Hello, welcome to McDonald's October 21, 2013 investor conference call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question and answer session for investors. At that time, investors only may ask a question by pressing star one on their touch-tone phone. I would now like to turn the conference over to Ms. Kathy Martin, Vice President of Investor Relations for McDonald's Corporation. Ms. Martin, you may begin.
Thank you, hello, everybody. With me on the call are President and Chief Executive Officer, Don Thompson, and Chief Financial Officer, Peter Bensen. Today's conference call is being webcast live and recorded for replay by phone, webcast, and podcast. Before I turn it over to Don, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both of these documents are available at www.investor.mcdonalds.com as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. Now I'd like to turn it over to Don.
Good morning, everyone, thank you, Kathy. In July, we talked about three lenses through which we're framing our performance. We talked about the past, the present, and the future. Today, I want to talk about the present and the future. We're focused on the actions that we are taking to drive current performance in an environment that is pressuring growth. We'll discuss how those actions will position us to deliver results in the near and the longer terms. Today, our business continues to grow, as demonstrated by our third quarter performance. While global comparable sales of 0.9% were not as high as we'd like, operating income grew 6% in constant currencies and earnings per share was $1.52, a 7% increase in constant currencies. Even though our comp sales lap eases in the fourth quarter, macroeconomic and competitive conditions are not expected to change dramatically.
As a result, we expect October sales to be relatively flat. Around the world, we are accelerating those initiatives that we believe will have the greatest impact on our customers within our three global growth priorities to optimize our menu, modernize the customer experience, and broaden consumers' access to our brand. We're also thoughtfully adapting local market plans to remain relevant and appealing at a time when consumers are uncertain and the industry is stagnant. We continue to intensify our focus on the most critical tenets of the customer experience that strengthen our performance, menu quality and choice, customer service, affordability, and consumer engagement. I'd like to briefly discuss each one of these.
Regarding menu quality and choice, we must ensure that the true quality of our ingredients and food recipes are better known to all consumers and that customers have choices across our menu that meet their taste desires and/or nutritional expectations. This includes featuring relevant and appealing new food and beverage news. Next, customer service. Simply stated, we must exceed our customers' expectations for fast, accurate, and friendly service at each and every one of our nearly 35,000 restaurants around the world. Furthermore, those restaurants must be clean, well-maintained, and contemporary. The third point is affordability. We need to offer compelling value options across all price tiers of our menu. Lastly, deepening consumer engagement with the McDonald's brand. This means creating stronger awareness and excitement around our menu and around our restaurants while further revealing the ways in which we're a good neighbor in communities around the world.
We know that meeting customers' expectations in all of these areas is critically important to a great experience at McDonald's. We'll talk more about these tenets, including specific examples of actions we're taking around the world to elevate the McDonald's experience at next month's investor meeting on November 14th. Let's take a look at the business across the globe, starting with the U.S. U.S. comparable sales were up 0.7% for the quarter, and operating income increased 5%. Our current sales performance was driven by a focus on bringing new and familiar taste to customers, exciting promotions, and an ongoing emphasis on affordability across our menu. We accelerated the timing of our Monopoly promotion in an effort to further increase awareness and encourage trial of recent new product introductions like Quarter Pounder line sandwiches and the new McWraps. Monopoly also reminds customers about our core menu classics.
It drives traffic and builds average check, while also engaging customers in a fun and familiar game experience that's only available at McDonald's. We also introduced Mighty Wings in the third quarter as a limited time offer. This bold new flavor addition to our U.S. menu originated in China and Hong Kong and has encouraged trade up to increase average check. While overall performance of Monopoly and Mighty Wings met our internal targets, it was not strong enough to offset current guest count trends. Our promotions and new products are complemented by our consistent value approach to offer affordable variety and choice across the menu. The Dollar Menu remains core to our high-low strategy, with products like the Grilled Onion Cheddar Burger and the popular McChicken continuing to generate strong demand at the $1 price point.
As we celebrate the 10-year anniversary of the Dollar Menu, we're leveraging the equity we've built to ensure we continue to satisfy our customers' expectations for affordability. The new Dollar Menu & More platform is designed to provide everyday predictable value beyond the $1 price point and will be supported with the weight of our national advertising. The sandwich lineup, which ranges from $1 to $2, adds new flavors and tastes to complement our existing menu favorites and provides additional pricing flexibility for the McDouble. In addition to the launch of Dollar Menu & More, we're balancing proven favorites with new tastes that add further excitement and variety to our menu. The return of the popular McRib sandwich and the Southwest Premium McWrap are examples of this flavorful balance that will be seen in restaurants within the United States.
Let's turn to Europe, where comparable sales were up 20 basis points for the quarter and operating income grew 8% in constant currencies. These results reflect strong performance in the U.K. and Russia and solid performance in France. Negative trends in Germany continue amidst a highly competitive environment. The U.K.'s business momentum remains strong, and we continue to grow market share. This growth has been supported by our expanded beverage lineup and an ongoing breakfast focus. This month, we're launching Mocha in the U.K. and using this opportunity to introduce the McCafé brand across our entire range of espresso-based coffees. Following the successful launch of McCafé iced smoothies and frappés over the summer, this represents a significant step in our journey to become a beverage destination in the U.K.
