers. That is the most critical thing. If there's nothing else that you take away from today, we are evolving alongside our customers.
They are the driving force behind all of the things that you heard today. Again, we are investing to build demand. I think that came through quite apparently in all of the presentations, and particularly in the one relative to the U.S., and enhancing our focus on execution and operations excellence. Our commitment to offering customers great-tasting food and beverages. A modern, contemporary, relevant restaurant experience is second to none. We also understand that we have to provide affordability and great value to all of our customers around the world, particularly in times like these economically. What I hope you haven't heard is that we're saying we're waiting on the economies to turn. That's outside of our control. What we can control are the things we talked about today. The passion for delivering on this excellence and delivering on customer experience, I think, again, is apparent.
The system is aligned. Our owner operators around the world, again, our suppliers, our employees, everyone is aligned around what it is that we're going to need to do in the various markets. Just a few headlines to get a little more tactical, because I think I want to make sure that you all, in the midst of us being "transparent" and giving some of the rationale for the plans, there's a few things that are very key. One, great food. Great food pipeline. You tasted it today at lunch. We've talked about it in each of the presentations. It's got to be great food even before you visit a McDonald's. Even before you visit. The brand perceptions of McDonald's have to build upon a customer's expectations prior to coming to McDonald's.
Steve Easterbrook talked about some of these things in his presentations, you saw some creative that really talked about the quality and provenance of our food. Energy and excitement. Our marketing leadership has to provide energy and excitement when we bring products or offerings to the marketplace. Why? Because that is the unique selling proposition. It's differentiated by our service and our ability to deliver in the restaurants, it has to be appealing and energetic. You heard a lot about operations today. A lot about operations and service excellence. It is at the core of everything we do. Even the greatest marketing in the world doesn't matter if you can't deliver on it at a restaurant level. Tim talked about it quite a bit. Again, you heard about it in all of the other areas. What am I excited about?
I'm really excited about the fact that we are innovating. You saw us talk about innovation from a real estate development perspective. Kenneth and Dave talked about that. They went fairly deep and shared some things that we're looking at from a go-to-market strategy. You've heard us talk about the innovation in our production system. You saw that. You saw one piece in part of it in the APMEA presentation, you saw a different piece in the U.S. presentation. There's a different piece that Doug and Jill and the folks talked about. We are focused on our operating systems and platforms. You saw energy around breakfast, both breakfast expansion and breakfast in terms of the existing products that we have, leading with coffee and the McCafé brand, also pairing that with food. We are a restaurant company.
We are not a coffee house, but we think that we can sell a heck of a lot of coffee, we don't have our fullest extent of share at this point. We have a strong management team. I'm extremely proud of all the folks who were here, who presented, everyone else that's sitting out in this audience. If you haven't had a chance to talk to them, again, please do. There are no other teams as strong as this team that we have at McDonald's. Hands down, no doubt about it. Am I biased? Absolutely. Am I sure of the fact? Yes. Experience in tougher times. Our team has experienced ups and downs before. We know what it was like when we shifted, we thought we wanted to open a lot more restaurants and not focus as much on the core. We don't like that.
We also know what it's like when we didn't think we gave enough time to development opportunities and in markets where we might potentially have fallen behind. A balanced approach to growth in the future is critical for us at McDonald's. I mentioned this before, we're not waiting to act. We're not waiting on economies. The things that we're doing and talking about are the things within our control. The other thing you heard, and Tim has fostered a lot of this, we're sharing more aggressively, but we're adapting based upon local conditions. We're not adopting blindly. Some things that work in Europe may or may not work in the U.S. Some things we're doing in France with Jean-Pierre may or may not work in China. We're sharing and we're adapting those things that we can learn from each other.
A couple people have talked to me and said, "Don, I want to get a little more insight on sales. Talk to me about the numbers. We want to know what's in the plan next year." I know that you all know we're not going to give you the marketing plans. Having said that, I would say this. Relative to the sales plan, look for core excitement from a menu perspective. Look for core excitement. Look for a combination and balance between core and limited time offers. You heard that in the U.S. presentation. You've heard it in the others. Look for us to expand in the areas that we've mentioned and been consistent with for quite a few years, breakfast, beef and chicken, and beverages.
