McDonalds in for a Fight in China
When spending on fast food slows, you have to take note. This is the case with McDonalds Corporation (NYSE/MCD), a bellwether for the fast food industry, after the maker of the “Big Mac” reported a 0.1% decline in July in its key same-store revenues for stores opened at least 13 months. It was the first decline in years and well below the 9.6% reading in December. In my stock analysis, this shows a global cutback in spending, even on fast foods.
The company is feeling the impact from Europe, where it derives about 40.0% of its system-wide revenues. Revenues in Asia-Pacific, the Middle East, and Africa are also down.
My stock analysis is that McDonalds has been the top performer in the restaurant sector over the past decade after the company made a dramatic shift in its menu, offering to include healthy meals and broadening its target market. While there are clearly healthier foods on the menu, the demand continues to be largely for burgers, “McNuggets,” fries, and soda.
However, this strategy shift worked, as McDonalds is at the top of the fast-food chain at this juncture, leaving Burger King Worldwide, Inc. (NYSE/BKW) and The Wendys Company (NASDAQ/WEN) behind, according to my stock analysis.
Yet, based on my stock analysis, the current stalling in revenues has been impacted by a growing list of rivals that all have targeted McDonalds as the company to emulate and, hence, try to take market share from.
In the key and growing China fast-food market, McDonalds operates about 1,500 stores (aiming for 2,000 by 2013), but, in my stock analysis, the company faces tough competition from YUM! Brands, Inc. (NYSE/YUM), the operator of such well-known fast-food outlets as Taco Bell, Kentucky Fried Chicken (KFC), and Pizza Hut.
YUM! has close to 4,500 restaurants spread across more than 700 cities in China, adding a record 656 restaurants in 2011 and planning to add another 600 this year. In 2011, YUM! generated $908 million in operating profits from its Chinese outlets. “We consider China to be the greatest restaurant opportunity of the 21st century,” reads the company’s web site. At present, about 40.0% of the company’s profits are generated in China.
YUM! opened its first KFC in China in 1987 and currently operates about 3,700 KFCs in the country. The growth of KFC has been amazing, considering that the U.S. has about 5,200 KFCs, so it looks like it will just a matter of time before there will be more KFCs in China. The Pizza Hut brand is growing in China with about 630 restaurants in over 120 cities.
Based on my stock analysis, McDonalds needs to be concerned with the strategy of Burger King, which announced it would open up 1,000 restaurants in China within five years.
In the U.S., stock analysis shows that McDonalds faces increasing competition from Chipotle Mexican Grill, Inc. (NYSE/CMG), which had seen stellar trading at a record $442.00 on April 13 before retrenching on growth concerns. Nonetheless, according to my stock analysis, Chipotle is a real threat and a best stocks play that can’t be ignored by McDonalds and the Taco Bell brand of YUM!.
It looks like the next major fast-food battleground will be in China and other emerging markets, based on my stock analysis.