Russia delivered positive performance in the third quarter, despite the lower inflationary environment that continues to limit our ability to take price. Successful food offers such as tastes of the season and the Ciabatta beef burger helped boost results for the quarter. France also delivered positive results for the quarter, marking its first positive quarter of comparable sales since the third quarter of 2012. The market continues to grow share in a contracting Informal Eating Out industry. A core menu focus, supported by strong marketing execution and an ongoing emphasis on affordability, helped to drive our performance. The Big Tasty re-hit in September generated strong demand, and the classic return campaign, which launched in August, proved to be successful drivers of France's performance during the quarter. Additionally, P'tits Plaisirs and Cassoulet continue to do well by providing attractive offers at affordable price points.
While we're pleased with these results, we're cautious about recent performance, especially given the volatility in France's economy. Germany's performance remains weak as negative comparable sales and traffic trends continued through the third quarter. Competitive activity remains aggressive, and the decline in the IEO category persists as the industry grapples with price-sensitive consumers. Today, affordability and specifically price value is key in Germany. We continue to evolve the balance between our base value and premium offers across the menu to address the near-term needs of the marketplace. Let's move over to Asia Pacific, Middle East, and Africa or APMEA. Comparable sales were down 1.4% for the quarter, and operating income decreased 4% in constant currencies. Performance across our big three markets remains challenging. This reflects tough macroeconomic conditions, along with the performance of recent new products and promotions that were unable to overcome our current negative guest count momentum.
Across APMEA, we remain focused on driving performance through consistent price value offers, accelerating growth at key day parts, particularly breakfast and overnight, and by leveraging brand extensions to enhance the service and convenience of the McDonald's experience. Australia continues to balance new product news and strong promotional activity to appeal to customers in a highly competitive environment. Looking ahead, Australia is targeting opportunities in chicken and the family business to broaden customer appeal. Japan's negative comparable sales and traffic trends persist. We're committed to making improvements to our value platform in the near term in an effort to appeal to consumers who remain extremely price-sensitive in this deflationary environment. At the same time, we're introducing new products and promotions to create excitement and attract customers into our restaurants. In China, comparable sales were down 3.2% for the quarter.
As a key emerging market, China has significant long-term opportunities across all three of our growth priorities. We're also evolving our value platform to give it greater reach across day parts and meal occasions. At the same time, we're using limited time offers and promotions to create energy around new menu news. We're leveraging brand extensions like kiosk and McCafés to reach our customers when, where, and how they want the McDonald's experience the most. Around the world, we remain focused on our customers. It's our top priority to deliver an experience that meets their evolving tastes and lifestyles. We recognize the opportunities that exist to profitably grow our business for the immediate and the longer term. We remain committed to making disciplined investments to fuel future growth and further differentiate brand McDonald's.
Our efforts to broaden accessibility through new restaurants and to modernize the customer experience by reinvesting in existing restaurants, including re-imaging, technology, and convenience initiatives, remains a top priority. Consistent with our long-standing priorities regarding the use of cash, after investing in our business, we're committed to returning all free cash flow to shareholders over the long term, first through dividends and then share repurchases. In fact, we recently announced a 5% increase in our quarterly cash dividend to $0.81 per share, bringing the annual dividend to $3.24. We expect our total cash return to shareholders for 2013 to be between $4.5 billion and $5 billion. In times like these, our ability to stay focused on those factors within our control is absolutely critical. As important is our ability to look within, to understand what's working, what needs to change, and why. We must execute.
Our decentralized local markets have the ability to test their plans and quickly course correct based on customer reactions. This is even more important in this environment because it allows us to identify the right tactics that resonate with consumers, and that will drive our performance in the near and longer terms. Our culture is built on the premise of always putting the customer first, making them feel good about visiting McDonald's today and into the future. Our ability to deliver on that promise through our actions will enable us to deliver long-term value for our system and for our shareholders. Thanks again, everyone. I'll now turn it over to Pete.
Thanks, Don, and hello, everyone. Our performance in third quarter speaks to the resiliency of our business model and our ongoing commitment to invest strategically to grow our business over the long term through a balanced approach of adding new units and increasing sales at existing restaurants. Despite modest comparable sales growth, McDonald's was able to achieve solid growth in revenues and income. While the growth has not been as high as recent years, we are confident in our ability to deliver significant shareholder value over time. Through the first nine months, revenues increased 2% and our combined operating margin increased 10 basis points to 31.2%, primarily due to higher franchise margin dollars and lower G&A expenses. With 81% of our nearly 35,000 restaurants franchised, our profitability is primarily driven by franchise margins.
In third quarter, franchise margins reached about $2 billion, an increase of 4% or nearly $70 million in constant currencies, with each area of the world contributing to this growth. The franchise margin percentage for the quarter declined 40 basis points to 83% as positive comparable sales were more than offset by higher occupancy costs. Global company-operated margins totaled $919 million for the quarter and were relatively flat in constant currencies. The margin percent decreased 40 basis points to 18.7% as weaker performance in the U.S. and APMEA offset gains in Europe. In the U.S., third quarter company-operated margins declined 140 basis points to 18.4% due to higher operating and commodity costs. Commodity costs increased about 2.5% in third quarter, with similar pressure expected in the fourth quarter. We have tightened our full year estimates and now project 2013 commodity costs in the U.S. to be up 1.5%-2%.
