Brief — McDonald's

418342----150 16-07-99/5F MCDONALD'S FRANCE / SEBOL, B&O, LES PINS, COLLORAF; JUDGMENT OF THE PARIS COURT OF APPEAL OF 9 DECEMBER 1998 RG: 1998.14119 BRIEF NO. 2 TO THE EXPERTS JEAN-LUC DUMONT and ALAIN MARTIN This brief aims to answer the questions that the Experts were kind enough to put in their report of the meeting of 11 May. It is produced subject to the two provisions already presented as observations in the preamble to brief no. 1: • to answer only the questions of the Experts and of the Court, without burdening the exchanges by replying to the allegations by which the appellants attempt to rewrite History by presenting reality erroneously (thus, submission no. 3 begins with the incantation making Mr COLLORAFI "one of the best managers of the network", an incantation repeated on page 11 of Mr COLLORAFI's note of 2 June, whereas the file establishes that Mr COLLORAFI, often in difficulty paying the fees owed to MCDONALD'S, obtained numerous loans from MCDONALD'S, see item 35 of the pleading file and our documents 1, 2, 82 to 85, and that Mr COLLORAFI, far from being a good manager, was not able to keep his financial documents up to date, so that a financial review had to be, in 1997, postponed to 17 November - see MCDONALD'S letter of 3 November 1997); • to remain at the disposal of the Experts to provide them with the additional answers they may wish before the completion of their assignment. 15 27 63_13 21/07689-.19:36 ,.lg: 3 FIRST QUESTION: If Mr COLLORAFI had halved his salary in 1995 and 1996 and had left in current account all or part of the dividends received in those years, in the company SEBOL and if, in the company B et O (the Court having no information on the salaries possibly received by Mr COLLORAFI and his wife from that company) he had made a current-account contribution in 1997, this would not have enabled these two companies to reach the annual break-even point, which is the turnover enabling the operation to break even, in 1996 and 1997. It is not useless to copy out the question, because the appellants lose sight of it: the question concerns the years 1995 and 1996. Consequently, opposing submission no. 3 evades the question on the pretext that "for SEBOL, the question does not arise: the company is profitable" and by then dealing with a period subsequent to that defined by the Court. The "observations of Mr COLLORAFI on the report of the expert meeting of 11 mal 1999" (hereinafter "the observations") make the same error by considering the management of 3 restaurants, hence the year 1997, which is not the question put by the Court, Likewise, opposing submission no. 3 distorts MCDONALD'S argument concerning Mrs COLLORAFI's salary. This opposing submission no. 3 considers the fictitious nature of Mrs COLLORAFI's salary (p. 3, 5th paragraph). But this was never claimed by MCDONALD'S, which stresses, on the contrary, that the salary was only too real whereas the post was not useful. Mrs COLLORAFI was therefore overpaid in relation to the function performed: for 9 years, SEBOL managed only one restaurant and Mrs COLLORAFI's post had no utility. SECOND QUESTION: State whether the amendment to the agreement of the company B et O mentioned above was made at the right time or too late and whether it was sufficient if Mr COLLORAFI reduced his salary in the company B et O, if indeed he received one from that company. Mr COLLORAFI's "observations" refer to page 4 of submission 3, where the appellants claim to discover, in the S.E.P.T. report, that the investment was only 17,636 KF. But Mr COLLORAFI knows full well that this sum of 17,636 KF concerns only the amount of fixed assets in the French sense of the term. The minimum fee does indeed derive from the investments of MCDONALD'S FRANCE, but these are not limited to the fixed assets mentioned above; a certain number of investment costs must be added, which are exentabilisés en charges ay. sens comptable francals du teme, such as Fax regu de: 01 15.27 63_13 - the financial costs borne by MCDONALD'S between the date of disbursement of the funds needed to acquire the occupancy rights and pay for the works and the opening of the restaurant; • the cost of the salaried teams of the expansion and real-estate departments of MCDONALD'S. These are spread over all the openings of the year by means of a percentage (around 4%); • registration duties and various legal deed costs paid on the titles. This notion of investment costs is therefore much broader than fixed assets alone. The fact that it enters into the calculation of the minimum fee is nothing new. This appears clearly in the financial presentations (Antibes Nord and Antibes Ouest) made by MCDONALD'S. THIRD QUESTION: charges oxes de la société SEBOL a a socie Bot comme darme GARDAnt d annual report drawn up at the request of Mr COLLORAFI (cf. page 24). Concerning the nature of the costs saved when opening a new restaurant, it is clear that this saving depends on the structure of the company