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Good Morning, Vietnam; Here Comes McDonald’s

By Mark Yagalla – Feb 10, 2014 at 11:59AM

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McDonald's is looking to play catch up with KFC and Burger King as it opens its first restaurant in Vietnam.

McDonald's (MCD 1.07%) is finally bringing the Big Mac to Vietnam and the country's rapidly growing economy. The question on my mind is, what took so long? After all, Burger King Worldwide (BKW.DL) and Yum! Brands (YUM 2.08%) both already have restaurants in the country. What's even more interesting is that Vietnam is the first new market for McDonald's in Southeast Asia in 20 years. Could McDonald's expansion into Vietnam be enough to boost global sales for the fast-food retailer?

A country with potential
Vietnam has a rapidly growing economy with more than 90 million people who all want a taste of American fast food. Since 2000, per capita incomes have nearly quadrupled. The median age in the country is only 28 years, and most of the population was born after the war. Therefore, you have a young country that wants to embrace American culture, and what better way to accomplish this than with McDonald's?

It is certainly a reversal of fortune for both U.S. multinationals and Vietnam since the end of the Vietnam War. McDonald's first location will be on Dien Bien Phu Street in Ho Chi Minh City and will have the country's first drive-thru. The opening is such a big deal that even McDonald's CEO Don Thompson will be there. Vietnam will be the 38th country for McDonald's in Asia, and the Ho Chi Minh City location marks the 10,000th location in the region.

What took so long?
McDonald's wanted to wait before entering Vietnam for three main reasons.For one, there was a lack of domestic beef cattle. Second, the supply chain infrastructure to ensure everything went from farm to table was not in place. Both are no longer an issue and have been rectified. The final delay was due to not having the right partner in Vietnam. McDonald's partner in Vietnam is Henry Nguyen, a former Goldman Sachs banker who now runs a venture capital and private equity firm called IDG Ventures Vietnam. He also happens to be married to the daughter of Vietnam's current prime minister.

What's on the menu?
On the menu there's McDonald's regular menu items and the McPork sandwich, which was added specifically for Vietnam. A Big Mac will cost 60,000 Vietnamese dong ($2.82). A Big Mac value meal with fries and a drink will cost 85,000 Vietnamese dong ($3.99). While more pricey than typical Vietnamese street food, going to McDonald's is more of a status symbol for the Vietnamese people as they get a taste of Americana.

Plenty of catching up to do
McDonald's has plenty of catching up to do in Vietnam. KFC has been operating in the country since 1997 and now has 135 locations there. Burger King entered Vietnam back in 2011 and now has almost 20 restaurants. Other chains also in the country include Baskin-Robbins, Dairy Queen, Carl's Jr., Popeye's Louisiana Kitchen, and Subway. Subway opened its first location last year in Ho Chi Minh City and now has three locations. Over the next few years, McDonald's plans on catching up and having 100 restaurants in the country.

Shares are still attractive
Shares of McDonald's are still cheaper than shares of Yum! Brands or Burger King Worldwide. McDonald's is trading at only 15 times next year's earnings, while Yum! Brands trades at 17 times and Burger King Worldwide trades at 26 times. McDonald's also has the highest dividend yield among the three at 3.4%. Shares of McDonald's have underperformed the market and are trading at the same price as last year.

Foolish assessment
While Vietnam is not big enough to have a meaningful impact on McDonald's global sales, it's nice knowing that there are still markets without a McDonald's. We see a McDonald's on practically every corner and think that there's no way the restaurant chain can keep growing. Well, McDonald's is proving that there are still markets out there without a location yet.

McDonald's has made some mistakes lately, as described in "McDonald's Has More Than a Chicken Wing Problem." That said, I'm still a big believer in the long-term growth story of McDonald's. For investors with a long-term horizon, McDonald's has been a proven winner, and that trend will continue as there still remains untapped markets like Vietnam for McDonald's.

Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. 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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