We have taken three price increases year-to-date, with the most recent increase in September totaling about 1%. This brings our total increase to about 2.6%, which is relatively consistent with a year ago. We are at the midpoint of the projected 2%-3% full year increase for food away from home inflation. Food at home inflation has been running about a point lower, so we are keeping a close eye on this measure as well as we consider future price moves. In Europe, third quarter company-operated margins increased 70 basis points to 21.1%, primarily due to the strength of our two largest McOpCo markets, Russia and the U.K. These two markets contribute nearly half of Europe's company-operated margin dollars.
In addition, France, the third largest market in terms of McOpCo margin dollars, contributed through positive comparable sales and certain labor efficiencies, most of which we don't expect to realize in fourth quarter. Commodities increased about 1% for the quarter. Europe has also lowered its full year projected increase to 1.5%-2%. Our price increases varied across the 39 European markets. Excluding Russia, most European markets are averaging year-over-year price increases around 1.5%. As we consider future price increases, we remain mindful of the economic uncertainty, cautious consumer sentiment, increased taxation, and lower disposable income. Our global strategy and approach to pricing remains unchanged. We continue to balance our goal of driving traffic and market share gains while effectively managing the impact of rising costs and evolving consumer trends.
Turning to Asia, Pacific, Middle East, and Africa, company-operated margins for the quarter decreased 160 basis points to 15.3%, primarily due to higher labor costs across the segment, as well as new restaurant openings, mainly in China. For a perspective, China represents approximately 30% of APMEA's company-operated margin dollars. Our G&A expense in the quarter declined 11% or more than $66 million versus a year ago. This was primarily due to lower incentive-based compensation. To be down 2%-3% in constant currencies. Solid, consistent financial performance from our unique business model generates meaningful amounts of cash flow. We strategically reinvest a significant amount of this cash back into our business to drive future growth and returns. Our restaurant development teams are making good progress against their plans for building new restaurants and reimaging existing locations, taking advantage of improved tools and capabilities.
We have trimmed our 2013 capital expenditure estimate to $3 billion. This is a conscious decision to delay a limited number of new openings into 2014 based on current conditions. We feel this is prudent given the short-term pressures and our desire to maximize the quality of our new openings. We continue to generate strong returns on new restaurants in mature markets, with emerging markets like China historically achieving our benchmarks within three to four years. In 2013, we expect to open about 1,500 new restaurants, ending the year at over 35,000. New openings by area of the world include over 225 in the U.S., about 300 in Europe, and more than 750 in APMEA. Approximately one-third of our global openings are in developmental license or affiliated markets where we do not invest our capital.
We also continue to modernize our existing restaurant base through reimaging more than 1,600 restaurants this year. Globally, about two-thirds of our interiors and over half of our exteriors reflect the current contemporary look. Let's now turn to foreign currency translation, which negatively impacted third quarter results by $0.01. At current exchange rates, including the euro at the 135, 136 level, we expect full year EPS to be negatively impacted by about $0.05 to $0.06, which implies a fourth quarter negative impact of $0.01 to $0.02. Please take this as directional only, given the volatility in exchange rates. Lastly, I'd like to comment on our expectations for the remainder of this year.
On the first quarter call in April, I said that we expected company-operated margins to be pressured throughout 2013, the margin decline should be less pronounced than in the first quarter, as sales comparisons ease in upcoming quarters. Let me give you an update. Sales comparisons have eased and will continue to do so, our current sales trends are a stronger predictor of future performance than prior year comparisons. Based on what we know today, we expect fourth quarter global comparable sales performance to be in line with recent quarterly trends, and restaurant margin percentage declines, both McOpCo and franchise, to be at a level relatively similar to first quarter declines. We are wrapping up our planning cycle over the next few weeks, we look forward to sharing some of our 2014 outlook with you at our November investor meeting next month.
The McDonald's system remains focused on building our business to generate enduring profitable growth for our shareholders, franchisees, and suppliers. Our third quarter results speak to the benefits of our geographic diversification and the many levers we have to generate top and bottom-line growth. We are confident in our ability to successfully navigate this environment while preserving our competitive advantages and positioning the brand to participate fully when consumer spending improves. Thank you. Now I'll turn it over to Kathy to begin the Q&A.
Thanks, Pete. I'll now open the call for analyst and investor questions. If you can press star one if you have a question, and star two to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, we ask that you limit yourself to one, and we'll get back to you with follow-up as time allows. Our first question is from Joe Buckley of Bank of America.
Thank you. Can you hear me okay?
Yes.
I'm going to ask just a very near-term question. Looking at the year-ago October performance, this comparison looks pretty easy. Obviously, you're guiding to a relatively flat number. I'm curious if things have worsened yet, if perhaps the government shutdown and debt ceiling discussions may have impacted the U.S. business or what drove that. Kind of a related question, the margins held up very well. They were actually up in Europe this quarter. Why the greater margin deterioration in the fourth quarter? Is there something unusual going on?
Hey, Joe, this is Don. I'll take the first part, and then I'll ask Pete to speak to your question relative to margins. Regarding October, Joe, we still expect, and it's really October in the fourth quarter, we expect the fourth quarter to remain challenged based on some of the existing top-line pressures that we're seeing. We're seeing flat or declining IEO markets and heightened competitive activity across all the geographies. Even though the comp sales lap do ease in the fourth quarter, heightened macroeconomic and competitive pressures are not expected to change dramatically, as we've said. In Europe, we've got less pricing power than we had a year ago, and consumer psyche is affected by both the economies and also some of the upcoming austerity measures, VAT pressures, et cetera. In the U.S., we continue to experience a bifurcation of the consumer base.
