Is McDonald’s Dependence On High Growth Markets Increasing?

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In mid-2015, McDonald’s (NYSE:MCD) started operating under a new structure that classifies segments and combine markets with similar characteristics and opportunities for growth. Under the structure, the broad classification is:

  1. U.S.: It is McDonald’s largest segment, responsible for a majority of the company’s revenues.
  2. International Lead Markets:  It consists of established markets including Australia, Canada, France, Germany, the U.K., and related markets.
  3. High Growth Markets: These markets are believed to have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, Poland, Russia, Spain, Switzerland, the Netherlands, and related markets.
  4. Foundational Markets & Corporate:  The remaining markets in the McDonald’s system, consisting of Asia, Europe, Latin America, Africa and the Middle East. Each of these markets are believed to have the potential to operate under a franchised model.

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Lately, McDonald’s has been laying a lot of stress on its “High Growth Markets,” consisting of large countries like China and Russia. Its efforts at attracting customers include creating excitement through a customized menu, promotions, and implementing an improved digital strategy. In 2015, the company opened over 400 new restaurants in the region. The High Growth markets include approximately half of the total planned global openings for 2016, of which 400-500 restaurants are expected to be set up in China. This indicates McDonald’s increasing reliance on the segment for its future growth.

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In terms of constant currency, revenues from the high growth markets have consistently increased year on year. However, the foreign currency headwinds being witnessed due to a stronger dollar have affected the revenues and comparable store sales data adversely.

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As the FX headwinds subside, and McDonald’s finishes its re-franchising program in 2018, we can expect the high growth market to return to growth and be responsible for the company’s turnaround.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for McDonald’s

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