McDonald’s Competitors Pushing into Emerging Markets

April 14th, 2011 by Trefis Team
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McDonald’s (NYSE:MCD) focus on expanding its international presence, mainly in emerging markets like India, China and Russia, is paying off. Its comparable store sales, a retail metric to measure a company’s profitability, increased by 4.4% in the U.S. versus 5.5% across Asia-Pacific, the Middle East and Africa in Q4 2010. [1] International franchising has proved to be a successful strategy for the company. However, McDonald’s could come under pressure from competitors like Burger King, Denny’s, Subway, Wendy’s (NYSE:WEN) and Yum! Brands (NYSE:YUM) that are also focusing on growth in these markets as well.

While we anticipate McDonald’s number of franchised & affiliated restaurants will approach 29,000 by the end of our forecast period, Trefis members predict the number will reach close to 32,000, implying an upside of 7% to our MCD stock price estimate.

We currently have a Trefis price estimate of $78.40 for McDonald’s’s stock, which is just slightly ahead of he the current market price around $77.

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International Franchising Strategy Paying Off

McDonald’s made a prudent decision in 2007 to sell off 21% of its company-owned restaurants in the U.S. in order to channel more resources on expanding its operations in the fast-growing international markets like India, China, Russia and Latin America. This helped the company in diversifying its risks in terms of economic downturn affecting certain regions.

India and China are lucrative markets for fast food restaurants like McDonald’s as a large percentage of the population is under 30, upwardly mobile, and have growing incomes. The franchise market in India is pegged at $3.3 billion and is expected to grow at 30% annually. [2]

In addition to India and China, McDonald’s is planning to increase its investments in Russia. In 2010, the fast food chain opened over 30 restaurants investing around $174 million. Going forward, the fast food chain plans to open more stores in this region, expecting to grow its store count by 15% each year. (See McDonald’s Invests in Russian Growth as Part of EM Focus)

Competition Abound

Seeing the huge growth potential in emerging markets, leading chains like Subway, Burger King, and Wendy’s have redoubled their focus on growth in these markets. This translates to increased competition for McDonald’s. Denny’s plans to foray into India and has announced plans to expand with up to 50 units. Starbucks and Dunkin Donuts have also announced plans to enter the country. [2] Subway recently surpassed McDonald’s in total number of restaurants worldwide. However, McDonald’s is still the leader in terms of revenues. [3]

Our complete analysis for McDonald’s’s stock is here.

Notes:
  1. Summary Box: McDonald’s 4Q, Businessweek, Jan 24, 2011 [↩]
  2. U.S. fast-food chains bet on India to drive growth, Reuters, April 11, 2011 [↩] [↩]
  3. Subway passes McDonald’s in global presence, MSNBC, March 8, 2011 [↩]