McDonald's core customers skew toward those customers whose disposable income is not rising as much and are spending a little bit less in QSR. As we look at those things, as we look at the macroeconomic conditions that persist in APMEA and across APMEA, we believe that this fourth quarter is still going to be relatively challenged, as we've mentioned. Regarding the government and the shutdown, you asked a question about that. Actually, for us at McDonald's, the impact is limited to a few different areas. One would be communities with large federal employees, and those populations where a lot of the consumers there, their purchasing power may be limited based upon the government shutdown if their government employees are impacted by it. Another is from a supply chain perspective at port authorities.
When things like that happen from an impact perspective, the port authorities are operating at reduced levels, that changes the importation processing times for some of the products that we may have. Lastly is things like the E-Verify program, federally verified program, when it's closed down and the impact that it has relative to hiring processes. You can see that these are outside of that first one, which really gets into population impact, it's fairly minimal at this point relative to what's taking place from a government perspective.
Joe, regarding margins, you pointed out exactly the difference between the third quarter and our outlook for the fourth quarter, and that was Europe. The two markets that really had the biggest impact on that improvement in the third quarter in Europe were Russia and France. Combined, they basically contributed the 70 basis points of growth. While the U.K. had growth, it was pretty much offset by the other markets. France, we had some exceptional labor efficiencies due to their higher sales levels in the quarter that we don't expect in the fourth quarter. In Russia, we had a true-up of some of their distribution costs that resulted in a credit that added some improvement to the margins there. Last year, that true-up happened in the fourth quarter, so their margins in the fourth quarter were a little higher last year based on that.
On a comparative basis, we don't get that benefit. At the end of the day, based on the current sales trends and the lack of a couple of these unusual items, we don't expect there to be that growth in Europe margins in the fourth quarter, leading the consolidated margins to be more in line with the declines we saw first quarter.
Our next question is from John Glass from Morgan Stanley.
Thanks. My question's on the U.S. It sounds like you're saying that the promotions you've run the last couple of months have been sort of in line with what you expected, but the underlying business is just so weak. I just wanted to challenge that. Can you sort of back up why you think these promotions have been effective? They seem like they're not driving incremental traffic to the business. Are you focusing too much on the short term, for example? Whereas maybe in prior periods, we were winning from a position of strength. Can you also just talk about the Dollar Menu & More? It didn't seem to work a couple of years ago because the consumer still thought dollar meant dollar, not more. Why does that work this time, do you think?
Hi, John. This is Don. I'll talk a little bit about both of the areas. Relative to promotions, actually, the promotions themselves have been within the range of our expectations. As an example, if I look at Mighty Wings, Mighty Wings resonated with consumers but performed at the lower end of our expectations. Your comment about overall base and base trend lines was very accurate. When you see the overall industry being a bit softer, it does impact our ability for us to drive sales to a higher level. When it speaks specifically to the wings, there was a couple of things that although it performed within our targeted expectation range, again at the lower end, there's a couple of things we can improve on. One is still affordability. A $1 per wing was still not considered to be the most competitive in the current environment.
The other thing we saw, it's a very slight modification, but the flavor profile was slightly spicy for some consumers. Having said that, what's interesting is we sold or expect to sell probably about 35 million pounds of wings. We can address the challenges with spice or as we look forward with price. You will see wings again in the U.S. business. It has been successful for us. It is at a time when the overall environment is a bit softer. It did create trade-up as most of the products that we've introduced have done. Remember that as we went into this year, one of the things we wanted to do was to make sure that we had an innovative food pipeline, but we did not want to forget core classics, and we tried to do that. Monopoly helped us again with that.
The other thing we wanted to do is make sure we remained affordable, and we've been working on this around the globe. That part, I feel, we still are operating from a position of strength in most of our markets. Markets where we have challenges, we're addressing those challenges in those markets. All in all, we're doing the things that I think we should do to position ourselves to grow this business. As the economy does come back a bit, we know that we'll benefit from that, but we're also not going to sit back and just wait. We are doing many things tactically try to address the current environment, but we're not missing out on the long-term environment as well. The other piece I want to mention real quick is the notion of Dollar Menu & More. We have not tried Dollar Menu & More.
One of the things that was attempted a while ago was something that was called an Extra Value Menu. This is very different. Dollar Menu & More means that you keep the Dollar Menu price points. It's consistent with how we've continued to evolve the Dollar Menu since its inception back in the early 2000s. Over time, we have changed some of the Dollar Menu as we needed to. We changed from a Big N' Tasty initially to a double cheeseburger, from double cheeseburger to McDouble. We've always evolved the Dollar Menu. That's what we're doing now, that continued evolution. What we've also found, John, is the need to have a $2 price point for some products that are a slight trade-up from just the Dollar-based price points that also supports additional margin growth in the restaurants.
It gives customers a value ladder of sorts, so that based upon their discretionary spending, they have multiple offers at McDonald's. We also have a $5 price point, which really speaks to things like 20-piece nuggets, there's varying levels of affordability, and we still continue to have our extra value meals and premium-based products that we'll talk to. We've definitely not forgotten our core and the core classics of Big Mac and Quarter Pounders and Filet-O-Fish and those things you'll continue to see. We haven't forgotten the innovative food pipeline, McWraps, Mighty Wings, et cetera. For us, we most definitely haven't forgotten our affordability platform with the Dollar Menu. All of those things will play well together as we continue to come up with the most compelling menu offerings and compelling calendar for customers moving forward.
