The directors present their strategic report for the year ended 31 December 2023.
The directors believe they have acted in a way they consider, in good faith, to promote the success of the company for the benefit of its members as a whole (having regard to stakeholders and matters set out in s172(1) (a-f) of the Companies Act).
The success of the company is the driving factor behind the decisions made by the directors. Decision making processes are structured to enable the directors to evaluate the merit of proposed business activities and the likely consequences of its decisions over the short, medium and long term.
Our employees
Our people are key to our success. That is why we work hard to create jobs and opportunities for all our people, regardless of gender, age or life stage. Understanding how our people feel about McDonald's is vital. It helps us ensure that we are giving them the right support to achieve their potential and to serve our customers well. We undertake quarterly surveys with restaurant crew and managers to drive the conversation about how they feel at work. We also conduct regular “Love to Listen” surveys to check how satisfied our employees are with their jobs.
Our customers
Our customers are the reason for our existence, and we therefore strive to provide high quality food and superior service, in a clean, welcoming environment, at a great value.
Our suppliers
Long-term commitments with our suppliers has enabled them to grow with us and drive positive change within their own businesses. The company recognises that relationships with suppliers are important to its long-term success and is briefed on supply feedback and issues on a regular basis.
Communities and environment
The directors carefully consider the impact of the business on communities and the environments in which the company operates. We support charitable organisations such as Ronald McDonald House Charities. We collect litter dropped in the local area around our restaurants. Recycling units are installed around our restaurants and our paper cups are sent to specialist recycling centres in the UK. Our paper straws are 100% recyclable. Our cooking oil is recycled to convert it to biodiesel. We are aware of our responsibility in this area, and 2024 will see the introduction of more initiatives to help make local communities and the environment a better place.
Business conduct
In all our activities the directors require that our employees and suppliers conduct business with the highest ethical and professional standards by adhering to our Standards of Business Conduct set by McDonald's Corporation.
Business Review
The directors aim to present a review of the development and performance of the company during the year and its position at the year-end. This review is consistent with the size and nature of the company and is written in the context of risks and uncertainties it faces.
The principal activity of the company during the year was as a McDonald's franchise, the company operated fourteen restaurants during this financial year, no new stores were acquired in this year, no changes have taken place in the use of the premises.
We consider that our key financial performance indicators are those that communicate the financial performance and strength of the company as a whole, these including turnover, gross profit and operating profit.
Sales through digital channels, including McDelivery, mobile and self-order kiosks have increased during the year.
The pace of change in the restaurant industry has accelerated post pandemic, with customers increasingly looking for greater speed and choice when ordering food. McDonald's are constantly elevating the digital experience with varying promotions offered via the mobile app in 2023 and the company continues to push digital and delivery offerings.
The financial performance of the company improved in 2023. This was aided by Government support packages such as the 75% business rates relief in the retail and hospitality industry and rent assistance from the franchisor.
The profit for the year before taxation amounted to £1,858,274 (2022 £1,422,454), an increase of £435,820.
Turnover comprises sales from company franchised restaurants. During the year total company turnover increased by £3,468,501 to £71,034,478.
Gross profit as a percentage of sales is 66.17%. This has been maintained by continually reviewing prices to reduce the impact of food cost inflation, whilst still offering great value and quality.
Given the straightforward nature of the business, the directors are of the opinion that further analysis using key performance indicators is not necessary for an understanding of the development, performance or position of the company.
It is the strategy of the company to refurbish restaurants periodically to keep them fresh and inviting to our customers. The company continued to benefit from its investment in the national McDonald's store refurbishment projects and continues to update and improve its restaurants. The re-imaging strategy continued to have a positive impact on sales growth which is in line with the directors' expectations and objectives. The "Convenience of the Future" upgrade programme was carried out at two stores during the year.
We continued to enjoy the benefits of an industry leading supply chain and the significant scale of McDonald's. This has enabled the company to navigate 2023 successfully reporting growth in terms of revenue.
The management of the company and the nature of its trading strategy are subject to a number of risks. The company operates a thorough risk assessment and management process which involves a formal review of all the risks identified and introducing processes to monitor and mitigate each risk, where possible.
The company operates in a highly competitive market with high levels of price sensitivity. Consumer behaviour can impact the company's turnover and profitability. The company mitigates this risk by adopting a policy of constantly assessing its pricing strategy with ongoing market research. Demand has increased during the year.
The company remains exposed to periods of general inflation and food cost inflation together with the variability of commodity prices, which impact on the company's profitability. The company continually assesses any risks identified with the aim of mitigating the threats these may have on the company's operations and profitability. The company's supply chain is closely maintained by McDonald's, who are therefore able to negotiate effectively on behalf of franchisees to ensure better purchasing terms. This helps as much as possible to protect the company from risks associated with fluctuating food costs. The company has been impacted by factors beyond its control, with inflation rising sharply.
