McDonald’s Corporation (NYSE:MCD) is expanding into China faster than ever. Last year, McDonald’s Corporation (NYSE:MCD) planned on opening only 200 new stores in China by the end of 2013. Now, management has recognized the true potential of the new middle class Chinese consumers and is stepping up their game.
Competition and bird’s
Yum! Brands, Inc. (NYSE:YUM) is also planning on opening 700 stores in China in 2013, on top of their already massive 5,200 store count in China. Yum! is McDonald’s Corporation (NYSE:MCD) main competitor in China with its KFC and Pizza Hut stores.
KFC is Yum! Brands, Inc. (NYSE:YUM)’s biggest success in China, but recently, slowing economic growth and the bird flu epidemic are really hurting Yum!’s growth prospects. In March, primarily due to the bird flu scare, KFC same-store sales were down 16%. Compared with the 4% growth for Pizza Hut, it looks like the bird flu (which sadly has killed 13 people so far) is scaring consumers away from chicken. Luckily for McDonald’s Corporation (NYSE:MCD), beef and fries are their staples, not poultry.
Growth prospects
McDonald’s Corporation (NYSE:MCD) plan to open up more stores couldn’t have come at a better time. While consumers shy away from KFC, they will have McDonald’s Corporation (NYSE:MCD) greasy burgers waiting to comfort them. A 700 store increasing would increase McDonald’s total store count by 54% in China, which is great growth for a blue chip company.
In February, McDonald’s global same-store sales were down 1.5% (slightly better than the 1.6% decline analysts were expecting), and in the Asia Pacific, Africa, and Middle East region, sales were down 1.6%. On the flip side, management said that sales in China were “positive.” While positive isn’t an exact number, that does give investors some optimism on future growth.
If China comps can grow while everything else is contracting, then what kind of growth can you expect in better times. In 2011, Yum! Brands saw a 20% increase in same-store sales. Maybe, with consumers shying away from KFC, McDonald’s could see some double-digit same-store sales growth on the back of better market share. That would help them turn around total same-store sales, which were down 1.9% and 1.5% in January and February, respectively.
Macro economics
The Chinese macro picture is heavily in McDonald’s favor. When China posted Q1 2013 GDP growth of 7.7% (versus 8% expected), everyone saw that as a major disappointment. Keep in mind that 7.7% growth for an economy that is almost $8 trillion is still very impressive. In the GDP report, the consumer side was still resilient.
Retail sales were up 12.6% year over year. It was the industrial side that was hurting, with production only increasing 8.9% versus expectations of a 10.1% increase year over year.
Right now, China’s inflation rate is very low at 2.1%, which is down sharply from the 3.6% seen in March last year and approximately 6% seen in 2011. Lower levels of inflation will lead to larger real disposable income gains, enabling consumers to spend more.
Some more burgers
Another fast food restaurant that sells burgers in China is Burger King Worldwide Inc (NYSE:BKW), but they only have 63 restaurants in China so far. That was far below the 250-300 number that management wanted to open in China by the end of 2012. McDonald’s has benefited from not having to compete with Burger King in China, as it is the only major fast food burger joint around.
Burger King Worldwide Inc (NYSE:BKW) doesn’t have the same amount of cash flow as Yum! or McDonald’s to invest in expanding its business abroad, so for the next few years, McDonald’s won’t have to watch its back with Burger King like they will have to with Yum! Brands. But, in the future, Burger King will want to take some of the $29 billion (and rapidly growing) Chinese fast food industry and will make a more serious push to take market share.
Final thoughts
McDonald’s growth prospects in China look very promising, and it is great to see management wake up and realize where the next major growth market is. Right now, McDonald’s is richly valued, so you would want to buy in around $95, at the very least under $100.
For the long-term, McDonald’s seems well placed to take up market share in China and boost investors’ returns as this Chinese investment pays out huge dividends. I’m bullish on McDonald’s in the long run, but I wouldn’t be a buyer at this price unless McDonald’s pulls back, or posts a very bullish earnings report on Friday.
The article Will China Carry This Fast Food Company to Greater Heights? originally appeared on Fool.com and is written by Callum Turcan.
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