Wisconsin Public Television University Place Entrepreneurship in Society  Jim Carras Entrepreneurial Thinking in Retail Design  September 28, 2011 UP639   cc >> Jeanan Yasiri: I'd like to thank our partners in supporting this course. The UW Office of Corporate Relations, the UW College of Engineering for their technical support, and financial support which is provided by the Ewing Marion Kauffman Foundation, which is committed to advancing academic education and entrepreneurship. Additionally, we'd like to thank our media partners, Wisconsin Public Television and their University Place crew for taping today's lecture. I'm quite pleased to introduce Jim Carras, our special guest today. Jim is McDonald's USA Senior Vice-President of US Restaurant Development. His responsibilities include leading the areas of construction, real estate, training, special venues and McDonald's Restaurant Design Group. Specifically, he's charged with setting long-term development strategy and supporting execution of new restaurant development, rebuild, relocation and remodel plans, which involves reviewing and setting long-term development strategy, revising policies, capital allocation and significant building design strategy. He has been with McDonald's for 22 years, starting at the entry level real estate coordinator position and advancing through a variety of departments, eventually being promoted to Vice-President, U.S. Restaurant Development. He is a graduate of Arizona State University where he holds a bachelor's degree in quantitative business analysis, or statistics. As we discuss mature organizations in this course and the need for them to embrace entrepreneurial values, I asked Jim to come and share with us how that translates in the world of location and redesign with McDonald's USA. 

Please join me in welcoming Jim Carras. [applause] >> Jim Carras: Thank you and as I told the last group, my second time now to University of Wisconsin, this one is going to end much happier than my first time, was a year ago, when Arizona State was playing the Wisconsin football team, and we lost 20-19. We missed an extra point. We missed a field goal. We had a pass interference in the end zone. But I don't hold a grudge. Wisconsin had a great year. And, hey, maybe you'll be in the national championship this year. We're hoping to get to the Rose Bowl. Maybe we'll see you there. 

But love the campus, love everything I've seen so far. And it's a great opportunity to share a little bit of the McDonald's story, and a little bit about how we're doing business and what kind of the daunting task we have in front of us to rebrand our restaurant. So I'm going to do a little bit of that. Jeanan went over a little bit of my background. When I graduated from ASU with a degree in statistics, I wasn't sure where I was going with that. I knew pretty quickly that I wasn't going to be an actuary in the insurance industry, which is where a lot of statistics degrees go, just a little too behind the desk for me. I got into an entry level job with a real estate developer, learned a lot. Two years later, I was laid off. I applied and I got the entry level job McDonald's, at the level we call real estate coordinator. That is a position that takes the real estate deals and kind of funnels them through to completion to where we actually open the restaurant. 

Moved up from there and became a real estate rep where I was a deal maker, and then I became a real estate manager, where I actually managed the group of deal makers. I'm in Phoenix at this time. This is in the '90s. And a couple things I would share with you. One is, my first big career decision really had to be in 1999, where I had an opportunity to be promoted, but to move to L.A. I'd be in Phoenix for 19 years at that point. I grew up in Chicago. It's 1999, and it's L.A., and I'm thinking, cost of living, traffic, floods, riots, you know, all of L.A., because I had never lived there. I had to make a big decision. I had a young daughter at that time. 

But we made the move. It was not only a great career move, but it was also a great family move. So now at any given time, my family wants to get back to California, because now we're living in Chicago. So, loved it. And then in 2004, my second big career move. When you work for a corporation, a retailer like McDonald's, we have every discipline you can think of, from marketing to supply chain, to real estate, to operations, to construction. So I had a broad interest in the business. I was always curious about the restaurants. I had never worked in them. So I was allowed to be part of an accelerated operations program, and I went into the stores and I actually started-- you know, I did french fries, I did grill, I cleaned the bathrooms, all on an accelerated basis so I could learn the restaurant. 

Then I actually managed a restaurant for three months in the summer, the scariest three months of my life. Then I got pulled out, I got an opportunity to lead our restaurant development efforts and come back to Chicago. Part of the reason I tell you the story, is as you get into your careers, your willingness and ability and passion to switch gears a little bit, move physically or move functionally is really, really important to career growth. Not to say you have to do that. You might love what you do and just do it for 40 years and be real happy. But within our organization, I would not have gotten the opportunity to be an officer of the company had I not made that move into the operations field and learned about the restaurant. So a little bit about my career path and how it's kind of played out. With that, I think I'll get right into where we're at with McDonald's. I'm going to give you a little bit of an overview. We've had a fantastic run since 2003. 

Going into 2003, we've kind of lost our way. We were still number one in the industry, but we had been struggling. Sales had been up and down. We were opening a lot of restaurants. And as we say, we had taken our eyes off the fries, and we weren't running very well. We weren't reinvesting in our restaurants. We were trying to keep up with, on the corporate side, we were trying to keep up with the growth rates of the dot.coms and technology companies. So all of a sudden, we bought Boston Market. We bought into Chipotle's. We bought a pizza brand out of Ohio. 

Be bought Fazoli's Italian food, and a couple others. We said, okay, we're going to diversify, because yeah, McDonald's still has a lot of growth, but we've got to do some other things to really grow. Well, while those companies, we did some good things, it really took our eye off of things. So, slowly but surely, we have divested ourselves of those partner brands, all of it for the right reasons or not. We look back at Chipotle's and say, hmm, did we screw up on that one? So what we did with Chipotle's is we made it an initial public offering, and they went public on their own and we made a lot of money one time by doing that. But Chipotle's as you know right now is doing fantastic. As I asked my last group, how many people in the last month have been to Chipotle's by a show of hands. You can see. So we made the decision as a company. And still it's probably still the right decision. 