The company is also inherently exposed to pressures within the labour market and to wage cost inflation. Recent changes to the national minimum wage and national living wage have contributed towards the increase in wage costs. However, given the success of the company, we will continue to invest in our people. The company mitigates this risk by a policy of adopting remuneration and benefits packages designed to be competitive within the market as well as ensuring full compliance with labour market regulations, with employment policies to allow fulfilling career opportunities for all employees.
Increased volatility, uncertainty and cost pressures in the UK energy market have resulted in an increase in utility costs. To manage and mitigate the risk, McDonalds has entered into several Power Purchase Agreements (PPAs) to increase the company's renewable energy capacity.
The company's operations demand a high level of compliance within a wide range of regulatory requirements including hygiene, licensing and employment law. These areas are closely monitored by McDonalds to ensure the company is compliant.
The fast-food market is extremely competitive, with a high number of competitors competing in the sector. To remain a market leader, McDonald's have dedicated teams who focus on ensuring the brand remains a leading brand in the market.
The company's principal financial instruments comprise bank balances, loans to the company and trade creditors. The main purpose of these instruments is to provide funds for the company's operations. Their existence exposes the company to several financial risks which have been considered and are managed as follows:
Liquidity risk: Liquidity risk is the risk that the company will have insufficient resources to meet its financial liabilities as they fall due. The company's strategy to managing liquidity risk is to ensure that the company has sufficient funds to meet all its potential liabilities as they fall due. In respect of bank balances the liquidity risk is managed by maintaining a balance between the continuity of funding and flexibility using overdraft facilities at floating rates of interest if necessary. In respect of bank loans, although the interest rates are variable monthly repayments are fixed. The liquidity risk is therefore managed by ensuring there are sufficient funds available to meet the monthly repayments. In respect of trade creditors the liquidity risk is managed by ensuring sufficient funds are available to meet amounts due for payment.
Operational risk: Operational risk is the risk of a direct or indirect loss resulting from the inadequacies or failures of processes or controls due to technology, staff, organisation or external factors. To monitor and control operational risk the company maintains a system of comprehensive policies and a control framework which is designed to provide a sound and well-controlled operational environment.
Interest rate risk: Interest rate risk is the risk that financial performance of the company will be adversely affected by adverse fluctuations on interest rates being charged to the company on its financial instruments, most noticeably bank loans and its bank overdraft facility. The interest rate risk is managed by the on-going monitoring and assessment of its borrowings and the interest rate charged.
Price risk: Price risk is the risk that the financial performance of the company will be adversely affected by pricing charges. Due to the nature of the financial instruments used by the company, there is no exposure to price risk. The company sets its own prices within allowable variations. Cash flow and liquidity exposure is therefore directly related to prices and turnover.
Other areas of risk include include health and safety and food hygiene. The company's operations are constantly reviewed by McDonald's to ensure a high level of compliance.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2023.
The results for the year are set out on page 13.
Ordinary dividends were paid amounting to £581,000. The directors do not recommend payment of a further dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company's principal financial instruments comprise bank balances, trade creditors and loans to the company. The main purpose of these instruments is to raise funds for the company's operations. Their existence exposes the company to several financial risks which are detailed in the Strategic Report under financial risk management and policies.
The company does not carry out any independent or specific research and development. However, McDonald's Restaurants Limited and its associated companies carry out research and development on behalf of all franchisees. The company makes a contribution towards this through its existing payments to McDonald's Restaurants Limited.
Details of business relationships have been covered in the 172(1) statement in the strategic report.
The directors are committed to increasing both the turnover and profitability of the company. The company will continue its policy of refurbishing its stores in line with the McDonald's national re-imaging strategy. The company will continue to push delivery and digital offerings.
The directors are confident the company will continue to grow due to the strength of the brand and success of delivery and digital services. The company will continue with the management policies which have resulted in profitability in this trading period.
The auditor is deemed to have been re-appointed in accordance with section 487 of the Companies Act 2006.
Methodologies for energy and emissions calculations
In line with the government's streamlined energy and carbon reporting requirements we are required to report our organisation's carbon emissions for the period 1st January 2023 to 31st December 2023 against our 2022 baseline.
Our emissions are reported using the financial control boundary and the methodology used aligns with Defra's Environmental reporting guidelines (2019) and uses the UK government's greenhouse gas reporting conversion factors (2023) to quantify emissions.
For major emissions, primary data is sourced from AMR readings, utility bills and expensed claims. Emissions data is collated centrally by Mitie Energy's Sustainability team who have overall responsibility for ensuring the calculations and methodology are correct.
The McDonald's recommended intensity measurement ratio is total gross emissions in metric tonnes C02e per unit of turnover.
Principal measures taken to increase energy efficiency
Our largest source of emissions is a direct result of electricity consumption, followed by natural gas and purchased fuels used for our restaurant kitchens and heating. McDonald's goal is to achieve net zero emissions in all UK restaurants by 2030. This significant decarbonisation of the emissions from our restaurants will be in line with the SBTi net zero criteria and a 1.50C climate scenario pathway. This is an interim target towards becoming net zero across our entire business by 2040. We will achieve this by reducing our emissions through how we power our restaurants, as well as how we reduce and recycle our waste.