managing the store. In this respect, the table presented on page 10 of opposing submission no. 2 is wrong. This table seems to indicate the presence of 5 levels of supervision at MCDONALD'S against 4 at Mr COLLORAFI's. In reality: - Gilles MARTINEAU, as Market Director, also supervises 4 restaurants in Nice in addition to the 3 restaurants in Antibes, whereas Mr RUIZ was himself in charge only of the 3 Antibes restaurants under the responsibility of Bernard COLLORAFI: - MAR is a 100% subsidiary of MCDONALD'S FRANCE S.A. (MSA). Its manager is isabelle KUSTER, also general manager of MSA for the South-East region. As the preferred contact of the lease-managers (*location-gérance*) of her region, she also supervises the market directors of the South-East, under the direct authority of the Chairman Denis HENNEQUIN. Her role can in no case be compared with that of a lease-manager (*location-gérance*): Fax regu de: b1 "•to - MCDONALD'S FRANCE RESTAURANTS SARL is another 100% subsidiary of MCDONALD'S FANCE S.A., whose manager is Mr Marc BATAILLIE, who supervises the entire internal organisation of the so-called "Company" restaurants of the Paris region (i.e. 40 restaurants), under the authority of Denis HENNEQUIN. Isabelle KUSTER and Marc BATAILLIE are therefore totally independent of one another and do not have the same responsibilities. Thus, MCDONAL D'S FRANCE RESTAURANTS SARL has strictly nothing to do with the management of the South-East restaurants, and the activities and costs of Mr MARTINEAU and of MAR are spread over more restaurants than those of Mr COLLORAFI. In fact, B. COLLORAFI had set up a much heavier supervisory structure than the one with which MCDONALD'S now manages these same Antibes restaurants. This is particularly surprising because one of the main reasons for the success of the MCDONALD'S "Franchise" (as opposed to direct management) is to avoid the superposition of unnecessary layers of supervision in order to: - bring the management centre closer to the reality on the ground, • reduce structural costs (see also the answer below to question 7). It is clear that B. COLLORAFI failed in these 2 objectives. FOURTH QUESTION: That finally the said court-appointed experts will be asked to present a summary of the operation of the companies SEBOL and B et O considered as an economic unit owing to the common interest of the parties in seeing them operate as such for the period in question. FIFTH QUESTION: la compilon en de la locompeve a Valaliférentes, - ...!... fax_reçu de: 41 61002Eu--3313° SIXTH QUESTION: Mr COLLORAFI, as the latter seems to claim, or whether on the contrary it wanted to give him an additional chance to pull through. These questions gave rise, on the part of the Experts, to no request for additional information following the meeting of 11 May. SEVENTH QUESTION: Considering that the experts must give their opinion on the consistency of the overall financial management of Mr COLLORAFI in the three companies up to 1 January 1998. A - It must be observed that Mr COLLORAFI produces numerous inaccurate calculations and irrelevant comparisons. Thus: 1° - regarding the activity of the Antibes Nord restaurant, which he compares with the activity of 3 other Drive restaurants (it being recalled that the concept of catchment area is not used in the MCDONALD'S network and that Mr COLLORAFI refers to it without foundation). According to him, a take-away sales gap of 12.5% relative to the average of shopping centres translates into a gross margin differential of 1.51% (pages 1 and 2). The reality is quite different: the differential is of the order of 0.4% to 0.5% for a gross margin of around 73%. One must in fact reason with a constant materials cost as a % of turnover including VAT (see table | below). Eat-in *'Take-away Total н.т. TTC TABLEAUL C.A. H.T. IC.A. TTTC Achat nourture/omballagos Marge brute IC.A. H.T. C.A. TTC Achat nourriture/emballages Marge brute 1100,00% 70,00% 72.7% 19,42 50,58 82,5 82,50 % 99,50 84,3% 22,88 30,00 % 31,65 27,3 % 7,28 22,72 17,5 17,50 % 18,46 15.7 % 4,25 13,25 100,00% 116,07 26,70 100,00% 23,00% 26.70% 73.30% 00,00% 100,00% 117,96 100,00% 23,00% 27,13% 12.87 % Fax regu de : 81,45 27 67,13 4092-03213° 2° - in the comparisons between his management and that of MCDONALD'S: • the document appended to our brief no. 1 concerns the analysis of the activity of the restaurants in 1997 and was circulated on 29 June 1998. • the document communicated by B. COLLORAFI under no. 198 concerns the analysis of the activity of the franchised restaurants in 1995 and was circulated on 21 June 1996. They are therefore not the same documents, and the one communicated by MCDONALD'S in particular is not communicated "partially in order to deceive the experts", as Mr COLLORAFI dares to write. It is curious that B. COLLORAF! prefers to refer to 1995 activity indicators rather than to those of 1997. 