In breakfast, coffee and McCafé as a lead along with food pairings or the day part expansion, particularly in areas of APMEA and Europe. In beef and chicken, look to the pipeline. You tasted some of it today. You've seen some of it in the presentations, but it will be balanced, again, with the core. Relative to beverages, you've heard us talk about blended ice. Doug talked quite a bit about Europe and what we were doing in Europe relative to blended ice. The key, though, to delivering on the menu, I will say it one more time, that is consumer-based insights are driving our actions. Consumer-based insights are driving our actions. This is not us talking to each other.
On the marketing end, Steve Easterbrook and I and Kevin Newell and others are having conversations with our agencies as well, basically we're saying you have to bring energy and excitement. We're accountable for that energy and excitement. It can't be the same old, same old. We have to differentiate the brand in our promotional activities. On the digital front, it is a journey. We believe consumer engagement from a digital perspective is a thing that will also elevate our brand. Steve Easterbrook, Atif Rafiq, all of the people, all the folks we have around the world will be focused on that. It is not going to be an exit stage right, and everything is digital. It has to be a balance and a migration relative to some of the allocations of media. We're going to be very balanced about that.
We're also not looking at just traditional individuals and organizations that have supported us. We're looking at larger partnerships, and we're looking at global scale. Ongoing capacity enhancements. We have customers, in some cases, we're not serving, not because the operational platforms and systems don't work or afford it. Jim Johannesen mentioned it. Sometimes it may be staffing. Sometimes it may be the fact that we need to have additional density or additional support out of the prep kitchen and out of our operating system. We're looking at improvements to the system, but the system itself and the engine itself does drive it. We haven't forgotten affordability, so look to see that in the plans. The incremental changes we'll continue to monitor as we have value platforms around the world. Lastly, I think you saw quite a bit relative to development and our development expertise.
Some of us were around when we were developing sites, and we were, if you will, cannibalizing some of our existing sites. We're not going back there. That is not a place we want to be, we will be balanced in growth, and we think we have tremendous opportunities. Again, I thank you all for being here. We're well-positioned to capitalize on the market opportunities to grow our business. We do have the right strategies in place. We have the right people leading those strategies and these major markets in supporting our business. We are financially strong. We have the capital and the resources to smartly invest and execute, and we remain committed to managing this business for the long term and the benefit of our shareholders. I'm confident that the investments that we're making today will generate enduring and profitable growth.
With that, I thank you for your continued investment, your continued interest in McDonald's, and I'd now like to open it up for one final Q&A session before I turn it over to Kathy Martin to close us out. Questions? No questions at all, we'll go right now to the reception and drinks. I know I saw Jeff down. We got somebody up there. Number 2, please.
Hi, it's Howard Penney.
Howard
Hedgeye Risk Management. First, I just want to thank you for putting this together. I know that takes time and effort to do this, and I really appreciate it. I have a couple questions. First, I want to start on the beverage end. If I remember, however many meetings ago, whenever it was, there was three components to McCafé. The first one was hot, then cold, and then you actually had a bottled beverage component to it. I know you put water up there as a beverage part of your strategy. What happened to that, first of all, and are you going to revive that if it died? Then digging into the beverage and specifically the coffee, you gave a market share two years from now. Is there a market share number?
Is there some benchmark that we can look to for you to prove out your success in taking market share in coffee? Then the third question is, are we going to see a partnership with Coca-Cola to develop a beverage in the supermarket category in 2014 or 2015?
Wow, Howard. All right, buddy. I'll hit some of the history stuff. On the Coca-Cola part, I'll make a comment about that. I'll save the U.S. folks on this one. The original strategy, you were right. It started with drip coffee back in 2007. The notion was for the U.S. business, drip coffee first, then espresso-based coffee, both of those being hot. It then went to iced coffees, and it was iced coffee initially, then it was iced blended coffees. Iced espresso and iced blended kind of kicked in about the same time. The results went from about 2% of sale, as I recall back in 2007, to upwards of seven-plus percentile today in the U.S., so it's been some substantial growth. Yet and still, the folks gave the market share numbers. We still have some opportunity to grow it.
We won't forecast on what that would look like, Howard, but there will be tremendous energy. I think the biggest part that I would add at this point is this is not a U.S. strategy now. Matter of fact, it started outside the U.S., New Zealand and Australia, and as it's migrated, it's now kind of making this trip around the world. We have different aspects of that McCafé strategy that will be taking place in different markets. We're going to have different share targets and opportunities we're going after around the world. The last part of that on the bottles. What happened with the bottles was that we did test it. The margin on the bottles was lower than what we would have wanted. We shifted our focus back to the fountain base, where our margins are much, much stronger.