Next question is from Jeffrey Bernstein from Barclays.
It's a question on the longer-term business model. I'll preface it by saying it's beyond 2014 because I know you do have an Analyst Day coming up, where we'll get some color on that. If you could just maybe offer some insight, longer term. You mentioned the franchise business, 81% worldwide. Just wondering whether there's still an opportunity to push that. Obviously, you still have huge skin in the game, but with, I think you mentioned 35,000 units, I'm wondering whether over time the idea might not be to push that to 85 or 90%. As a related question, the CapEx, I know, Pete, you mentioned you tweaked it down in terms of dollars and modestly in terms of the unit openings. I'm wondering whether that's at all a sign of future.
I know in the past you talked about maybe accelerating the pace of openings and whether this tweak might not be to signal that maybe things are slowing a little bit or maybe you want to shift to more remodels and less new units. How you think about that? Thanks.
Jeff, I'll talk about the CapEx, and then Don will probably have a perspective on the franchising percentages. Really, the change in our CapEx this year has really been a short-term thing. It speaks nothing about our view of the future. As we look at the environment, especially most of the unit cuts have come from China and some of the emerging markets in APMEA. Virtually all of the dollar variance from our original budget to our revised outlook is coming from APMEA. Europe will be on their opening budget. U.S. and the other areas of the world will hit. It's really in China and some of these emerging markets where we were looking at where the projects were.
In a lot of these countries, we rely on other retail development and housing development and some of the other development activity in the marketplace to create the traffic generators. If they're delayed or behind schedule, there's been years when we would go ahead and open the restaurants anyway, knowing that that demand would be coming. This year, we're just taking a little more prudent look at those kind of projects in light of the sales environment to say, "You know what? We'll hold off and wait for those traffic generators to open or those projects to continue before we'll open the restaurant." It's really just some fine-tuning and not an indication that going forward, we're looking to change our CapEx mix more toward re-imaging and backing off of openings.
We still think there's plenty of opportunity to grow to the market potential in several of these countries by opening new units.
Hi, Jeff. Relative to franchising, as we move forward, your point is appropriate. We continue to look at opportunities. Today, we are 81% franchised globally, 19% company operated. We continue, particularly across areas we are growing in, such as APMEA. We will be continuing to leverage our DLs to look for new DLs as we are doing across China. We are continuing to move forward with conventional franchisees and conventional licensing. We continue to do that. APMEA will continue to see more franchising across the market. In addition to that, we are also looking at the mature markets and existing markets where there are opportunities for us to effectively franchise as we continue to grow the business. Yes, we will continue to definitely look at franchising and franchise opportunities, and you will see more of it, particularly across APMEA.
Our next question is from Michael Kelter, Goldman Sachs.
Good morning. It is Ivan Holman sitting in for Michael. Thank you for taking my call. I was just wondering, the Dollar Menu itself has represented historically 13%-14% of sales. Can you please give us a little bit of guidance on how you see that evolving in the near term, as well as from a longer-term perspective in terms of how you see the business model over the next couple of years? Within that context, how do you think franchisees might be receptive to a change of that percentage, either up or down? Thank you.
Hi, Ivan. Just relative to the Dollar Menu, I think that we will continue to look first at customers and customer behaviors and affordability. What we've always done is leverage that data, then as we have discussions with the franchisee body to look at what's going to be the most compelling offering for McDonald's. Again, the Dollar Menu is only a part of that. We continue to see and believe that it will continue to represent somewhere in that same percentile, 13%-15%. As we stretch out the Dollar Menu a little bit more with Dollar Menu & More, provide some additional offers that will be even more appealing to some of the customers, we believe that it will continue to be a compelling offer and still best in class when we look at the overall marketplace. That part will remain the same.
Franchisees have been a part of the discussions. They always are as we look at making decisions like this one.
Next question is from David Tarantino from Baird.
Hi, good morning. Don, I think you mentioned in your initial remarks that you're focusing or have been focusing on what's working well around the globe and what needs to change. I was particularly interested in maybe the last part of that, what you think needs to change going forward. Perhaps if you could give us some examples of some maybe bigger picture or more meaningful changes as you look out to next year, or even the following years as you're planning your business.
Thanks, David. I'll start at the back end of that and then go into what needs to change. I think as we look at next year, clearly the areas of, we call it the three Global Growth Opportunities that we have, those things will remain the same. We're still focused on making sure that we have the best menu across the board for customers. We'll continue to balance that between the core classics and favorites with new products. We'll continue to enhance that relative to the nutritional offerings that we have. That's been a focal point. That has been working around the world. The Modernizing Customer Experience is something we've been focused on. That really deals with our re-imaging and making sure the restaurants are contemporary. That part has been received well by customers. We continue to do that.
The strong portion of that, Pete mentioned it, is that when you look across Europe is much further ahead there. We won't have to do as many globally, but we'll leverage what we do need to do to make sure we are a compelling offer to customers around the world. Technology is going to be a big part of our future, particularly digital engagement with consumers. You'll hear us and see us talk much more about digital engagement with consumers. The other thing that you'll see change a bit is we are being much stronger relative to communicating about our brand, communicating about our food. Customers want to hear more about transparency. They want to hear about provenance and where the food is from. Those things we're very proud of at McDonald's and will continue.