They're growing by leaps and bounds. They've got from an average restaurant volume from about $1.2 million to $1.9 million in about five years. They have phenomenal growth opportunity, and they've developed a brand that is resonating with a lot of people. But for us we still have a whole lot of internal growth. We have growth to do in China, India, Russia, Poland, Brazil and other countries. We have a lot of growth within the United States, both by building restaurants and by making our restaurants better. So it got us refocused, and we've had a great run since then. So I'll share a little bit with you of what's caused it and what we're doing going forward. So really most of it revolves around menu, and I'll speak to that in a second. The people side, people both in the corporate office and at the restaurants, at the restaurants it's about making sure people are valued, making sure they're getting healthcare plans available to them, making sure that they have promotional opportunities within the restaurants. 

And then on the technology side, mostly at the restaurants as well. The example I will give you is if you went to McDonald's two years ago and you ordered, and you maybe had, take the cheese off and give me a nonfat latte and apple dippers instead of french fries on the side, you'd watch that person on the screen, and they'd be pressing like crazy. What they were doing is going from screen to screen, because we didn't have a platform that was nimble enough for them to handle the custom order that the customer wants and that we want to provide. So the big thing we've done in the last two years is we've changed to a new platform where that order that I just described might have moved them to 13 different screens at any given time. That same order that I described now would be on two screens, and in a much more user-friendly format, much easier for our folks to learn that are new. So that's a big part of our technology platform. The other part of it is having a platform that then can be ready for the future. So when you think about things like mobile ordering, the ability to order on your iPhone and then come in, and flash and do the bar code, the ability to pay on a mobile device, all those things are part of getting to the right technology platform that we needed to get to, and we're just arriving there now. Then, restaurant development or what we call place, and not just growing new restaurants, but rebranding our existing base. And I'll talk about that later on. 

So with menu, McCafe, which I hope people are familiar with. It's the brand halo we have around our beverages. It started with the need to fix our existing coffee, which we did about five years ago. We had to get coffee credibility with the coffee customer, so we improved it. We had huge sales increases on coffee. Then we went into the McCafe line, the lattes, cappuccinos, mochas, knowing that that would be kind of a balanced strategy that that's kind of your winter drink, where it's very seasonal in the winter. Then in the summer, we started working on the whole smoothie and frappe lineup. Those have far exceeded our expectations. Now we've got this balanced group of beverages on the menu so that we're not just a place for fountain drinks. And now beverages have become more than 20% of our business. 

And when you think of the convenience that we offer, our locations, our drive-thrus, you can see that even if maybe you like one of our competitors' products a little better, if we're the person that's on the way to where you're going, you'll at least feel like, you know what, the McDonald's smoothies is good. I think it's better than the others, but I'm prejudiced. You'll still go through and get a smoothie from us or a cappuccino or latte. So big on beverages. We did a lot with chicken. We now sell almost as much chicken as we sell burgers. We sell more chicken than anybody else in the U.S., including KFC. So we've become big in chicken, everything from chicken nuggets to grilled chicken on your salad, to grilled chicken snack wraps, or crispy chicken snack wraps, a lot of chicken variety on our menu. The reason we did that was the trends on chicken were going up significantly versus the trends on beef and pork in the U.S. So we knew we needed to play more in that arena. 

It's worked very effectively for us. That's a little bit about that menu. I've talked about that, the beverages. The other part is the convenience piece, continuing to elevate our drive-thru experience and make it better and better. And I'll talk about that in the remodel program as well. And then, just menu choice, balance and choice. So things like parfaits, and salads, and oatmeal, and things that we never had before, but that play to a customer who wants more variety when they visit us, or maybe are not visiting us at all, and will come and at least try something that may be more on the healthier side, more on the nutritional side. So we're continuing to balance that, and it's been a big part of our success going from where we were to where we've been. So here's a little picture of it with our competitors. On the bottom, you've got the average volumes of us and our competitors. 

You can see that in 2002, we were the leader at $1.6 million per restaurant, was our annual sales volume. But the other guys were in the neighborhood. They were at $1.4 million, $1.3 million. Again, we weren't doing as well back then as we're doing now. Fast forward to 2010, and this is what it looks like. We are at $2.5 million. These other guys are still down in the $1.2 million to $1.4 million per restaurant range. The ability to then At that volume for our franchisees, because 85% of our stores are franchisee-run, to reinvest in the restaurant, to offer good value, and just run a better operation is much stronger at higher volumes. So we feel really good about that. But we have a lot of work to do, whether it relates to our facilities or continuing to evolve our menu. 

So that's a little bit about the business. Certainly, we want to take any questions in Q&A, but we wanted to do two things today, Real Estate 101, which is what I call it, and then a little bit on what we're doing to reinvest in our facilities going forward. So we have a reputation for 50 years of 14,000 locations in the U.S. Of doing a pretty good job with real estate. There are a lot of retailers who say that wherever McDonald's goes, I want to follow them, because of the research we've put into it. We can certainly get better, but we've got a lot of tools and a lot of history in how we do things. I'm going to give you a little flavor as to how we grow, and we are now continuing to grow. I know it feels like McDonald's is everywhere, but we've got a lot of gaps in the market. We have to follow growth patterns around the country. So there's still a lot of growth to be done. 

So it's interesting. This quote from the New York Times, a guy named Michael Culp, "Although nearly $23 billion worth of Big Macs, Whoppers, and other hamburgers were sold in fast food outlets last year, there are signs that Americans are suffering from burger fatigue. After two decades, the burger chains have finally begun to reach their saturation point." This was Michael Culp. This was 1982. So in 1982 when he thought we had reached saturation, we had 4600 restaurants. And today, we have 14,000 restaurants. A lot of that goes to what I talked about with menu evolution, chicken, beverages, salads, and the ability to serve a variety of products, and not just be caught up in one line. But that shows kind of our growth rate over the last 30 years. And then here's what it looks like visually. Those are our McDonald's. 