The other opportunities, we had about four or five that we did test, the resonance actually wasn't as great. If you have a big volume, a big selection, a big variety, it tends to work better in the bottled beverage space. We decided to leave that part alone and focus even more so on the iced blended and on the other beverages. That was where we went. Relative to development with Coca-Cola, not that I know of at this point. However, we're always working with Coke on certain things. You've seen certain things, Zach. You know about their Jet Program or the multi-dispensing system where you program in your own drinks. We have worked with them on that. It's called Freestyle now? Okay. I'm used to the old code language, Freestyle. Some of those things we'll continue to work with them on, Howard.
Coke's a great partner, Coke also works with us on things outside of CSDs.
Don, question for you. It's R.J. Hottovy, Morningstar.
Hey, R.J.
You've talked a lot about infrastructure being positioned for growth. I don't think anyone's denying the McDonald's scale. It seems like the last couple of years, there's been some incidents where the infrastructure's actually been constraining in terms of getting enough supply to roll out a new product on a timely basis. This is particularly in the U.S. Maybe just elaborate on some opportunities in terms of getting things to the market quicker, maybe some learnings to be a little bit more nimble, especially as you talk about adding new ingredients in a prep table and expanding it in different proteins in that regard.
Okay. I'm going to ask Tim to touch base just a little bit relative to the operation. I think you're asking about several things. One is operational capacity. I think we've talked a little about it, Tim can chat a little bit more about it. The other aspect really relative to our supply chain. For those who don't know, Jose Armario is here somewhere. Jose, put your hand up. I want to make sure they catch you at the reception. Jose is head of Global Supply Chain. Relative to any questions or thoughts about the supply chain and what we're capable of doing, Jose can answer those questions. R.J., for us at McDonald's, anything that we do, when we did smoothies, we have to prepare and plan multiple years out, whether it's fruit, whether it's entering into the poultry space with Mighty Wings.
It takes us sometimes a year plus to be able to have enough supply to be able to support just the U.S. system. The same thing happens across some of our markets across the rest of the world. On the supply chain piece, Jose can tell you a little bit more about that, it does vary, and based upon the product it varies. On the other parts of that, Tim?
Just a couple quick things to add. When we went into the McCafé or combined beverage solutions, did a lot of work with the drive-thru on bumping that out to get some capacity to have that throughput for it. From a supply chain standpoint, that's just the formula of size. When you're as big as we are, you've got to get some lead times on that. I know some of you had asked questions in some of the meetings we had earlier in the year about Mighty Wings and why would it take so long, or how come initially you wouldn't do it? We had to figure out and get the crop growing and getting into it. On the prep table, I think Jimmy J.
addressed it earlier, that it's not only capacity for new products, but it's ease and throughput for existing products on just ease of operation, bigger containers, so on and so forth. Nothing more to add.
Hey, Joe.
Hi, Don. Joe Buckley. Just a question. It's more of a U.S. question, I'm afraid, but kind of ran out of time in that session. How expensive is the investment around the assembly table? The fact that you're addressing the assembly table makes it sound like the speed of service side of the equation, some of that issue might be on the preparation side of the counter as opposed to the customer side of the counter. Generally, I thought otherwise, that it was more on the customer side of the counter. Could you talk a little about the investment cost, per se, and then just that issue of where you think the speed of service is? Maybe one last one on assembly, if I can. Is it setting the stage for additional new product or new product platforms?
Let's do this. Let's have Jeff talk about the U.S. specifics. On the second one, I really want to have Tim talk about setting the stage because it is a much broader question, and I think he can talk to you a little bit about we are setting the stage around the world, but it's in different ways. Strat?
Sure. I'd call the investment modest in terms of what needs to be done on the prep because there's different stages of it, Joe. For example, the high-density prep that we're talking about right now, it's going into all of our new stores, reloads, and rebuilds, and it has been for over a year. In those restaurants, if we're to add anything to it might be the addition of a refrigerated rail. Fairly simple. There are others that will need more capacity into the production system, all the way to replacing the old table with the brand new. It'd have refrigeration on it, not only in a rail but underneath so we can handle more capacity. Does it offer us better opportunity in terms of product in the future? The answer is yes, it does.
