TECHNOLOGICAL FACTORS We continue to explore the feasibility of generating renewable energy on site at our restaurants.

McDonald's Brazil, for example, has installed a wind turbine in the northern city of Fortaleza. McDonald's France and McDonald's Brazil have also been testing the use of solar energy to heat water. McDonald's Germany is testing solar photovoltaic panels, which use the suns energy to produce electricity We have been actively working with our suppliers to develop and test restaurant equipment that is better for the environment. One example is equipment that uses alternatives to hydrofluorocarbon (HFC)-based refrigerants. We are focused on these because HFCs have a significant climate change impact. We opened the first HFC-free restaurant in Denmark in January 2003. McDonalds Europe is currently implementing additional HFC-free alternatives in its restaurants and is planning to open a second HFC-free restaurant in Denmark later this year. Since then, the ways we make our nutrition information available have evolved with emerging technology. For some years, we offered it on in-store trayliners, posters and/or brochures. Then we began offering it on the Web, and in 2006, on our packaging. Our expansion of alternative sources of nutrition information helps consumers make informed choices based on facts, not perceptions. As projected, we completed rollout of NII to 20,000 restaurants worldwide by the end of 2006. This industry-leading initiative provides easy-to-understand and globally relevant bar chart icons to illustrate the number of calories, fat, sodium/salt, carbohydrates and protein in most of our core products. The development of this iconic approach to communicating nutrition information involved extensive research and consultation with our Global Advisory Council, the McDonalds Europe Nutritionist Steering Group, other independent experts and government officials. We also solicited customer perspectives on the most user-friendly ways to communicate nutrition information.

KFC updates look with new LED technology

LEDs have numerous advantages including low energy use, low operating voltage, ease of installation, low heat generation and long life. The longer lifespan of LEDs is greatly welcomed by KFC

DEMOGRAPHIC FACTORS
1

Americans have more disposable income than ever before; baby boomers in particular

baby boomers' annual spending power is estimated at $1.1 trillion per year. The health care funding crisis has increased the publics attention on health and diet. Obesity is on the rise on the U.S.; the number of obese adults has doubled since 1990 and tripled in children. The organic food market has grown at a rate of nearly 20 percent per year for the last seven years. Dining out is increasingly viewed as an entertainment; restaurants are responding by creating interactive experiences such as personalized menus. Pharmaceutical and food companies are using biotechnology to create new strains of functional foods (i.e., a genetically modified cauliflower which is orange in color and has 25% more beta carotene than traditional cauliflower) Fast food chains have been jumping on the healthy food bandwagon with varying success for some time now. Enhancing their menus with foods featuring lower fat, lower cholesterol, and lower sodium, the idea is to bolster sales and invite a new demographic into their restaurants. Restaurants have attempted to add healthier items to their menus in the past, with some hits but a lot of misses, too. McDonald's low-fat beef burger, the McLean, flopped. Pizza Huts addition of lower-fat pizza toppings failed. Then, things started to turn around. For example, Burger King's grilled chicken sandwich, the BK Broiler (now called the Tendergrill), was more successful. As fast-food chains roll out healthier menu items, suppliers and food processors will see opportunities. Nerac Food Science Analyst Shanon Trueman shared her thoughts on where those opportunities might be. the most visible change in fast food restaurants has been the addition of salads, such as Wendy's Garden Sensations line. Wendy's also carries a line of baked potato menu items with various toppings. Opportunities are there exist for ingredient manufacturers willing to work with menu designers to create low-fat and low-calorie options, such as turkey bacon and dressings with lower fat and calorie content. One development with significant impact on food manufacturers was the decision of many fast food chains in the U.S. to replace cooking oils with new formulations that significantly reduced or eliminated trans fatty acids (TFAs). McDonald's, KFC, Eat NPark, Wendys, and Popeyes are just a few of the major chains that eliminated TFAs. And many of them made the change before jurisdictions such as New York City mandated it. Especially in the last few years, consumers are demanding fast food in non-traditional locations, such as shopping malls, universities, hospitals, and other high-traffic areas. Consumers are demanding greater convenience when purchasing. The locations listed above are some of the most popular non-traditional locations that could be exploited by a fast-food chain. The fast-food chains are recording high sales in those areas due to high-