So where you guys might see saturation, I see opportunity. There's still a lot of opportunity to grow. But that's kind of what it looks like and it's kind of daunting, but at the same time we've been around a while, and we've gotten pretty big. In the rest of the world, still have a lot of opportunity in areas like China, and Russia, and Brazil, and some of those other countries, so we still have great opportunity there as well. So the objectives on kind of this Real Estate 101 I'm talking about, understand our philosophy and how we look for real estate, how we develop our trade areas and where we expect our customer base to come from. We rate our locations and we've got have a system for doing that that is not rocket science, but is something that we've used for a long time. Understanding distance to K, and distance to K means basically the amount of visits we get from the person who lives a block away, versus the amount of visits we get from the person who lives a mile away and how that-- how that plays and how that's radically different from one to the other. And then comparable restaurant analysis, I would need about four hours to do this, but that's basically how we ultimately we do our sales volume forecast when we're going to open a new restaurant, so all of this plays into that. So from a philosophical standpoint what we've learned from studying thousands of restaurants over the years, is we know we're a convenience-driven business. 50% of our customers make their decision to eat at McDonald's while they're on the road. 

So it's not, you know-- It's not the I'm going to work, I've got to stop somewhere, where should I stop? Okay, McDonald's, maybe something else. It's the, I'm going home, I've got to pick up dinner, what am I going to have? I'm going to a doctor's appointment, whatever it might be. If 50% of their decisions are made while they're on the road, we have to be even that much more sensitive to how we choose our real estate and build our locations. If you're going to Walmart, you're probably not making that decision on the road. You probably made that decision, you know what, I got to go to Walmart on Saturday, because I've got to pick up a couple things. So their location and their decision-making is a little different, and they're what we call a destination, so they have to choose good real estate as well, but they don't have to be as detailed about it as we do. The majority of our customers are coming from home, work and shopping. So what does that mean? So we interview thousands of customers in the stores. Where did you come from? Where you going to? I came from home. Okay, where do you live? We put a dot on the map. 

Where are you going to? I'm going shopping. We put that dot on the map. We do that hundreds of times over, and it gives us the analytical detail we need to make really good decisions about where to locate, and what that volume projection might be, because the patterns tend to repeat themselves. And then basically easy to find, easy to use, because we could be easy to find, but if we're not easy to use, if you can't get in and out of that property easily, or if you can't make a left out, or if you can't make a right out, you may not come back, because, again, convenience-driven business. You may like us, but you may not like us that much. You might want to go to the next competitor that's easier to get in, easier to get out. It's the kind of stuff you guys recognize from how you travel every day. The larger factors, market conditions, what are the demographics like, what's the growth rate in the area, where are homes being built, what's going on with shopping, all that type of stuff that you think would be intuitive. The quality of the real estate itself that I'll talk about. And then for us, because we have so many locations, where our existing locations are is a key factor. 

We can't say look at that shopping center, that's cool, let's build a store. If we've got another one a half mile away, we probably can't do it. We have to be a little bit more careful, whereas if you take a start-up, or a young company like Chipotle's or Panera Bread, they can be a lot more aggressive in going to those hot spots than we can, because they don't have as big a store base. Over time, they're going to have the same issue, because when you open that restaurant, you're cannibalizing sales at that restaurant, and that may be a different franchisee. There's a lot of ramifications that come into play when you build too close to another restaurant. Store density. Basically the way we measure it is number of restaurants per 100,000 people. So today, we have four restaurants per 100,000 people. Or one for every 25,000 people. So then we look at that and say, okay, that's the high level. 

Then we break it down by region of the country, then by market, and then by what we call mini market, very small mini markets. So we look at it and say, okay, so are we reaching saturation in any given mini market? For those in hear who have any statistics background, this is a regression analysis. I can't put the numbers on because they're proprietary, but on the bottom is the number of restaurants that we have in a given mini market. We have 2300 mini markets around the country. So low end is on your left and high end is on your right. If we were reaching a saturation point, that regression line, the line that's going through the middle of it, would be dropping off. And the reason that is, is on your left-hand side is customer counts per person. If we're building too many restaurants, there is a drop-off in the customer counts per person and then we know we've built too much. I don't want to have you try and understand this without really understanding some of the backup behind it, but the point is that we know that even as we build more restaurants, if we build them correctly, and in the right location, we can continue to grow effectively. The dots below the line are where we have issues. 

So, if you're below the regression line significantly, we have to go into that market and say, wait a second, why are we not getting the same number of customer counts for the same number of restaurants? If we have four restaurants per 100,000 people and one market is getting 60 customer visits per year per person, and another market is getting 100, why? Is it the locations? Is it the facilities? Is it the operations? What is it? And then we go in and we study what we need to do in that marketplace, especially before we build new restaurants. So investigating the site, getting down to the detail of the site itself. We do drive times. So a lot of retailers do one mile, two mile, three mile radius is very easy, plug it into a computer. We're so convenience driven that we are at five minutes. It used to be three minutes, it's now five minutes. 75% of our business is coming in that five-minute window. So we can't count on three miles down the road there's a new Walmart and we're going to get business from it. We're not, not of any significant frequency. So that five minutes is critical. 

And then where the people are located within the five minutes is also critical, and I'll talk about that. So then you look at the quality of the trade area. So here's a full trade area. You can see kind of the arches in the middle. You've got residential backup. To the left of us what you see there, that parking lot is a shopping center, a large shopping center. Behind that down here is industrial and workers. Here you've got the nice mix of home, work and shopping, and we're in the heart of it. So you know as long as you've got a good piece of real estate, you've got a very dynamic trade area here and you should do very well. Here's a half moon trade area. 