At the November 14th NEM meeting, we'll discuss more about some of these opportunities. When it comes to changes, we'll chat a little bit about that in November as well. Frankly, we've got a few markets where we have opportunities. We've been, again, very transparent about those. In Japan, we've got to get consistent value. It's a deflationary environment, a tough market. We're focused on that. We've had some leadership changes in Japan. We continue to look at the opportunities we have in that marketplace. Germany is a market that we are also focused on solidifying the balance between premium and the value-based offerings. We fluctuated a bit there, possibly too much. We need to shore that up. Australia, we're focused in a very competitive environment on making sure we have that same balance.
In the U.S., we've got a great food pipeline now. We're focused well on the operational base of what's taking place in the marketplace. Those things, again, you'll get to hear a little bit more about at the NEM meeting in November. Those are some of the areas and some of the markets that we're focused more intently on.
Our next question is from Will Slabaugh from Stephens.
Yeah, thanks, guys. I wanted to ask you a little bit more about the value menu domestically. Do you feel like you're winning that value game here in the U.S.? Is that a segment that can actually drive sales and profits higher? Or do you think more or less the Dollar Menu as it is maybe something that helps you hold those guest counts in place in a tough environment, it takes more of the success on the higher end of those more premium items to really return to more stronger same store sales and profit growth?
Great question, Will, the answer is yes. The Dollar Menu definitely, particularly in times like these, where you see consumers stressed a little more from a discretionary spending perspective, you see a bit of a bifurcation relative to the economic strata in the U.S., it's very important to have that affordability platform and the value, the Dollar Menu that we have. It does keep a base of customers. Keep this in mind. While it only represents 13%-15% of sales historically, you've got about a third of the customers that will leverage that Dollar Menu in some form or fashion. It is a strong part of the base. Having said that, we also have to have core news, the core has to be affordable at a value menu price point and premium-based news, whether that be McWrap or Mighty Wings. Those are promotional.
Those are limited time offers. But those things help not only with margin, but they help with the excitement for customers so there's something new and exciting at McDonald's. We have to be able to balance both of those two ends of the barbell, if you will. Also, I would say we have to fill in what's in between. That's the reason for Dollar Menu & More. When we talk about $2 price points with sandwiches that have a few additional things to offer than our base value Dollar Menu offerings do.
Next question is from Matthew DiFrisco from Lazard.
Thank you. Just looking at the franchise margins and the guidance, I appreciate the guidance you give and given the volatility we're seeing in the comps and everything for the current quarter that we're in now. Can you give us some sort of what you expect in trends for 2014, especially with the franchise side of the margins? Is there anything structural that you're doing as far as relief plans or anything that might continue into 2014 that you can give us an outlook on now? Or is it just simply
comps coming back and the franchise margins improving in step with the comps. Thank you.
Hey, Matt, it's Pete. We will get into 2014 in a little more detail in November. Essentially, there's nothing structural that's changing. As you point out, and as we continue to mention, it is really a top-line game, and our franchise margins are even more sensitive to comp because a great proportion of the costs in that line are fixed. When we generate higher comps, we get the significant leverage. The only thing structural that's been going on in the last couple of years has been our contribution toward reimaging with franchisees. As we co-invest with them, we continue to get greater amounts of depreciation. Again, with comp sales increases, that should not be a barrier to the margin growth.
As you point out, in this current environment, we're not getting that top line, so we don't expect the franchise margin to grow in the fourth quarter.
Next question is from Brian Bittner from Oppenheimer.
Great. Thanks. This is Michael Tamas for Brian. Is there anything in G&A that can be cut if sales trends continue to underperform? If there's any quick comments you can give on the China business of why that continues to struggle. Thank you.
Hey, Mike, I'll talk about G&A. Don maybe can give a perspective on China. When we look at our total G&A mix, what we're doing in this current environment is really looking at what are the discretionary items that we can pull as levers to moderate short-term performance. Travel, meetings, open headcount, things like that are things that we look at in environments like this. At the end of the day, we're about growing this business for the long term. We're going to continue to make investments in things like technology, especially digital, that Don mentioned. We're going to continue to make investments in our restaurant development teams and in the tools and processes to continue to grow restaurants. As we look forward, there's no dramatic restructuring or anything like that that's going to happen.
We're going to continue to invest our G&A in the areas that we think are good for the long-term growth of the business.
Yeah, Mike, relative to China, I'll give a bit of an overall perspective as to what we're seeing, at least, and then just a little insight as to McDonald's business as well. There is, and has been, as you all know, a slowing of the economy. The GDP is at its slowest growth level in 23 years, and that's causing a bit of a credit crunch across China. Slight decline in consumer confidence that goes along with that is consumer sentiment is very cautious, is the way I would describe it. GDP is projected to be in the mid-sevens for the rest of the year. Typically, anything below an 8% is a bit concerning, but nonetheless, we do see across China some bright spots, and for the long-term, definitely we see a bright opportunity in China. Today, IEO is flat to declining.
That makes it a little bit more difficult for growth. The Chinese typically, in tougher economic times, they typically revert to what we would call CQSR, Chinese QSR, noodle shops, et cetera, than they do Western QSR-based companies. These are things and phases we've seen before. We're solidifying our affordability and opportunities to reach the customers with some of the products that we have. Breakfast has performed positively for us in the marketplace. We've got a broader strategy around how we engage millennials and own the night, as we call it, because that's a big opportunity for us. We continue to look at our menu mix across the board. One last point, and that is Pete mentioned G&A, and we get asked about it quite a bit.