traffic. Consequently, the companies are constantly looking and testing for new hightraffic locations to expand. Changing preferences of consumers. During the 1980s, consumers began to demand healthier foods and KFC was faced with a limited menu consisting mainly of fried foods. In order to reduce KFCs image as a fried chicken chain, it changed its logo from Kentucky Fried Chicken to KFC in 1991. In 1992, KFC introduced Oriental Wings, Popcorn Chicken, and Honey BBQ Chicken as alternatives to its Original Recipe fried chicken. In 1993, KFC rolled out its Rotisserie Chicken and began to promote its lunch and dinner buffet.

NATURAL FACTORS In the wake of the 2006 e. coli spinach crisis in the U.S., we began working with our suppliers, the United Fresh Producers Association and others in the food service industry to develop and implement an approach that included additional safety checks at critical points early in the production of produce and a re-verification step prior to harvesting. Under this approach, audits are conducted to verify the implementation and maintenance of GAP and GHP both prior to planting and after harvest. As the next step in increasing verification of the raw material, we have been working with other end users in the food service and retail industries to implement a standardized pathogen testing process that is both reliable and meaningful. As protocols are developed and implemented, guidance from appropriate U.S. regulatory bodies will be sought to enhance the process application. we are closely monitoring the Avian Flu situation around the globe, and have mobilized a team to proactively create contingency plans in case we have to address this issue. We are working with our suppliers, government officials and restaurant teams to safeguard our food supply. One of the branch of KFC was recently (14th October 2008) closed due to vermin infestation. It's a case of Kentucky Fried Twit china after a Whitley branch of the popular chicken takeaway was closed due to a rat infestation

ENVIRONMENTAL FACTORS

Climate change is an important issue, generating growing interest from many sectors of society from individuals and NGOs, to governments and corporations. The seriousness of this issue means that everyone has a role to play in reducing our impacts, including companies like McDonalds. McDonalds restaurants use of electrical energy and natural gas accounts for the bulk of our direct greenhouse gas emissions. More efficient use of these resources helps us save money and reduces our environmental impacts. Within the restaurant, our two key areas of focus are the heating and cooling systems and the cooking appliances, which together account for approximately 80% of a typical restaurants energy use. McDonald's Canada and McDonald's USA are testing high-efficiency LED lot lights. Outdoor lot lights are estimated to account for up to 10% of a restaurants energy bill. Preliminary findings indicate that installing high-efficiency lights saves up to 50% of lot light energy. Savings include not only energy costs, but also replacement costs because the LED lights have a longer bulb life than existing lights. The Low Oil Volume Fryer (LOV) is our next generation of fryers. Its innovative design allows restaurants to cook the same amount of product with approximately 40% less oil. The LOV also improves cooking efficiency, requires less maintenance and provides enhanced environmental benefits. Tests indicate it uses approximately 4% less energy than standard fryers. It also reduces packaging waste for markets using "jug-in-box" oil delivery and results in less oil to be disposed of for recycling or rendering. In the U.S., an independent franchisee has installed and is measuring the impact of a Ground Source Heat Pump (GSHP). A GSHP can increase the efficiency of the heating and cooling system in a restaurant by up to 50%, thus reducing the restaurants total energy use by up to 20%. This technology is not suitable for all restaurants, and installation will depend on many factors, but we are excited by the potential. McDonald's Europe achieved a nearly 2,000 ton per year reduction in the consumption of non-renewable materials through the launch of a paper salad bowl and wooden coffee stirrer. Redesign of the McFlurry spoon eliminated 286 metric tons of polypropylene plastic and 423 metric tons of paper materials were saved through enhancements to the Big Mac carton. McDonald's Australia has incoporated 35% post-consumer recycled PET plastic in cold beverage and dessert cups, reducing the amount of virgin plastic resin needed. A 915,000 pound reduction in packaging weight was achieved through implementation of the company's carton board reduction strategy In an effort to reduce waste generated in its restaurants, McDonalds Japan launched a consumer campaign in October 2007. Through stickers and signage at the counter, the company encouraged customers to reduce their usage of plastic shopping bags and paper napkins. In the first three months alone, paper napkin use dropped more than 6% per guest count and more than 75 tons of waste were avoided.