So you've got everything on the right, but you're pretty limited on the left. You see that green area. So now you start asking questions. You say, okay, we might still be able to do the location. What's going to happen with that open space? Is it going to be homes? Is it never going to be anything? Is it a cemetery? They won't come to you. So what is it going to be? Cemeteries and golf courses are bad. Golf courses eat up a lot of land, don't have customers. So we have to make sure we understand what's happening in that area and make the right decision. We still may build here. There may be enough dynamics in the half moon to make it work, but you've got to be a lot more careful. 

Quarter moon, this is even worse, but we built a restaurant here and there's a reason. So the key for this one would be so you've got this quarter moon. You don't have a full trade area. You've got all that backup on the upper right quadrant. If those people are funneling out toward you every day, if that's the direction of where they're going to home, work and shop, you might be okay. You might be able to open a restaurant here and be okay, depending on what's going to happen with the other quadrants. Will they be built out. If they're going the other direction, you've got a restaurant you're going to close in a couple years. You've got to be in their way. You've got to be convenient, and easy to find, easy to use. 

Three-quarter, another one, again, knowing what's going on with the other part of the trade area, making sure you've got enough going on within that three-quarters of a trade area to get after it, get enough volume. Then barriers are really important. While the trade area here might be pretty good on the right side, if you will, obviously you don't have boats coming over to get to you from across that river. So the barriers are critically important to your decision, because you know you've limited your trade area at that point and do you have enough volume to drive the business. So then when you get to that trade area, you've made the decision you're going to be in the trade area, you've got enough people, enough homes, work, shops, now you get to the quality of the real estate. And we rate them 1,000 ABC, 1,000% of course being the best, can't be oppositioned, great location. Then A being one step below, B and C. So 1,000%, so here's an example of what it might look like. We're on the corner. It's two high-traffic intersections. 

We're on the corner. We've got access through the shopping center and our own access, and we can't be oppositioned by a competitor. They can't get a better spot than we can. We call that 1,000%. Now here's what we might call an A location. You're still on the corner, but the better corner is likely that one to the left, where the apartments or condos are, whatever that is, because if your high traffic count is that other street, if that's your high traffic count, you want to be on the far corner as they're coming through the intersection. Why do you want to be on the far corner? When I say far corner, I mean you come through the intersection, then you come into the restaurant. If you're on the near corner, and there's high traffic, what happens? You get backed up, and you're waiting for red lights to change. Now, while you're waiting, you can't get into the restaurant. You're saying, you know what, I don't want to wait to get in, and I don't want to wait to get back out. 

So then, when you're in the far corner, you've crossed the light and now that light serves as your blocker, if you will. So now you've finished your visit, first of all, you got in, you made the right-hand turn, you got in. Now you want to leave. Light goes red, you've got an open window to get out. So near corner, far corner, kind of confusing. But far corner is what we aim for, because we want to make it easy for the customer to get in and out. And then B location, so now your intersection is way over there on the right, 16th Avenue and 48th, look how far in we are. We're probably 1,000 feet off the corner. So, we've completely lost any visibility to 16th Avenue, and we're just picking up traffic off of 48th. We're hidden behind this shopping center building. 

So that's a B location. Again, do we build them? Yeah, but rarely. Have we built a lot of them in the past? Yes. And then, you know, likely we'll will look to relocate this restaurant and get to a better position at some point in the future. But clearly, we can be oppositioned by our competitors in many locations here. Then, C location, it's kind of hard to tell from this visual, but, again, buried down, middle of the block. In this instance, if you know the Chicago area, York Road is the lower traffic count, so we're on the wrong street, and we're buried in the middle of a block. So two negatives, C location, a location that we'll typically again try and relocate if we can to get to a better area. So I thought I'd illustrate it just a little bit further. Let me see if I can get this right. 

It takes a second. So this part will be a little interactive. Again, I went through it in about two minutes, so I don't expect you guys to have the answers, but I've got an intersection here. Those of you who have been in defensive driving class lately, kind of what I remember. So on kind of the north/south, that street carries 15,000 cars. On the east/west, that street carries 30,000 cars. The arrows, these arrows here, represent going westbound, and you would make a right-hand turn in and a right-hand turn out. Then the arrows obviously are the opposite going the other direction. So if I've given a good enough explanation, remembering far corner/near corner, remembering high traffic count, which of those properties would be the 1,000% location? Q. Excellent! Good. Q is the answer, because your higher traffic count is what you want to maximize, and you want to maximize it with right in and right out traffic, and you want to do it on the far corner. 

Now, would you not do X? No, but you just need to know that with X, a competitor might take Q and have a better real estate position. It would affect your volume projection for the restaurant because you did X instead of Q. I'll change it a little bit. Let's just say a Target got built here, and we've got another access point here, another access point here, another access point here. So now you've got this Target. So you got the benefit of the business that Target brings, and you've got these multiple access points. Do we now think that maybe X is the 1,000% location? Anybody? Take that risk?  Nobody, huh? I would argue, and it's art, not science, by the way. There's no set rule. I would rather have X, because the multiple access points, allowing customers to get in and out how they want to, and the benefit of being on top of Target and not across the street from Target, would all of a sudden make that a better property. It's kind of a toss-up, but I would go with X. 

So those are the type of things that are part of the consideration. Now, we have another consideration at McDonald's, and that is if we have a restaurant down the block, say to the east of X, that's on that same side of the street, and already picking up traffic that's maybe a mile or two down the road, now our focus may be to go to the south side, and go for T or for V. Because if we've already got a traffic pattern that's picking up the right in, right out on one side, what we call shoelace. It's, let's shoelace it on the other side, and pick up a different traffic pattern. because generally, if you're going to a quick service restaurant, you're not making a left turn unless you have to. So we've got to make sure our right turns are critically important, good access, good visibility, easy to get in and out. That makes a decision as well. Breakfast side and dinner side is another factor. So if we're not on the breakfast side, customers who are coming to us for breakfast only have a little time. So we want to be breakfast side in our business. 

