McDonald's Is Betting Big on China

There's good news for the fans of McDonald's (NYSE: MCD  ) in China. Now they all can enjoy burgers, fries, and shakes from their favorite international food chain, as the company has decided to open more stores in the country. While fans of the Happy Meal are probably happier now, how should investors feel?

So what's cooking?
McDonald's aims to open at least 700 new stores in the country by 2013. At present, there are 1,300 Big Mac outlets in China, marking its largest expansion strategy ever deployed there. The newly announced goal sharply accelerates its December plan to open just 200 locations. So why the sudden move?

Mickey D's is no stranger to the Middle Kingdom. In fact, McDonald's has been in China for about two decades and, therefore, understands the market better than many of its rivals who may be just jumping in.

McDonald's bet on China is clearly a play on the country's growing attractiveness as an investment destination and as an opportunity to capitalize on the "Westernization" of consumers. To boost sales and improve profitability, companies have raised stakes in emerging markets where availability of cheap labor and raw materials often help these companies improve margins.

The second reason for this expansion can be the pressure McDonald's is facing from its competitors. The fast-food market is heating up, and this is the time to expand. McDonald's is looking at Asia for growth as it prepares to take on key rival Yum! Brands (NYSE: YUM  ) in its pursuit for growth in China.

In the battle for market share, Yum!'s KFC appears to have a head start in China with more than 3,000 stores already in place. But that's not all. Starbucks (Nasdaq: SBUX  ) , the world's biggest coffee chain, has also decided to boost its presence to 70 Chinese cities and triple its presence to 1,500 stores by 2015. A fight for market share would, in all probability, lure other established players such as Domino's Pizza (NYSE: DPZ  ) , Wendy's/Arby's (NYSE: WEN  ) , and hopefully Chipotle (NYSE: CMG  ) into the fold.

A Fool's take
It's evident that the rivalry is heating up in the fast-food market even in emerging markets such as China. If McDonald's succeeds in its Chinese expansion, it would see an immediate impact on sales and bottom line. The company has the advantage of a two-decade-old presence and such an experience fused with a well-planned strategy should further strengthen its foothold there.

Fool contributor Kabya Ghosh does not own shares of any of the companies mentioned in this article. Chipotle is a Motley Fool Rule Breakers selection. Starbucks is a Motley Fool Stock Advisor pick. Chipotle is a Motley Fool Hidden Gems recommendation. McDonald's is a Motley Fool Income Investor recommendation. The Fool owns shares of Chipotle, Domino's Pizza, Starbucks, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On May 11, 2011, at 11:03 AM, David369 wrote:

    We are taking over the world using fast food addiction. If any country gets out of line they get cut off... If we had started with the middle east we wouldn't have half the problems we do today.

  • Report this Comment On May 11, 2011, at 11:05 AM, David369 wrote:

    Oh yeah, and if that doesn't work we will send the mouse to brain wash them by playing "it's a small world".

  • Report this Comment On May 11, 2011, at 5:46 PM, xetn wrote:

    Having lived in China for over 2 years, my observation of Yum's stores and MCD were that KFC (for example) while have many more stores them MCD, were mostly empty (except after school, etc) while MCD stores were mostly full. I observed this in several different cities, including Hong Kong and Macao, and it never deviated. To me, that meant that Yum's cost of sales were higher.

    One thing that did impress me about KFC was there attempt to proved basic Chinese foods, such as congee which is a kind of water rice that many people eat for breakfast.

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