3° - regarding the P&Ls of the franchisees: Bernard COLLORAFI twice attempts to discredit the reliability of the franchisees' P&Ls and therefore the studies carried out by MCDONALD'S FRANCE that derive from them: - p. B of his note to the Experts of 2 June 1999, - p. 11 of his observation note on the report of the expert meeting. In reality, MCDONALD'S receives every month (by post or fax) the P&Ls of the previous month of the franchised restaurants. There is no specific software in the franchised restaurants to draw up this P&L. For some, it is done on an Excel spreadsheet, for others using a specific program of accounting software. This P&L has 2 columns: current month cumulative since the beginning of the year As the P&Ls are drawn up in the days following the end of a month, a certain number of costs are estimated. If the actual cost differs from the estimate, the franchisee has 2 solutions: - either he takes this difference into account in the "current month" column of the P&L of the following month: ...A... Fax regu de : 01 • 15_27 67, 13 41/0 32a-u72150 » the "cumulative" of the following month = "cumulative" of the previous month + "current month" of the following month. - or he corrects his P&L of the previous month without sending the corrected version to MCDONALD'S, then draws up the P&L of the following month without taking this correction into account: → there is a break between the cumulative and the addition of the "current months" in the P&Ls in the possession of MCDONALD'S. This distortion is not problematic. In both cases, the "cumulative" of the following month est garait la primence. A Qui est important des que le PS cumule non en garantit la pertinence. l'addition des P&L mensuels) soit identique ou rapproché périodiquement de situations comptables. Dans de sa de valeurs au sur ers a trous a a de es et po des montants minimes: July 98 = difference of 100 FRF on financial costs regularised on the P&L of June 98 August 98 = difference of 2,187.50 FRF on financial costs regularised on the P&L of July 98 difference of 2,541 FRF on office expenses regularised on the P&L of July 98 In the end, the cumulative P&L of Vallauris corresponds entirely to the 1997 and 1998 result appearing in the draft balance sheet. Only Bernard COLLORAFI is surprised by B - Level of administrative costs: What was said above, in answer to question 3, is corroborated by table II below: TEn KF 1st January / 30 June 1997 (1) Ant. Nord Ant. Ouest lAnt. 1 12-month basis (2) Ant. Nord Ant. Ouest Average Franchisees Ant. 1 Accounting and legal fees Produis & chargen divers non contrólables. Sub-total *'742 administrative ..... Total (1) Source: "document no. 205 of Jean-Paul CLEMENT, Avocat à la Gour (2) Multiplied by 2 for Antibes 1 & Nord, by 6 for Antibes Ouest (opening = 30/04/1987) (3) Sites opened before 31/12/96, achieving a turnover of between 9 and 14 MF Fax regu de : 01 • 15.27 63_13 The table compares the figures announced by COLLORAFI with those recorded in 1997 on the average of franchised restaurants achieving between 9 MF (id Ant. Ouest) and 14 MF (id Ant. Nord) of turnover. This average is 517 KF for administrative costs (and not 420 KF as estimated on a flat-rate basis), i.e. 1,551 KF for 3 restaurants. It is 2,524 KF as regards B. COLLORAFI. If the analysis is widened to "accounting and legal fees" as well as to "miscellaneous non-controllable income and expenses" as B. COLLORAFI suggests in his submission no. 3 (document 190), a difference is found of: 117 KF for "accounting and legal fees" = (164+94+48) - (63×3) 23 KF for "miscellaneous non-controllable income and expenses" = (186+164+72) - (133x3) B. COLLORAFI therefore remained well above the average of the other franchised restaurants as regards administrative costs. C - Update of the turnover of the three restaurants previously managed by B. COLLORAFI and now by MAR: These continue to progress compared with 1998. They are all 3 positive. The results are as follows (KF): Antibes 1 Antibes Nord Antibes Ouest at end of May +1.02% + 1.26% + 7.26% at end of June + 3.46% + 3.00% + 9.06% This progression is also useful for the answer to questions 5 and 6. .d... Fax regu de : 81 _ 35.27 63 13 21/87/29— 19:36 ..Eg: 10 TENTH QUESTION: Considering finally that in this application document of the companies SEBOL and B&O, Mr COLLORAFI announced as one of his four objectives: "Objective No. 2": Increase in turnover Our current concern is to increase turnover very quickly in order to reach the minimum break-even thresholds"; Que det louala se rete rant ALDe rest a Monsieur COLL , ere lui le prat to achieve his "objective no. 2". This involved assessing a turnover. A - Turnover excluding VAT is the product of the number of transactions (or tickets) by the average ticket excluding tax. To estimate sales, two components must therefore be assessed: • the average ticket, - the transactions. B - Average ticket excl. tax: The factors that influence the level of the average ticket are essentially of 3 kinds: • the take-away sales rate: Because of the 2 VAT rates in force (5.5% eat-in, 