Oil companies, gas stations, want to be dinner side, because people typically buy their gas not in the morning, but in the evening. So there's different nuances that come into play and different things that we look at in making that final decision. Now, the tricky part of it is all those little Q, X, T, V, those properties are not just sitting there available for you, so you don't always have that choice. But when you do, those are the decisions you make. I talked about easy to find, easy to use, location, visibility. Where does the building sit on the property, where's the signage, what kind of signage are you getting? Nowadays, cities are tougher and tougher on how much signage you can have, and where you can place it. Access, getting in, getting out, where is it, how is it located, is it convenient, how does it get into the drive-thru? Little things have a big effect on our business. And then the drive-thru layout, we've done a lot of work with drive-thru layout, and will continue to do so going forward, including the double lane side-by-side drive-thru. So, now a little bit on distance decay, and hopefully this will make sense, too. We've got kind of this battleship board here. 

The McDonald's is in the middle of this board. The percent of our total visits will be on the right-hand side. This is an eight by eight square mile grid, and I'm going to be adding to it. So now, the height of the bar represents the trip pattern visits, so the percent of people who said I came from "here," when we interviewed them, and this is hundreds of restaurants into a sample. So more than 10% of the visits are coming from right there, right on top of the restaurant, not a big surprise. Now take it a step further. So there's that bar and there's all the other bars around it. This is actually a specific location, I misspoke earlier. It's a specific location. You can see, here's the obvious thing. 

So you've got a river, no customers coming from the other side of the river, so that makes sense. You can see though, the height of the bar represents the amount of business we're getting from those customers. And you can see how the bars taper off, later on. I've been on rides with real estate folks that are presenting a new location and they talk about how wonderful the trade area is, and we'll be driving, and in that first quarter-mile or half-mile, there's no people. It's farmland, it's golf course, it's whatever. And everybody's on the outskirts of the trade area. That's where you say timeout, do we have enough, are we going to get enough frequency from the people that are on the outskirts versus the people we would have had right on top of the restaurant? That's where we study it in great detail. Here is a very typical frequency of visits. So within a quarter mile, those customers, 5.7 visits per month. You go out to one mile, just a mile, one visit per month. 

They're visiting you five times more within a quarter mile than they are at a mile. At two miles, you're getting them, you know, ten times more versus a quarter-mile, quarter-mile versus two miles. So distance to K, or the drop-off in our customers' willingness to come to us depending where they're at, some of this has to do with the number of restaurants we have. If there's another restaurant two miles away, and it's closer, there's no reason to backtrack. But it really is a unique aspect of our real estate decision-making that doesn't necessarily apply to a Walmart, a Target, or Kohls. It does, but not to this extreme, very important to our decision making. Then, here's what it looks like in all of our restaurants. One mile, 60% of our customers are coming within a mile. 80% are coming within two miles. Then if you look at it from, if you break it down, so urban sites, suburban sites, small towns. 

In an urban area, it stands to reason you're going to get even more visits within two miles than you are in a small town. So 90% of our visits within two miles, 55% in small town. Only game in town, you're going to go a little further. You're used to driving a little bit further to get to wherever you want to go and it changes the dynamic a little bit. But I think, what I hope it helps illustrate is this is why we still believe we have a lot of growth opportunity, because we are not where everybody is. We're not on every high-traffic corridor. We have people traveling long distances to get to us for a lot of our locations. So it allows us to continue to be bullish on how we grow. A little bit about the volume, volume estimating. So if any of you have ever seen an appraisal, or reviewed an appraisal on a house, what they'll do, is they'll take all the characteristics of the house and compare it to three other houses that have sold recently. 

So if you have a swimming pool, it's an extra ten grand, if you have a fireplace, it's five grand, if you have four bedrooms, add 20, versus three, so that kind of stuff. So they adjust up and down. We do the same thing in projecting our volume. So we take a new location, and we take all the information, and we find three similar locations, or four, or five, whatever the number is, and we compare all that stuff. So we compare number of people in the trade area. We compare their distance to K, how close they are. We compare shopping, what do you have, do you have a Target and a Jewel, or do you have nothing? We compare work, so we compare do you have 2,000 employees, do you have 1,000 employees? And ultimately that breakdown, those pluses and minuses come to a volume projection that we use to make the financial decision whether to move forward or not. Here's some of the characteristics we look at in making the decision. Demographics are a big part of it. So if you've got a trade area that has a median income of $20,000 or less, you're kind of in a poverty area, obviously they can't visit you as much. 

If you've got a trade area that has 80% Hispanic or 80% African-American, we have different frequency that we get from a Hispanic customer versus African-American, versus Caucasian, and that gets built into the model. All of that is data we put in, in addition to what we're going to do, how we're going to build the location, how big is the building, what the signage looks like, and we put factors on all of that. So I'll leave the "Real Estate 101" piece. Yeah, let me go to the next one so we can move through and then do Q&A. So, long-term reinvestment strategy, I talked about our need to rebrand our system, through relocations, rebuilds and remodels of our restaurants. We've got a long way to go, but we want to get to the new look of McDonald's as quickly as we can. It's probably going to be, our goal is over the next five years to have 85% of our restaurants look new and different, as I'm going to show you in a second. I'm going to jump over this one and go to the next one. So in our remodel program, we're going to remodel probably 1,000 restaurants a year, we had to make decisions on what is the scope of work going to look like that we're going to require upon our franchisees. Before we remodel a restaurant, we've got to make sure it's running right, so you get to things like electrical, water line, sewer lines, HVAC units, what does the restroom look like. 

