McDonald’s Looks To Europe And Russia As U.S. Sales Stagnate

It has been a tough few months for McDonald’s Corporation (NYSE:MCD) especially after new CEO Don Thompson took over. In the U.S., a resurgent Wendy’s and an aggressive Burger King are making life tough for McDonald’s and balancing margins vs. sales has become all the more difficult. Overseas, the recent yen devaluation has eroded the company’s Japanese sales in terms of dollars. In China, there has been a bird flu scare and almost all of the fast food chains are faring badly.

In this overall difficult atmosphere, Europe could provide a ray of hope. In August, while sales were below expectations in the U.S. and Asia, Europe surprised the market with a 3.3% increase in same-store sales. ^[1] Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

Some of the recent data coming out of Europe has been encouraging. The manufacturing sentiment across the eurozone recently hit a 26-month high as the air cargo traffic has improved and German and British economies are doing well overall. The automotive market in Europe has also shown some green shoots lately. These are signs that the worst may be behind in Europe. ^[2] A rebounding European economy could provide some upside to an otherwise bleak year so far. Europe is already the biggest market for McDonald’s with the region accounting for about 40% of its revenues.

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Look To The East

Apart from the opportunity to raise sales in its existing stores, there is scope to expand in Russia where McDonald’s has a very limited presence especially in the Eastern part. In 2012, McDonald’s signed an agreement with Rosinter to franchise restaurants which will see the fast food giant adding 45-50 restaurants in the country each year. The restaurant chain presently has 357 restaurants in the world’s biggest nation, but almost all of them are concentrated in the Western part of the country since setting up the supply chain and logistics in Siberia/East Russia is an arduous task. ^[3]

Expanding in Russia will give McDonald’s a better mix of restaurants since the nation’s GDP growth rate is not only above the global average, but also does not face any imminent debt crisis. Moreover, there is a paucity of fast food chains in Siberia with KFC and Subway being the only two international chains present.

On a cautious note, it is still early days and given that McDonald’s has more than 33,000 restaurants globally, it will take some time before the Russian success could show any considerable impact on the company’s income statement.

We have a $99 price estimate for McDonald’s, which is slightly above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. MCD 8-k [↩]
2. Europe’s Economy Recovering: Three Positive Signs, Including Strong Manufacturing (PMI) Data, Air Freight Traffic, Encouraging UK Story, September 3, 2013, ibtimes.com [↩]
3. McDonald’s pushes for expansion in Russia, February 21, 2013, chicagotribune.com [↩]