Biodiesel: Using our recycled cooking oil to fuel our suppliers' fleets
We are finding ways to incorporate used cooking oil into our operations The answer is biodiesel. For example, in Europe, more than 80% of used cooking oil is currently being converted into biodiesel and about 30% of the fuel used in the logistics trucks that serves our restaurants comes from biodiesel. About 16% of it comes from biodiesel generated from our recycled used cooking oil. McDonald's Europe looks to increase this percentage going forward.

By the end of 2008, McDonalds UK expects to be recycling 100% of its used cooking oil for biodiesel to fuel delivery trucks. This will be the equivalent of replacing nearly six million liters of diesel fuel.We are making progress on the biodiesel front in other markets as well. McDonalds Brazil participates in a Biodiesel At Home and At School program intended to raise environmental awareness. In the U.S., our restaurants in Hawaii have their used cooking oil picked up and processed into biodiesel fuel, a portion of which goes into the distribution trucks that deliver food and paper to the restaurants. Over and above ensuring our packaging is supplied via recycled or renewable resources; KFC are enthusiastically complying with the new environmental directives on recovery and recycling of packaging waste. LEGAL FORCES 1. New franchise laws in Mexico give fast food chains the opportunity to expand their restaurant bases. In January 1990, Mexico passed a law that favored franchise expansion. The law provided for the protection of technology transferred into Mexico. The law also allowed royalties. Before 1990, there was no protection for patents, information, and technology transferred to the Mexican franchise. Also, before the new law royalties were not allowed. This resulted in higher number of the company owned fast-food chains rather than the franchises in Mexico. However, with the new law, the companies are given an opportunity to benefit from selling franchises. The

fast-food chains are now able to expand to other regions of Mexico by selling franchises to individuals rather than keep building company owned stores in centralized locations to keep the operation simple and effective. POLITICAL FORCES Another area of concern for KFC has been the increased political turmoil in Mexico during the last several years. For example, on January 1, 1994, the day NAFTA went into effect, rebels (descendants of the Mayans) rebelled in the southern Mexican province of Chiapas on the Guatemalan border. Around 150 people were killed. The peso crisis of 1995 and resulting recession in Mexico left KFC managers with a great deal of uncertainty regarding Mexicos economic and political future. KFCs approach to investment in Mexico is to approach it conservatively, until greater economic and political stability is achieved. It is now even more interesting for companies to invest between US-Canada-Mexico since the NAFTA (North American Free Trade Agreement) came into effect in 1994 and eliminated tariffs and quotas on goods shipped between the three countries. It made it easier to do business between those countries as a result. Mexico especially appears to be an attractive market since it has about 103 million in population and its proximity to the US, which increases control, reduces transportation costs, etc.

Low profitability and high risk of doing business in Mexico. Due to the current devaluation, profits are greatly reduced. This reduction in earning power has brought about much political unrest. Mexico has a largely unskilled labor pool that provides little stability. Cultural attitudes toward punctuality, absenteeism and job retention tend to make managing employees difficult under present circumstances. High turnover rates lead to high training costs and can threaten the brand integrity. In the past, the Mexican economy has triggered violence toward American firms by frustrated nationalists. The culmination of all these problems led to low profitability due to a low profit product margin.