I know that for many businesses the rule of thumb is that if they want to augment their already established business, then they should just go east until they hit China. But doing business in China has many legal and cultural constraints that could impede the progress of leading franchise companies such as Starbucks Corporation (NASDAQ:SBUX) and McDonald’s Corporation (NYSE:MCD). These companies have been in China for a while and it’s high time to examine these top chains and see if their stand in China was worth the travel. So is Asia worth these companies’ effort?
Starbucks
During 2012, the company’s revenue grew by 13.7%. In the China/Asia Pacific region revenue grew by 30.6%. Alas the revenue in this region are only 5% of the company’s total revenue. In terms of profit margin, the China/ Asia Pacific region’s operating profitability was 35%. In comparison, in the Americas the profit margin was only 21%, and in the EMEA region the operating profitability was only 0.9%. This means that not only the China/ Asia Pacific region leads all other regions in terms of growth, it also leads in terms of operating profitability. If Starbucks Corporation (NASDAQ:SBUX) will expand its business in China, its operating profitability might fall. After all more established companies such as McDonald’s Corporation (NYSE:MCD) have a lower profit margin in the Asian region than in other regions. On that note let’s turn to McDonald’s.
McDonald’s
The company has a strong hold in China. The APMEA or Asia Pacific/Middle East/Africa region accounts for 22% of the company’s total revenue. How has the APMEA region, which includes Asia/Pacific regions, done so far? According to the annual report of the company for 2011 (the company didn’t publish its full annual report yet) its total revenue rose by 12.2%. The APMEA region’s sales grew by almost 19%. Europe was next in terms of growth at 14% and U.S had a growth rate of only 5.1%. So the APMEA region leads other regions in terms of growth. But how this region did in terms of profitability? In 2011, the APMEA region’s profit margin was only 17.3%. In comparison, in the U.S, the profit margin was the highest at 20.6% and in Europe the margin was 19.3%. So the APMEA region is leading the way in growth but drags behinds in terms of profit margins. As Starbucks will continue to expand, its profit margin in China and Asia Pacific might also follow the way of McDonald’s Corporation (NYSE:MCD) and fall below the profit margin of other regions.
Even though Starbucks Corporation (NASDAQ:SBUX) produced higher growth in revenue, it wasn’t able to have as higher profit margins as McDonald’s. Moreover, McDonald’s is able to offer a higher dividend yield of almost 3.12% based on $0.77 per share. Starbucks only offers an annual yield of 1.45% based on $0.21 per share. McDonald’s also has a much higher payout ratio of 54% while Starbucks has a payout ratio of only 40%; even though both companies have more than enough to pay their respective dividend with their free cash flow. So Starbucks is growing faster than McDonald’s in terms of revenue. But the former has a much lower profit margin, and offers a lower dividend and smaller payout ratio than the latter. This puts Starbucks as a lesser attractive investment than McDonald’s Corporation (NYSE:MCD) for those who seek a higher payout and more stability.
Some companies have yet to make a splash in China even though they do have a strong business in Asia.
This brings me to another competitor of Starbucks Corporation (NASDAQ:SBUX) that has yet to make it in China – Dunkin Brands Group . This company’s international business is mostly located in South Korea and Japan in joint ventures. The Asian region accounts for almost 74% of the company’s entire international operations. How is the company doing in these regions compared to its US operations? In 2012, Dunkin’ Donuts U.S net revenue grew by 8% while the international segment by only 1.5%. The U.S operations also have a higher profit margin than the international segment. This means, this company isn’t able to grow faster or have a higher profit margin in the Asian market than in its core U.S operations.
The Foolish bottom line
I have presented three competing companies. All three have a foothold in the Asian market. But these companies present very different performances. The drive of leading companies to Asia is reasonable but doesn’t always lead to higher profit margins or higher growth. Keep in mind that when expanding for a foreign country such as China, uncertainty and risk rise from legal, logistics, cultural and currencies stand point. So growth isn’t the only factor to consider.
The article Does Starbucks Need Asia to Grow? originally appeared on Fool.com and is written by Lior Cohen.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
