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?
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.
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.
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.
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.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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.