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Is It a Good Morning in Vietnam for McDonald’s?

Earlier this month, McDonald's (NYSE: MCD  ) opened its 10,000th Asia-Pacific, Mideast, and African, or APMEA, region restaurant in Ho Chi Minh City, Vietnam -- the first in the country. Formerly named Saigon, Ho Chi Minh City is Vietnam's most densely populated metropolitan area and it is home to nearly 10% of the country's 90 million citizens.

Competitors Yum! Brands (NYSE: YUM  ) and Burger King (NYSE: BKW  ) beat McDonald's to Vietnam by arriving in 1997 and 2011, respectively. Since then, each of these companies has slowly expanded across Vietnam while also focusing on locations in adjacent Asian countries like China and Japan. With that in mind, how much success can McDonald's realistically expect in Vietnam?

Downtown Ho Chi Minh City, Vietnam.  Credit: Michael Carter.

McDonald's says good morning, Vietnam
McDonald's might not be the first international fast food chain to enter Vietnam, but it is the first to offer drive-thru service. The two-story stand-alone 350-seat capacity restaurant operates 24 hours a day and it has parking for cars and over 250 motorbikes. Like many newer McDonald's restaurants, it also offers free Wi-Fi access.

In recent quarters, McDonald's has struggled to grow in the U.S. Last quarter, the company's comp sales fell by 1.4%.

However, internationally the chain has experienced healthier results. Most recently, global comp sales grew by 1.2% in January for McDonald's. This was driven by 2% growth in Europe and a 5.4% jump in APMEA. China, Japan, and Australia have traditionally carried earnings for the APMEA segment.

KFC in Vietnam. By Christopher, via Wikimedia Commons

Yum! Brands and Burger King in the lead
Yum! Brands brought KFC to Ho Chi Minh City in 1997 . There are now 134 KFCs and 34 Pizza Huts today in Vietnam. Similarly, Burger King introduced the Whopper to Vietnam in 2011, and today the company has over a dozen locations there.

YUM Restaurants International, or YRI, is a segment which covers all countries outside of the U.S., China, and India. Despite KFC's lingering problems with the December 2012 poultry supply incident in China, the company is still the market leader by a wide margin in many Asian locations like Indonesia and Vietnam.

In 2013, Burger King's Asia Pacific, or APAC, segment had comp sales growth higher than any other Burger King segment, at 4.1% for the year and a whopping 6.2% in the fourth quarter.

Both Yum! Brands and Burger King also have leads in marketing and distribution. Foodpanda is the leading online marketplace for food delivery in 38 countries and it allows partnered restaurants to bring their menus online and extend their customer bases. Foodpanda has partnered with Yum! Brands and Burger King, and also with Dominos, Dunkin' Brands, and Starbucks

KFC Vietnam menu. Credit: Michael Carter

Can Vietnam afford McDonald's?
Similar to what it does in other international locations, McDonald's has attempted to make its famous menu cater to the Vietnamese. However, the company's $3.10 McPork burger looks very expensive in relation to Vietnam's average salaries and typical food prices.

The average wage in Vietnam is around 3.2 million VND ($150) per month, while college graduates working in top professions make 9.2 million VND ($440) per month. Even CEOs make just 17-20 million VND ($800-$950) per month. Even though these wages seem low by U.S. standards, a salary of just $500 a month in Vietnam is more than enough to live on.

Local restaurants often charge $2-$5 while most street vendors that offer authentic Vietnamese cuisine sell meals for under $1. Pho, a popular street food in Vietnam that is comprised of noodle soup mixed with herbs, vegetables, and meat, and sought after in Asian restaurants throughout the U.S. at a price that sometimes reaches $10, rarely costs over $1 in Vietnam.

It is going to be difficult for McDonald's to compete with these prices if the company still wants to make a profit. Furthermore, Vietnam sees fewer tourist visits than other countries in Asia. Much of the tourism into the country still involves Vietnamese-Americans returning to visit family.

Can coffee help McDonald's in Vietnam?
Vietnam is the world's second largest exporter of coffee with a market share of 20%. However, coffee is not as popular in Vietnam as it is in the U.S. and it is mostly grown for export. Tea has traditionally ranked first, followed by beer, sugar cane juice, soybean drinks, sodas, and fruit smoothies.

The current effort by McDonald's to expand its coffee offering may not be as big of a factor for the company in Vietnam as it may be in the U.S.

Could McDonald's grow in Vietnam like it has in China? Shizhao, via Wikimedia Commons

Bottom line
I visited relatives in Vietnam a few years ago and the lack of a McDonald's was one of the first things I noticed. Staying in Ho Chi Minh City, I saw several KFCs and Pizza Huts, and ate at both chains. Customers at these chains were often younger professionals and many were tourists.

The success of McDonald's will be driven by the economy in Vietnam and its median wages. It is unrealistic to expect those who make $150 a month to spend $3-$4 on a single meal. However, sometimes it isn't even about the price. Sometimes it is just a matter of something like pho being more appealing than a Big Mac, or in this case, a McPork.

Furthermore, tourists to the country may prefer to try new things because you can almost find a McDonald's anywhere.

McDonald's is still a global powerhouse and it may be worth a second look in terms of investment potential.  However, there are many companies that are built on solid fundamentals and it's no secret that investors tend to be impatient with the market.  The best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 03, 2014, at 2:53 AM, Interventizio wrote:

    What's the use of a drive-through service if, as in the picture, these guy essentially travel on mopeds?

  • Report this Comment On March 03, 2014, at 5:36 AM, mikecart1 wrote:

    Hi Interventizio,

    That is a good point. When I was there, I didn't see many 4-wheel transportation. Of those I saw were taxis, buses, and transportation to-and-from the airport. It will be interesting how this drive-thru service works there and whether McDonald's thought this through.

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Michael Carter

I graduated with honors with a B.S. in Mechanical Engineering from Virginia Tech and later got my MBA from the University of Pittsburgh. I'm a Licensed Professional Engineer (P.E.) for the state of Pennsylvania. As an experienced equities investor and Motley Fool member since 2006, I try to show that investing is not only for the pros.

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