20.6% take-away), there is a direct link between the average ticket and the take-away sales rate: for a given expenditure, that is, including VAT for the customer, the turnover excluding VAT will be higher for the restaurant if it is a take-away sale than if it is an eat-in sale. Example: purchase of a Best Of menu for 30 FRF including VAT if eat-in menu, turnover excl. VAT = 30/1.206 = 24.88 FRF if take-away menu, turnover excl. VAT = 30/1.055 = 28.44 FRF The average ticket is therefore traditionally higher where the take-away sales rate is highest: restaurants with drive-through service. Fax regu de : 81.45.27 67 13 21/07693-19:36 ..Pg: 11 • the products ordered: Depending on the location (town centre, shopping centre, stand-alone building), the occasions for visiting a MCDONALD'S restaurant are not the same. Here too, stand-alone buildings (with drive-through service) are at an advantage because they are essentially frequented at mealtimes for a complete menu and little in the afternoon for simply an ice cream or a drink. • the number of persons per transaction: A transaction is not equal to a customer but to an order. It is estimated in FRANCE that the average number of customers per transaction is slightly above 2. But here again, stand-alone buildings are at an advantage because they also have the largest children's play areas (they have the room for it): they therefore attract more families and the number of persons per transaction is higher C - Number of transactions: 1° - The approach consists in segmenting the restaurant's transaction potential. Several segments can be distinguished: - residents, . shops, • jobs/schools, passing traffic, - leisure. For each of these segments, the base must first be defined, that is, the number of persons concerned. This involves collecting data from the various sources of information: INSEE, municipalities, chambers of commerce, on-site studies,... This information is mostly taken up in the market study included in the Pre-Contractual Information Document given to the future lease-manager (*location-gérance*) (see opposing document 110 bis as regards Antibes Ouest). Fix regu de : 81 • 45 2? 67,13 41034207-52130 2° - Once the base is defined, the capture rate from which the restaurant can benefit must be estimated by weighting various factors. This weighting is an element of MCDONALD'S know-how that cannot be disclosed, for this reason and also in view of the publicity given by Mr COLLORAFI to his lawsuit with MCDONALD'S. The following may be cited in particular: - the characteristics of the surrounding population: number of children, age pyramid, socio-professional categories, unemployment rate, average income.... - the importance of tourism and the resulting seasonality, - the visibility and ease of access to the restaurant, - the size of the restaurant and its seating capacity. - the level of competition (Quick, but also cafeterias and other catering) and the existence or not of other MCDONALD'S restaurants nearby, - foreseeable changes in the future (traffic routes, establishment of new shops....). The expansion manager then has an estimate of the number of potential transactions of the site. 3° - This estimate is then compared with other assessments: - by comparison with existing sites having similar characteristics: In this respect, the number of MCDONALD'S restaurants open at the end of 96 (540) constituted both: • a formidable comparative database, - a guarantee of seriousness in the choice of locations. - by discussion with other MCDONALD'S people with experience in the matter: Operations Consultant, Regional Director. • by exchange of views with the prospective lease-manager (*location-gérance*) if he already operates a restaurant on the market. His knowledge of the local market indeed allows him to form a very good idea of the potential of a restaurant. D - Summary: The Antibes Ouest restaurant is a stand-alone building with drive-through service. The average ticket of restaurants of this type was 53 FRF in 1995. Taking into account the specific features of this site (no attractive play area given the size of the restaurant), the average ticket used had been revised downwards: 50 FRF. As regards the estimate of the number of transactions, Antibes Ouest enjoyed a certain number of positive points: - number of inhabitants and population growth rate, - importance of tourism, • quality of the location. Conversely, other factors called for greater caution: • existence of other MCDONALD'S restaurants in the Antibes conurbation, - size of the restaurant and small number of parking spaces. At the end of the process, the number of transactions had therefore been estimated at 260,000 over the year. Hence our turnover estimate: 260,000 x 50 FRF = 13,000,000 FRF. The company MCDONALD'S FRANCE and the undersigned remain at the disposal of the Experts to answer any question that would be useful to shed light on the nine questions put by the Court. Jean-Marie LELOUP harper, 17