They've got to do the greens fees if they're going to do the remodel. So we have that discussion. Then we look at capacity. Remember, our sales have gone from $1.6 million to $2.5 million. Many of our stores are busting at the seams, both in the back of the house, in the drive-thru and in the lobby. So what do we need to do to make sure we've got the right capacity to serve the customer base that we have in those areas? Let me go back. So, drive-thru being a key part of this. So, our drive-thru business is 65%. A lot of stores are 70%-75%. The side by side, or two at a time order taking, has become a big success for us, as you might imagine, like you would at a bank. 

You get one person at that window, and maybe that order takes three or four minutes, they've backed up a whole line, especially if it's 12:00-1:00, or 7:00-8:00 in the morning. The ability to have two lines go through allows us to get more orders into the kitchen and get more people through quicker. We're making it a key part of our future. New restaurants and our remodels we're adding a second drive-thru lane whenever we can. Then, branding, so the look and feel of our interior and exterior of our restaurants is really kind of a linchpin of what we're doing. As we try and continue to evolve our menu, we always say we can't sell a $4 sandwich in a $2 lobby. We've got work to do. I visited a couple restaurants in the area yesterday, and they're not there yet. They haven't been remodeled. But when we get there, it's a big transformation that the customers appreciate. 

So here's a view of one. This used to be, I don't have a before picture, but this is an example of where we have a large indoor play place. It used to be just a cube, and all you could see was the play place. But you can see, on the left, you can see kind of what we call our brand wall, with the stacked stone and the arch. You can see the yellow facade band across the middle, which breaks up the mass of the building. And then the louvers, as well, above the facade. The louvers break up the mass of the building, help with energy efficiency. Then we've matched the facade on the entry door there, on the right, so we've matched that yellow facade as the welcome to the restaurant. There's one example of it. I'll show you a couple others. 

Here's Butte, Montana. It's snowing. That's what it looked like, and here's what it looks like today. Now you get a look at a little bit of the more typical restaurant, without the indoor playland. The awning across the front, again, the stacked stone, what we call hardy plank material on the side, which is very indigenous to Montana and their architecture. But what you'll see in all the restaurants is what we call our roof cap element at the top, or a flying french fry or a swoosh, people call it many things. It's become the brand icon of our architecture now. We have customers that we researched who say that's going to be your next golden arch, is that kind of flying eyebrow across the top. So we have that on the front, we have it on the sides as well in most locations, but it's all part of kind of rebranding our look and getting away from the past. Here's another one. 

I think there's a restaurant behind that playland, but I'm not sure. But this is the kind of thing we're getting away from. If you didn't have kids that wanted to play in that play area and you're driving by this McDonald's, are you thinking about stopping? Probably not. It just doesn't, it represents the old McDonald's. And here's what it looks like today. So we changed the look. We've got the roof cap element there, the awnings, the outdoor seating that's comfortable and inviting to people. So another example of how it changes dramatically. Here's another one, Independence, Missouri, very typical-looking McDonald's, with what we call the double mansard roof, that probably doesn't help you, but the roof and the roof up there, the two roof lines that kind of flank each other. We're getting away from that. 

It served us well for a long time, but now we've moved to the new architecture. And again and here's what this one looks like with the brand wall in front, the trellises on the side, again, a different look and feel. And Gallup, New Mexico, what do you know, it's snowing again. But that's the old McDonald's. We're excited, we're even changing weather patterns with the remodel program! It got sunny all of a sudden. But look at the different look. We're going to have different colors on the building itself to represent maybe the geography, or maybe to match a shopping center, so we have flexibility. As long as there's contrast between the side of the building and the front of the building. So you see the contrast on the side. You have kind of that lighter brown in the front. 

You've got that brown tile that looks really sharp. Then on the top there's also, on the top there's a corrugated metal wrap on the top of the building that also kind of frames it in a modern way. So these are the examples of how we're changing. And they're not all going to look exactly the same. But what you will see is kind of the roof cap gone, the yellow branding and a modern feel to the exterior. So now we go to the interiors. Here's a restaurant. We still have too many of these out there. They're going away slowly, but surely. But the core drilled seating, very fast food of the '90s, the pictures from Costco, the artificial plants, the floor tile looks cafeteria. 

The ceiling looks like a cafeteria. We've got to get away from this. This is what we used to look like, and what we're trying to improve upon. So here's an example of what we do look like in some of the new restaurants in some of the remodels. So you get a little a different feel, different types of seating, comfortable seating, different lighting, the drum stool to pull up to a table. In the middle there, is an acrylic feature, this is small town Missouri. You see kind of a clock tower and some buildings. That's a modern way to represent the local nature of the town, so those are actual pictures from the town, but instead of putting up pictures, we're doing it in more of a modern design type of way, so it's not in your face, well, here's a picture of the town that we all know we live in. We're not just going to put up framed pictures of jerseys of football players. Can we do it in a more modern and exciting way, where it's a little bit more this century and not the way people do things in the past. 

Here's another version of that. So the flat screen, you'll see that in most of our restaurants already, but even going forward. The ability to sit down and watch CNN or ESPN, or whatever, might be going on in that restaurant and sit at barstool type seating, but also be able to sit at a booth if you want, so varied seating is a big part of the equation. Note the ceiling treatment, the acoustical ceiling has a more modern look to it. It's not just a simple flat ceiling. There's break-up in the ceiling, as well. If you look at the back, you've got our McCafe area where we make the smoothies, espressos and cappuccinos, and note the merchandising of the coffee beans, merchandising our quality, merchandising that we've got other designs that reference and show apples and grapes, and some of the things that we do in our restaurants, just representing our brand, and not just what our individual franchisee decided to put in a restaurant. That's another big part of it. Here's another one with clean lines in Lake City, Florida. You've got that communal table, where people can sit at, but then you can go to the booths, a different look and feel. 