Our overall strategy is to pursue a program of energy efficiency combined with carbon mitigation measures such as the utilisation of renewable electricity and transitioning to LED lighting throughout all our restaurants. This will be bolstered with programs to reduce and decarbonise heat across our estate. We are committed to being more energy efficient through deploying better internal operating practices and by investing in technology which saves energy.
Information not included
McDonald's do not currently report fugitive emissions (refrigerant leakage) from refrigeration and air conditioning systems in leased properties or fleet. This is due to the difficulty in obtaining centralised data on refrigerant top-ups and the fact most of our buildings are out of scope as franchisees manage the HVAC systems. Given the size and types of emission sources listed by McDonald's, fugitive emissions are expected to be a very small proportion of total emissions and are therefore considered immaterial.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' responsibilities statement set out on page 8, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
We obtained an understanding of the legal and regulatory frameworks applicable to the company and the industry in which it operates. We determined that the following laws and regulations were most significant:
Companies Act 2006/FRS 102, Employment Law, Waste and Health and Safety. We enquired of management to obtain an understanding of how the company is complying with those legal and regulatory frameworks and whether they had any knowledge of actual or suspected fraud. We corroborated the results of our enquiries through our discussions with the directors and management. We did not identify any matters relating to non-compliance with laws and regulations or matters in relation to fraud;
- We obtained an understanding of how the company is complying with those legal and regulatory frameworks by making inquiries of management and those responsible for legal and compliance procedures.
- In assessing the potential risks of material misstatement, we obtained an understanding of the company's operations, including its objectives and strategies to understand the expected financial statement disclosures and business risks that may result in risks of material misstatement.
- In assessing the appropriateness of the collective competence and capabilities of the engagement team, the engagement partner considered the engagement team's:
> understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation.
> the specialist skills required and
> knowledge of the industry in which the client operates.
- We assessed the susceptibility of the Company's financial statements to material misstatement, including how fraud might occur. Audit procedures performed by the engagement included:
> assessing the design effectiveness of controls management has in place to prevent and detect fraud;
> challenging assumptions and judgements made by management in its significant accounting estimates;
> identifying and testing journal entries, in particular manual journal entries made at year end for financial statement preparation; and
> assessing the extent of compliance with the relevant laws and regulations as part of our procedures on the related financial statement item.
As part of an audit in accordance with ISAs (UK), we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiiencies in internal control that we identify during our audit.
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A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditors' report.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
The income statement has been prepared on the basis that all operations are continuing operations.
The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported. These estimates and judgements are continually reviewed and are based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Accounting estimates and assumptions are made concerning the future and, by their nature, will rarely equal the related actual outcome. The key assumptions and other sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
Franchise rights and intangible assets - Franchise rights acquired on each business combination are capitalised, classified as an asset on the statement of financial position and amortised on a straight line basis over its useful life.
The company establishes an estimate of the useful life of franchise rights and intangible assets arising on business combinations. This estimate is based on the term of the franchise of each operating restaurant.
Fixtures and fittings - The company's accounting policy for fixtures and fittings is set out in the note 2.6. Estimated useful lives of fixtures and fittings are based on management's judgement and historical experience with similar assets.
Cara Restaurants Limited is a private company limited by shares incorporated in England and Wales. The registered office is McDonalds Markham Moor, A1/A57 Interchange, Retford, DN22 0QU.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
The financial statements represent information about the company as an individual undertaking. It is not a member of a group.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to profit or loss.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans, loans from fellow group companies and preference shares that are classified as debt, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps and forward foreign exchange contracts, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
Holiday pay accrual
A liability is recognised to the extent of any unused holiday pay entitlement which is accrued at the balance sheet date and carried forward to future periods. This is measured at the undiscounted cost of the future holiday entitlement at the balance sheet date.
The average monthly number of persons (including directors) employed by the company during the year was:
Their aggregate remuneration comprised:
The number of directors for whom retirement benefits are accruing under defined contribution schemes amounted to 2 (2022 - 2).
The actual charge for the year can be reconciled to the expected charge for the year based on the profit or loss and the standard rate of tax as follows:
The bank loans are unsecured and carry interest rates at between 1.2% and 1.4% over bank base rate.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The company operates a defined contribution pension scheme for all qualifying employees. The assets of the scheme are held separately from those of the company in an independently administered fund.
At the reporting end date the company had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
The company's restaurant premises are leased from McDonalds Restaurants Limited on operating leases expiring after more than 5 years. it is not possible to quantify the commitments due under the leases because of the variable bases of the rental payments. Rent is calculated as a percentage of sales above base and therefore the operating lease commitment relates to base rent only. The directors estimate that the total rental payments over the whole lease term will be in the region of £23,041,600.