One other thing I would add is I would keep in mind that our compensation, so when we talk about a savings in G&A based upon performance-based incentives or performance-based compensation, if we are not hitting the expectations we have in sales and operating income, then that compensation is at risk. That is a good balance. It's a good hedge within our overall formulas and the way we operate as McDonald's. We constantly look at our G&A to make sure we're making prudent investments for the future, and those investments yielding appropriate returns for our shareholders.
Next question is John Ivankoe from JPMorgan.
Thanks. It's Amod Gautam filling in. Can you address some specifics or concerns on how your speed of service and operations scores in the U.S. have trended over the past year, given some of the changes to the menu? You've had the new POS in place for, I think, almost a couple of years now and other aspects like scaling up dual drive-throughs. Are there any specific opportunities that you've identified for further improvement in 2014?
There are quite a few things that we continue to look at. Clearly, service for us, as I mentioned in my opening comments, is a critical performance factor and an experience factor for customers. When we add something like a dual lane drive-through, on a per car basis, if you looked at flow-through speed, we typically will see a couple second increase in a flow-through kind of a measure because you now have two lanes and they split off. For an individual customer, they get attended to quicker, and the absolute times that we see tend to be overall shorter for the experience. The dual lane drive-through has helped, and it has helped us with capacity. When we implement new products, there's always a softer period upon the launch of the new products, and then there's a recovery.
The more ingredients in a product, yes, that will impact service times, but our operating platform of Made For You Basically enables us to be able to implement those type products. I would tell you at this point, the operational focus is strong. There are different measures that come through each and every year relative to customer satisfaction. What we're focused on is our internal measures of whether or not we're satisfying the needs of customers from a fast perspective, an accuracy perspective, and then I will tell you the quality of that service and the friendliness of that interaction.
Next question is Sara Senatore from Sanford Bernstein.
Thank you very much. I wanted to step back, if I could, and just ask you about the demand environment and your results. I guess if I think back to the recession, 2008, 2009, your comps were better in absolute and certainly a lot better than your competitors, vis-a-vis where they are today. I think it would be hard for us to say that the demand environment was a whole lot better back then than is the case now. I was hoping you could help me just diagnose, is the issue your competitors are a lot better? Is the issue that you don't have quite as much of a sales layer opportunity? Just maybe if you can help me compare and contrast. Then a related question is, how are your franchisees doing in this environment?
Obviously, there's always some talk in the media about McDonald's relationships, I just wanted to get your take on that.
Thanks, Sara. Just having been the president of the U.S. when we went through this back in 2008 and 2009, I will tell you the things that were similar and some that were different. Clearly, there was, from a consumer discretionary spending perspective, it was a very timid, if not restricted environment. Having said that, though, the competition at that point was not as strong from a pure price perspective. We had just evolved our Dollar Menu, just as we're talking about doing now with Dollar Menu & More. We had just completed that evolution. As you all may recall, we went from a double cheeseburger to a McDouble, and we talked about Snack Wrap a little more strongly. We were talking about affordability in the same way that we're doing now and plan to do even more so in the U.S. business.
We had just begun really focusing on the coffee opportunity. I think you'll hear more about the coffee opportunity as it still does exist, and you'll hear more about that at the NIM meeting. Those things are fairly consistent in terms of how we approach it. Definitely more competition in the marketplace. We're getting back to that focus on the value, the coffee, and those interim pieces. I would tell you we had a pretty decent product innovation at that point, and I think that what you've seen this past year is getting us back on track with that in the U.S. as well. Relative to the franchisees, I was just recently at our National Leadership Council meeting as they meet with the U.S. leadership team, and I've not seen as strong an alignment in quite a few years.
I think everyone understands the environment that we're facing. They also understand the legislative environment that we're facing. Those things cause us at McDonald's to really consolidate our different needs and desires and really focus on the customer. That's what they were doing. I left there feeling pretty good about what I was seeing and sensing from the operator leadership group and from our U.S. leadership team and them all being on the same page. Notwithstanding different reports that will come out, it's wonderful to live in this world and get a chance to see and visit the franchisees, not only in the U.S. but around the world.
Next question is from Nicole Miller, Piper Jaffray.
Thanks. Good morning. I was hoping you could help us close the gap or get more color around your pricing. I understand the comment about limiting pricing power, but you do have a very sophisticated process. Maybe compare and contrast what that process has told you to do historically versus what it's telling you to do today. Maybe if it makes sense, could you tell us how it impacted taking the Dollar Menu to a Dollar More? Sorry for this part, but if you have it, can we get the gap in September of U.S. comp versus QSR? Thank you very much.
Hey, Nicole. I'll talk a little bit about the pricing. Traditionally, we strive to keep our price increases in line with food away from home. For the year, food away from home is projected to be up 2%-3%. Where we sit today, we're at about a 2.6% increase. We're kind of in line with that measure as we look at it. The other dynamic that we have to keep in mind is what's going on with food prices at the grocery store. The food at home price increases are actually growing about 100 basis points less. Through August, I think was the last data I saw, food at home was only up 1%. That does create a value perception with the consumer that we do have to keep an eye on.
