McDonald's and Burger King Battle for Latin America

Arcos Dorados (NYSE: ARCO  ) reported its third-quarter results last week. For Latin America's largest restaurant operator and McDonald's (NYSE: MCD  ) largest franchisee, the results could have been better. First,though, the good news: Arcos Dorados was able to deliver organic revenue growth of 18.5% and organic EBITDA growth of 25.8% this quarter over the same quarter last year.

However, the reported revenue and adjusted EBITDA in dollar-denominated terms were just 6.2% and 12.6%, respectively. Due to the economic slowdown throughout the region, Arcos Dorados' management has been forced to slow the pace of new restaurant openings in the near term.

McDonald's Restaurant in Argentina. Source: McDonald's.

Macroeconomic issues in Latin America have been a real challenge for Arcos Dorados over the past two years. The company's customers have been feeling the pressure, and the devaluations of currencies in countries like Brazil -- its largest market -- have certainly not helped matters.

Last quarter, Arcos Dorados' Brazilian revenue grew 12.8% on a constant currency basis. However, on a dollar-denominated basis, Brazilian revenue actually declined by $205,000 even though the company opened 71 new McDonald's restaurants in Brazil.

King-size competition
In addition to the economic slowdown across Latin America, increased competition from a familiar face is also beginning to heat up. Since being acquired by the Brazilian-backed 3G Capital in 2010, being restructured in 2011, and rejoining the public market in 2012, Burger King (NYSE: BKW  ) has put a particular emphasis on growing its business in Latin America.

Late last year, Burger King announced three separate partnerships with master franchisees in Mexico, Central America, and South America to open hundreds of new restaurant locations. Company management also announced this year that it unified its Latin American marketing under a single growth strategy. As of Sept.30, Burger King now has 1,451 restaurants throughout Latin America, up from 1,003 just two years ago.

Although it is growing fast in the region, Burger King also faces similar macroeconomic and currency concerns. During the same three-month time period as Arcos Dorados' latest earnings results, Burger King's Latin American segment reported revenue of $18.1 million, down from $33.5 million during the same quarter last year. In addition to unfavorable currency translation effects, this drop includes negative same-store sales growth in Mexico and Puerto Rico (Burger King's largest and third-largest Latin American markets, respectively).

Latin American potential
Driven by a growing middle-class of consumers with money to spend on discretionary purchases, and a restaurant industry made up mostly of small, independent operators, the fight for fast-food dominance in Latin America has only just begun. Despite the problems recently, the country still presents a great opportunity for these U.S. fast-food giants.

In the countries and territories that make up McDonald's and Burger King's Latin American operations, the combined population is more than 580 million people. With Arcos Dorados and McDonald's 1,993 restaurants and Burger King's 1,451 restaurants, this equates to nearly one McDonald's restaurant for every 300,000 people and one Burger King restaurant for every 400,000 people. If you compare that to the United States' ratio of one McDonald's restaurant for every 22,000 Americans, you can see that Latin America is still in the very early growth stages for these companies.

Foolish bottom line
McDonald's and Burger King still have a long way to go to reach a U.S. level of market penetration in Latin America. Today many Latin Americans are unable to afford these fast-food offerings, and slowing economies are hurting the wallets of those customers who can afford them. As the economies of Latin America improve and more people continue to join the middle class, the growth opportunity for McDonald's and Burger King in the region is tremendous, to say the least. It has been a largely unrealized opportunity thus far, but it is an opportunity nonetheless. 

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