Specifically what that's going to be, certainly I'm not going to say anything on that today, but we need that. The question on flexibility in terms of what we do in the future, I think, to be honest with you, it's a very good one. I think a lot of our attention through the work that Kevin's doing on the brand side, Greg is doing on the menu side, is all about getting us more nimble in terms of more ideas, faster to market, but doing them the right way. That's where the capacity, the staffing, and that side of the business comes in. I said earlier in my conversation, combined solutions. If you just do one without the appropriate staffing level, especially during those peak periods, we're not going to get what we want. We've got to do it all.
That's where we're working very hard with our operators and our company restaurants to get that done right now.
Jeff, I was going to mention a couple products, I certainly am not now. On new products, I think what this allows us to do is some of the consumer research that we've performed is there are some requests or some demand for more customization, more ethnic flavors, if you will, on some of our products, not only across the U.S. but globally. You've tasted some of the products we had today. They're not just from the U.S., they're from Europe, from the Middle East. We have found that great products travel well, that a good product doesn't need a passport. It can cross lines. In order to do that, though, you got to have the capacity because you can't slow down that engine that's in that grill area for us, which really drives the business for us. More requests for customization.
We are seeing more and more competition out there that's driving that in some of the research we've got. This allows us to get more into some of the flavors and tastes and different toppings that we can put on and implement some of the great global products that we have out there.
We talk about this being customer- and consumer-led. Maybe Steve, you could touch base just to touch on. We're talking in a little bit of code language, and we're saying the table and this and that. It's driven by some consumer insights that we've had that Erik Hess, who's head of consumer insights, is here, and Steve. Erik's also head of menu. Steve have really determined, and it's helping to set the world stage relative to how we proceed with our menu. Maybe, Steve, you touch base on that a little bit.
Yeah. I think the last two questions link together. One point I'd like to stress is just because we can do more doesn't mean we should. That's the first thing we should stress because the temptation is you've got this really powerful engine, you can just pump those stuff out. The customer can only take so much, and this is where the precision comes in, and this is where we get deeper rooted in customer insight, more precision in the products that we launch in our menu development. What it does mean is when we do find the bullseye, we can then be nimble because we then have the platform to then deliver it. We don't have to suddenly sit there and wait for our configuration to catch up with us. It does address the nimble question.
I just want to stress, this doesn't mean there's going to be a scattergram kind of approach where we're just going to launch a whole load of stuff. There needs to be precision. To Jeff's point, there needs to be a cadence in how you launch products. You're going to do so much. We are an operating business still, so we need to get them established. We need to get the platforms developed, get consumers used to them, get our restaurants really familiar with it, then be a little more precise and allow the consumer to guide us.
Okay. Number one.
Hey, Don, David Palmer, RBC.
Hey, Dave.
I want to dig into the innovation pipeline and just, particularly in the U.S., the innovation strategy for years, it felt like, is you were coming out with a couple new products per year that were particularly more incremental, more sales layer-like, and those were very well-tested. I know you seem to have hits basically since 2006. Every year, you had put these through many gates such that we could count on the incrementality of these innovation items. You seem to go a little bit different in 2012, where there was a lot of products, sort of extensions, and then you went and changed again in 2013. Maybe you changed to two new bigger platforms, but they weren't as tested because the innovation pipeline, I sense, was a little bit bare.
Coming into this year, how is the pipeline of really tested, to your standards, such that you feel confident you have the visibility on the incrementality of that innovation?
Mr. Stratton and possibly Greg Watson. My answer, and I know it will be the answer to folks up here, we do have a solid pipeline. The other thing I would offer is that many of the products that you saw today, believe me, some of those products have been in market for quite a while. We have a good understanding as to the strength of the global pipeline. Maybe Greg could touch base relative to the U.S. pipeline.
Sure. Thank you. Thank you for that question. What I would say is the work that we've been doing over the past 12 to 18 months has really been grounded in the consumer. As we've been getting smarter about the products that we're bringing to market, as Jeff talked about earlier, we've learned more about the cadence of introducing these products. We've also learned more about the importance of really staying true to those core insights, and making sure that the execution is the keyword, I would say. The execution from test market to launch stays at a very high level. You'll see exciting products.
You'll see fewer of them because of the focus on the core that we'll also have, but you'll see extremely high levels of execution to make sure that we get the benefit of what we've seen in tests come to fruition when we launch it nationally.
We all have a commitment from our U.S. marketing team via Kevin that we will launch with excitement, energy, and relevance in everything we do. I think that's right. Okay, good. Okay. Number two. We got John?