Then again, the communal table, the lighting. This is a little brighter. The acrylic treatments on both the wall and on the window. So I think that gives you a little flavor of how things are changing. We're continuing to evolve these designs and get consumer research on them. But that's where we're headed. It's going to take a few years to get to all the restaurants, but in the end, we feel like that gets us into a better place to match up to what we're doing, to evolve our menu and our brand, and our brand messaging. The restaurants have to match the experience that our customers expect. So with that, we can do questions. >> Thank you, Jim, very much. 

The students know that they just wave me down, and I hand the mic over to them. I'm looking over the group to see who wants to ask a question first. >> My name is Cora. I'm a marketing major. I just have a quick question. I'm definitely in favor of the redesign as far as interior goes, but I just was wondering in regard to some of your consumers who may be of lower income, or maybe not as comfortable with the modern designs, do you see that as being a risk when they come into this new setting? >> That's a great question. I don't know that lower income, per se, but I think what we're trying to do is make sure that every demographic we serve gets the benefit of the highest quality interior that we can provide, and doesn't get discriminated against. So we are promoting these designs. Where we are potentially, and where we are already having questions is-- So the group of seniors that come in for a cup of coffee and have been coming in for years, and saving the world inside the restaurant, and they don't want you to change anything. This is our booth. 

This is where we sit. Leave it alone. So we have had a little bit of backlash from older clientele that maybe don't like the color schemes we're bringing in, don't like that we changed how they can sit and where they can sit. But as long as we provide comfortable seating and a variety of choice within the restaurant, we feel like we're on the right track. But that's a great question, because there are people that don't want us to change. And we look at those restaurants and we say, you've got to be kidding me. We got to change these restaurants. There's no way we can't. We have the same question mark with some of our franchisees. Now, our franchisees have a couple different motivations. 

Some of them are a little hesitant to spend money. If they don't see the return on investment and the potential sales increase, or they don't believe in it, they're going to fight us, and they're going to say, well, my customer likes what I have. And it might be a smoke screen for, well, I'm not sure I want to invest with you right now. Or it's they legitimately feel like, and they know what their customers tell them, that I don't need to change it, or I don't need to change it that much. So, we're studying it very closely right now, because we want to make sure that any designs that we promote and we scale throughout the system do not have a backlash against us. A lot of research is being done on all the designs. >> Hi, I'm Terry. >> Hi. >> You've been talking a lot about your restaurants, but do you work with the Ronald McDonald's house at all, and do you, you know what I'm talking about, right? >> Of course, of course! >> Do you work on where you open those locations as well, or is it just strictly restaurants? >> Yeah, good question. We have 300 Ronald McDonald Houses around the world. 

And we add them from time to time. We expand them from time to time. It's kind of the linchpin of our charity, Ronald McDonald's charities. So, no, I do not work on them other than providing donations when they're coming up in my area. But if there's something specific or there's an area that you know of, or somebody knows of that they're wondering is there a plan for a Ronald McDonald House, by all means let me know and I will get to the right person and find out. But we continue to add them year to year and expand them. For those of that don't know, at a Ronald McDonald House, if somebody has a major illness, like a small child who might have cancer, and the family's got to be with them, they go to a nearby hospital, and they got to be with them for a month, and they can't afford a hotel or they can't get an apartment, or whatever. Ronald McDonald Houses are located near hospitals, especially children's hospitals, and for $10 a night, if you have it, even if don't have it, we won't charge you. For $10 a night, they can stay at the Ronald McDonald House. Meals are cooked by volunteers. 

So, literally, for $10 a night or even less, you can be near your child while they're going through treatment. That's the essence of the Ronald McDonald House. The other thing I really like that we're doing in today's healthcare environment, is we're expanding our Ronald McDonald Care Mobile program. These are actual big mobile units of doctors and nurses that come to communities, and provide basic check-ups, flu shots, whatever it is, and there's a notification done. It's usually in communities that's don't have the ability to get to the healthcare and get to the clinic, or whatever more lower-income communities. So that's something we do more and more of every day, too. >> Hi, my name's Natalie. You were talking about international business for a little bit, and you said that most of your changes occurred on the menu. I know that KFC changed their sides to include rice and egg drop soup in China. And I wonder if you did any altering of your menu. 

>> Yeah, every one of our menus in international markets has some alteration to it for the area. I was just in China for five days. They've got some unique items that you might expect. So yeah, we do that. Now, the interesting thing is in virtually every international market we operate in, it's still about the Big Mac, the fries, the Quarter Pounder, the drinks. But we do tailor the menu. You have to. The interesting thing with KFC-- I don't know if I mentioned this earlier, in China, they doubled our number of units, so China has always been very-- Chicken consumption has always been very high. KFC started before us, and moved quicker. They have about 3500 units today, and we have about 1700. 

We do as well as they do or better in the core markets, Shanghai, Beijing, and some of the bigger markets. They do better than us in more of the rural markets. It's become a huge part of KFC's growth strategy, because they're not doing very well in the United States. So it's an interesting dynamic. But when I was out there, I saw some great stuff that we're doing, and it does include unique menu. We've got beer in Germany, you know. So every place we go, there's a unique menu. We've got Spam in Hawaii, you know, it's something that people eat there regularly. So every place we go, we do that. >> Hi, I'm Maya. 

>> Hi. >> Okay, just to clarify, so McDonald's pays the cost of renovations, not the franchisee? >> Let me clarify, we split it. There's a formula, and it's kind of complicated. We partner with them. So the franchisee pays for certain things, and we pay for certain things. It ends up being, we constantly monitor it, but it ends up being a fair return for the franchisee and a fair return for us. Our franchise agreement technically says the franchisee pays for it. If we did that, the return on investment wouldn't work. So we do partner with them to renovate the restaurants. We partnered with them when we created the McCafe beverage sell inside the restaurant, because there was a big investment, too. 

