Fast Food but Slow Entry
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While Thomas Friedman’s bon mot about two countries with a McDonald’s (NYSE: MCD) never having fought a war has been rendered null by the South Ossetia War a few years ago my bet is on the Golden Arches ability to handicap where the opportunity for growth lies during a tough market. Company guidance for April, released on May 8th, painted a dreary picture near-term for the restaurant business. Wendy’s (NASDAQ: WEN) just missed their first quarter revenue target by 2.6% while McDonald’s hit theirs nearly to the penny.
While Europe has been a stronghold for them, generating nearly 40% of total revenue, it is not unexpected to see comps there drop. What is troubling for McDonald’s, which has weathered much of the current U.S. depression well, is that growth in Asia-Pacific/Middle East Asia (APMEA) has slowed dramatically in 2012. February saw just 2.4% same-store growth and April’s results were worse, 1.1%. These are down from double digit growth in 2010.
Over Arching Plan
When McDonald’s hits a new market they like to do it countrywide opening a large number of stores to which a solid growth plan is added over time. This is how they are developing their business in China and plan to add 700 stores to reach 2000 by the end of FY 2013, which have been recouping their initial investment in 3 years.
While internally McDonald’s motto may have been effectively, ‘one world, one taste’ they have had to be more flexible to compete with Yum! (NYSE: YUM) who have successfully tailored their KFC and Pizza Hut menus to suit the tastes and sensitivities of local cultures. So, if that means a curry sauce in Singapore for your Chicken McNuggets, so be it.
That said, Starbucks (NASDAQ: SBUX) and KFC both have an edge over McDonalds. KFC because they entered the market 25 years ago and have built a dining experience that is altogether different than the one at your average interstate exit in the U.S. Starbucks has used the traditional tea-time to build a meal time to build its customer base in the large urban centers. Even Pizza Hut has developed a $2 snack for that time of the day. While they are competing head-to-head in the U.S. and Europe, in China McDonald’s have a more pervasive presence while Starbucks’ store map will be similar to the U.S., mostly heavy urban.
McDonald’s stores in China are still predominantly company-owned. They have not converted many to the franchise model which the source of their power. It will be interesting to watch how that unfolds over the next few years. If this current slowdown in comps becomes a trend it will retard the franchise uptake rate.
Passing over Vietnam
As one of the fastest growing markets in Southeast Asia one would think that McDonald’s would have a plan to move into Vietnam. But, at this time they don’t. As I said, their strategy is usually countrywide and a number of factors have raised the barrier to entry:
- Strong competition from Yum and Lotteria
- High real estate prices in the major cities, Ho Chi Minh City and Hanoi.
- Vietnam too large vs. the population distribution.
Burger King and Domino’s did enter Vietnam in 2011 using a very interesting strategy of opening locations in airports. Most of the major airports in Vietnam now have a Burger King and Domino’s present, offering that comfort for foreigners traveling here for the first time. As air travel routes continue to open up this will give them ready-made geographic coverage making it even more unlikely that McDonald’s will roll out here.
The early 2012 same store sales may blunt the near term returns on their investments but McDonald’s is well positioned with rising check sizes (compounded growth of 5.5%) since 2008 to overcome any margin erosion and continue to serve the largest and fastest growing markets in the world.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend McDonald's, Starbucks, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.