Yes, sir. It's John Glass. My question is around the same topic, maybe a little bit more pointed. The company used to call itself a fast follower, and I wonder if you still think that's an accurate characterization. I'll give you an example. This fall, you launched a Pumpkin Spice Latte. You launched it on the 10th anniversary of Starbucks' Pumpkin Spice Latte. Why did it take so long for you to pick up an idea that was already in the marketplace and successful? My questions are: Are you really outward-looking enough at your competition? Another example would be everything pretzel was popular this summer. Could you have seen that earlier and maybe capitalized on that, or do you just take a pass because you can't?
Can you work with your supply chain more closely in order to, if you see a food trend, get into the stores quickly before consumers get bored of it? I think consumers are getting more quickly bored with trends come faster, but they also go faster. By the time you get there, maybe it's long gone.
Thanks, John. I think on that one. This is a broader question than the point. The answer is yes. Relative to being a fast follower, do we see ourself as that? We are a mass market provider of services, goods, products. We serve 69 million customers a day. When we move with energy in any product arena, we will see results. The fact that we're implementing blended ice, or just implemented it in the U.K., when smoothies have been around for quite a while, we're okay with tapping into that marketplace. Now, what's interesting is there's a lot of our competitors that implemented smoothies after we did and followed the strategy. I think what we're looking for, more so than whether we're a fast leader or fast follower, is we're looking for the consumer trend.
We're looking for what customers are eating, why they're eating it, and are they eating it in mass or drinking it in mass. When they are, that's something that we want to go after. It's less about whether or not we lead or follow, it's more about the market opportunity and the market potential. We don't have a real screen relative to, if someone else do it, should we do it? Shouldn't we? We have a screen that says, is it worth $140 billion in the marketplace, or is it worth $2 billion in the global marketplace? Based on the way our system is, a $140 billion opportunity globally, we'll go after aggressively as a global system. A $2 billion opportunity, maybe in one or two of our markets, maybe those markets we'll go after it.
The answer is, there are some things we may follow the trend until it's established. There's other things where we may lead and move forward to establish a category.
Just a hook on that. I'll take fruit smoothies in some of the countries. We had some competitors that nicked our idea and scaled it faster than we did. They didn't do it better than we did, though. I think it's more important for us to get it right than to do it right now. When you look at just the volume that we're doing in fruit smoothies in some of these countries, it's phenomenal compared to getting there first. We've also proven we can come late. We don't like to, but we can come late and dominate in that area when we do it right, when we execute right, and we put our scale, our marketing, and our penetration behind it.
Last question, Mr. Ivankoe. We got two. I'm sorry, who do we got? We'll take two then because I called John's name. John, and then we'll come back to number 3.
Thank you, John Ivankoe, JPMorgan. I might be a little bit off on the years, just bear with me on this. I remember way back when the U.S. started seeing negative comps, weaker comps in the mid-1990s, and you picked up unit development. Europe maybe was 1999 to 2001, comps were uneven, and you really were making a pretty aggressive push into continental Europe, opening stores. What I want you to do, and just in a public forum, it's hard to ask this question like this, how profound were those lessons that were learned, which were very negative lessons for the organization and led to a major rebirth of the organization, as you approach the strategy today?
You just look at it just very superficially and say, maybe comps are a little bit lower, unit development is a little bit higher, and are we in the beginning of a capital-intensive new unit development trend instead of comps and the ROIC, which really did drive your stock over the past 10 years.
Thanks, John. I'm going to ask Pete to chat about this one. Here's what I'll say. Steve experienced some of this when he was in the U.K. Tim experienced this. Doug experienced this. Hoffmann experienced this as he was a part of the leadership team. Garland was a part of the team when Stratton was a part. The reason I'm saying that is this. Many of us remember the days when we decided to shift to units because of the top-line sales, not because we had a real market opportunity. There were opportunities, the level of technology and data that we have today, this was a very different piece. I'm going to ask Pete, though, to talk to this because he keeps us on guard relative to this.
John, thanks for the question. It really does have to do with a shift in philosophy. Back then, we actually were growing to hit committed revenue growth targets. Believe it or not, prior to the Plan to Win, we didn't have capital budgeting within McDonald's. If you ran a region or a country, you were given an opening number for the following year, not a capital budget to maximize. One of the things the Plan to Win did was really institute that financial discipline, the competition for capital amongst the business units, the focus on returns, which wasn't there before, and that continues to permeate these conversations.