So it's both of us. >> Okay, I could be wrong, but it does seem to me like certain renovations and expansions will increase the cost of franchising. Is there anything you guys are doing to specifically protect the franchisee? >> So, protecting the franchisees. In the previous presentation I did, I showed the fact that our credit rating and debt rating is so strong, because of who we are, and the fact that we have a history of stepping in to help franchisees who are struggling, allows our franchisees to get interest rates that are lower than anybody in the industry. The first part is, the strength of the system allows a franchisee either to borrow at all, and then when they do borrow, borrow at low interest rates. Then, anything we do, and this is the strength of our system, if a franchisee is struggling, either because something didn't work, the remodel didn't work, road construction in front of the restaurant, and they need help, we have a history of stepping in. So part of the success that we continue to have, and that we've had over the eight years, is every program we come up with, every menu addition is done in collaboration with our franchisees. That's not necessarily the case with some of our competitors, and I'll leave it at that. So we're very proud of that. Just last week, we had a combined meeting with all of our leadership franchisees, all of the leadership of McDonald's USA. 

If you were in that room, and you walked up to somebody and had a discussion, you wouldn't know whether you were talking to a franchisee or whether you were talking to somebody in the corporation, because we're in lockstep with what we're doing. We challenge each other and we disagree at times, but they're very excited about the remodel program. Part of it is, it's a great opportunity for them. Construction costs are low. Interest rates are super low. We're contributing. They've had a great run in their business. Depreciation laws are very favorable, which is important to small business owners. So we're kind of in what we think is a perfect storm. That's why we really want to take advantage and get our restaurants to where we should be. 

You know, our competitors will try and do some of the same, too. But all the more reason why we have to be ahead of it. >> Hi, my name's Martha. I was wondering, I think that you guys are doing a really good job in terms of like, with food products, like entering into the chicken realm, and the drinks are really great. But do you guys think you'll do anything with vegetarian options? >> We have. Every time we test, and you know, we've done it mainly with veggie burgers. Every time we test it, what happens is we promote it for a while, we get a little bit of take great from the given area, and then once we stop promoting it, people don't buy it. So we end up, and we've tried, and we'll probably try again. You know, every few years we try. Then when people don't buy it, we can't keep it on the menu. 

So, part of it is, vegetarians, generally, I don't want to generalize too much, they're not thinking about McDonald's as their choice. But that's why we go to salads. We go to parfaits. We got to oatmeal. And we go to other nutritional items, because when we do something purely vegetarian, like a veggie burger, people don't come to us for veggie burgers, when we've tried it. And we've tried it many times. In the future, I'll suspect we'll probably go there again, but I don't know when. That's not my area of expertise. >> Hi, my name's Lisa. I was wondering, I know you're trying to do all the renovations quickly, so how is it like to put together a team to do all the renovations in a short period of time? >> Yeah, [sighs], you're looking at my life. 

It's been, it's been-- Because we're doing the renovations, and we're actually accelerating our new store growth at the same time. So we have 22 offices around the country. They all have real estate and construction teams. We provide them the number of people they need to meet their workload, or their expected workload. So we've been adding to that. But we also have to be disciplined about how many people we add to the organization. One thing is making sure the teams are large enough. And two, is we then hire outside companies to support us. There are companies that do remodels and renovations all day long, it's all they do. So we hire them. 

We don't hire their people on staff. But we hire their company to help support our folks, to help. So the architects, the consultants, the planning folks that go in front of design review boards. They support our folks who are typically shoulder to shoulder with the franchisees making decisions. But it's tough. This year has been very difficult, because we ramped up significantly and it had a fall-off effect of not getting done as quickly as we would've liked. So, part of my job is making sure that we've got the capital and the resources in the right place, and working with our teams to determine, okay, how do we help you get what we all want to get done without running yourself into the ground, and having too many delays, losing the quality of the construction and what needs to be done. I'll report back in a year and see how we did, because next year is going to be better than this year. I'll leave it at that. >> I'm going to close with just one last question. 

One of the students asked about menu options internationally that might be different, especially add-ons, and such. But I'm curious, is your experience as you're doing this redesign here in the US, is it different internationally? What would you say are a couple of the bigger points from the redesign standpoint? >> Good question. Some of the architectural, and I don't have any pictures, but some of the look and feel of the buildings, like in Australia versus France are a little bit different than what we're doing. They've got their own different architectural style. The interiors have similar features. But again, just slightly different designs. What we learned from Australia, we used Australia as kind of a benchmark. Australian McDonald's were struggling in the early 2000s. They had 800 McDonald's. They were able to remodel all of their restaurants in about a four year period, and they all have a new look and feel. 

What we learned then was, when they completed their remodels in 2007, every menu addition they do, everything they promote, they get a better sales lift than the rest of the world does. What we've determined, both in doing the research and just looking at the analytics of it is, the customers give us a lot more credit for everything we're trying to do in a market where we've changed the brand perception. They give it to us on the sales line. They give it to us in their, kind of brand attributes when we survey people, how do you feel about McDonald's and how they're doing, that kind of thing. So we're all learning from Australia. We're following their lead. I wish I could do 12,000 stores as quickly as they did 800 stores. But we'll get there. As we get there, customers give us credit for giving back to the community, investing in the community, providing a better brand, offering a better brand experience. You know, ultimately, we've got to continue to get better at everything we do. 

>> Change is always a fascinating thing to study. Jim Carras, I know the students join me in thanking you for helping us understand the change with McDonald's. [applause] >> Thank you.