Those are the two biggest factors that we look at as we're looking at our pricing, as well as using our models that actually go back in time and look at a history of all of the price increases by individual item, by restaurant, and look at what happened to demand at those various price changes to make sure we're optimizing the menu price changes that we do choose to make. That's how we continue to look at that. For the month of September, which is really the four weeks ended the 29th.
Our gap was actually positive 10 basis points to the QSR sandwich. On a year-to-date basis, that gap is 0.7.
Nicole, relative to Dollar Menu products, I want to make sure everyone understands the Dollar Menu, there will still be a Dollar Menu. What we've changed is And More, which means we're adding products at a $2 level, and there will be some $5 level products, and there may be some other fill-ins. I want to make sure no one thinks that we're abandoning the Dollar Menu. That is not something that would be part of our affordability strategy, particularly not at a time like this. This is one of the ways that we can maintain the Dollar Menu in the face of rising commodities and labor pressures, but also get a little bit more margin basis on some of the products at $2 and some of the products at higher price points from there. The franchisees support this.
I think when you listened to Pete and he talked about the comp sales gaps in the QSR sandwich industry, clearly, we, as McDonald’s, are still in a very viable and strong position. The challenge for us is still there is softness in the QSR industry. We have the right things in place, I believe, for the long term to continue to drive shareholder value.
All right. We have four more folks that we're going to try to get to because we're running out of time. Jeff Farmer from Wells Fargo.
Great, thanks. Just did some quick math there on Nicole’s question. Looks like 70 basis points of sequential improvement in share September versus August. I guess the question is, what do you attribute that improved share from month to month to?
Jeff, just to clarify, our gap between us and the QSR sandwich competition year to date September is 70 basis points. For the month of September, it was only 10 basis points.
Jeff, those are our sales gaps. What we attribute it to is the fact that we did have successful promotions relative to what we've done with Mighty Wings. We've had some good products with McWraps. Those things we have. The challenge again that we have is in an industry, in an IEO industry that's been contracting a bit. Also as spending has kind of split, we call it a bifurcation of spending, what we've seen is we've seen those customers into the middle to moderate ends, middle to low ends rather, are a little bit more stressed from a discretionary spending perspective. That part's a bit of a weight. At the same time, as you can see from those comp sales gaps, we still have offers that are appealing to consumers.
Next question is R.J. Hottovy from Morningstar.
Yeah, thanks. Appreciate the color on the fourth quarter margins and your expectations that restaurant margin pressures will be similar to the first quarter. I suspect that the magnitude of the different line items will be different. Could you elaborate where the different variations from the first quarter might be on the different food, labor, and occupancy line items? Any color here would be appreciated.
RJ, it's Pete. At this point, we're not going to get into that level of detail on our outlook. We really were just trying in this environment where the general expectation was that we would improve as these comparisons ease. We wanted to give some directional perspective on where we thought the numbers would settle out. Obviously, in January, we'll get into a lot of the details on what drove the actual.
The one item I will mention, though, as we move throughout the year, the commodity cost pressure actually is a little bit greater in the fourth quarter relative to the first quarter, and that's just really more a factor of specifically some of the proteins that were a little more benign early in the year and us having hedges in place, which actually protect our grain costs throughout the year and really don't allow us to participate in sharp declines when they do happen, yet over time, provide us that predictability and stability.
Next question is from Andy Barish from Jefferies.
Hey, guys. Thanks. It looks like even with maybe some pushback on the new unit opening front, it's still going to be a heavy fourth quarter opening schedule versus last year. I know oftentimes it's back-end weighted, is that factoring into some of the margin discussion as well here?
No, Andy, it actually isn't. I haven't looked market by market, the fourth quarter new restaurant openings aren't dramatically different than we see traditionally year after year. In fact, the new store drag, if you will, the new store impact on margins in China and APMEA has actually sequentially gotten a little bit better. There's nothing in those opening numbers that is adding to the pressure in the fourth quarter.
We're going to take our last question from Mitch Speiser from Buckingham Research. For those of you that we didn't get to, please feel free to call IR.
Great. Thanks very much. Just one final question on the margin outlook, I know, Pete, it's a global margin outlook. In particular, just in the U.S., you did take some incremental pricing. You did give us some pieces of the cost outlook. I was just wondering if the weaker margin outlook is due to maybe the chicken wing costs or just a little bit of increased discounting versus prior quarters, if those are issues in the overall margin outlook but as it relates to the U.S.
Mitch, they're not really. As I said, in the U.S., the commodities, the chicken, beef, and actually our new bacon are the three biggest impacts on commodity costs vis-à-vis the first quarter, partly offset by some of the lower grain costs. It's really, as I mentioned in one of the earlier answers, the biggest change from where we are in the third quarter is really being driven by Europe in terms of the global margin, and that was due to some of the more unusual or one-time kind of items that led to the increase in their third quarter margin.
Okay. We're out of time, I'm going to turn it over to Don with the final closing thoughts.
Everyone, once again, thanks for joining us this morning. As we wrap up the call today, I just want to reiterate our commitment to balancing thoughtful and strategic decisions for the long term with informed and decisive actions that we must take within our markets to continue to actively adjust the plans to strengthen our connection with customers and also to position ourselves to grow the business profitably. We balance both of those things together. I'm confident in our ability to deliver long-term growth for the system and for our shareholders as we continue to optimize our menu, as we look for additional ways to strengthen and modernize the customer experience, and as we broaden accessibility around the world within the framework of our Plan to Win. Thanks again, and have a great day.