It's using some of those tools that Tim highlighted, that coupled with the growth in the business over these years, that's given us the confidence to say, we think we can continue to increase our development pace, but it's not like we're going to go from opening 1,500 units to 3,000. It's a gradual, where are the opportunities? How confident are we in our team and in our ability to execute in those particular areas and allocate capital accordingly, not just chase growth for growth's sake. When we really sit down and talk about this as a senior group, we always focus on the fact that without driving comp sales, you don't generate enough margin leverage and cash flow to fund this kind of growth.
It's all back to what are the consumer insights that are going to allow us to drive comp sales to help enable us to get, as we say, better and even bigger.
Very quickly, out of that 1,500 to 1,600 gross units, how many will be net for 2014? Do you have a view on closures?
We've closed 300-ish a year, so if you use that for now, I'll have a better number in January. The one other thing is we didn't have a significant amount of DLs 10 years ago. Out of that 1,500 to 1,600, about a third of those will be opened between joint ventures and DLs where we're not using any of our capital.
Thank you.
I'm sure you all probably know, but just to make sure you do, for each of the markets, they get a number of targets now that we didn't get to Pete's point before. There is a very separate new store sales target. Notice I didn't say new store units, sales versus comp sales. They are very different. We look at base trend lines, we look at economic environments to establish comps. We look at market opportunity to establish new store development, new unit development, new sales, months of operations, et cetera. We are much more analytical about how we approach it, and we don't just give out one number and say, "Get to it any way you can." We're a little bit more steeped in analytics and data today. One more question?
Hi, David Fuchs.
Dave
with Lowy Family Group. My question is around demographics and coming back to this emphasis on consumer insights. Given that so many of you have been around for such a long time, if you look back 10 or 20 years, and then you look forward 10 or 20 years, to what extent is there a structural change in the demographics of your consumer in your major markets, and to what extent does that change the strategy of the business, if at all?
Thank you. I'm going to ask can we get a mic up to Mr. Hess. Erik, your comments, and then Steve, I'll have you close it out.
Erik Hess, I work in consumer insights.
No, you lead consumer insights.
I work for the consumer. The demography is definitely changing, right? What we really look at is their need states. Oftentimes the need states, as I get older and older, but I still have similar need states. At breakfast I have to go fast, I have to get in and out. Lunch, I may be with my family, I may be with my workers. Maybe I sit down for 15 or 20 minutes. We have to make sure that we're meeting the needs. That's the big screen. The second piece, though, is for McDonald's, for all of us, in everything we do, we have to stay modern and stay young. Whether I'm 50 years old or 40 years old, I always want to be with a brand that's a reflection of me.
Even though the demos are getting a little bit older, we have to stay young. I think everything you do, when you talk about energy and excitement, that's putting that screen on it.
Steve?
I mean, the reality is, our customer base will now be across multiple generations, which I think is fantastic. If you look back 20 years ago, the grandparents' age were difficult to get to because they didn't grow up with McDonald's. Now everyone, in 20 years' time, everyone would have grown up with McDonald's. The reality is they have a lot of commonalities, but also they have different needs. I think what will change, and the way we'll be adapting our model, will be the way we engage with those different generations, with different consumers. For some, the mass market, 30-second ad in the middle of a TV show, you're not going to connect with them. You're going to miss them. That's why we want to get to this more personalized approach. It's only going to heighten the need for consumer insight and accurate consumer insight.
It's not just random research. It's really getting under the skin of what really matters. Also don't treat them too differently either. On the 60-second ad there from the U.K., at the end of the day, the old fella and the young lad, at the end of the day, they still like a Big Mac meal. How you communicate with them and engage them and be relevant to them may be different. At the end of the day, they like to come in because they like our food and our drinks. We just need to be smarter and just more precise, I think is probably the way I'd say it.
Thank you all very much for the questions. With that, we'll bring up Kathy.
Welcome, y'all.
Okay. All right. Okay. I'd like to thank you all for your interest in McDonald's and for coming here and sharing time with us today. I certainly want to recognize the efforts of our IR team. Boy, that was a mouthful. The corporate controller group, the Area of the World staff, communications, creative services, all the Area of the Worlds, for all the efforts in putting this together. That brings the afternoon session to a close for those who are listening on the webcast, thank you for joining us.