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Following Rivals, McDonald's Sees Opportunity in China

By Jeremy Bowman - Apr 5, 2016 at 12:00PM

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The Golden Arches plans to open over 1,000 new restaurants in China over the next five years.

McDonald's Corporation (MCD -2.88%) is growing again.

The company released an ambitious growth plan for Asia last week after closing more stores than it opened in the U.S. for the first time in over 40 years last year. At the time, the net closures seemed to symbolize a giant in retreat, especially at a time when McDonald's comparable sales at home had fallen for six quarters in a row. 

A year later, things have changed. U.S. comps were up 5.7% in the fourth quarter on the strength of the all-day breakfast launch, and the fast food titan is planting its growth flag firmly once again, this time in China.

McDonald's said last week that it was looking for strategic partners -- franchisees -- in Asia, with a specific focus on China, Hong Kong, and South Korea. McDonald's expects to open 1,500 new restaurants in those territories in the next five years, adding to the more than 2,800 locations it already has there.

Of the 1,500 new restaurants, Mickey D's plans to open 1,300 in China, where it already has 2,200 locations.  For a company with more than 36,000 restaurants worldwide, China only represents a fraction -- 6% -- of total store count. Considering that American companies have long recognized the opportunity in China, the best question for McDonald's may be: "What took you so long?"

Late to the party
China has nearly a fifth of the world's population and 15% of the world's GDP. It's also the source of much of the economic growth in the world today, even with its recent slowdown.

McDonald's rivals like Yum! Brands (YUM -1.78%) and Starbucks (SBUX -1.32%) recognized this opportunity long ago. Yum, the world's biggest fast-food company by store count, has blanketed China with its KFC brand. It finished 2015 with over 7,000 locations in the country, delivering nearly $7 billion in revenue and $757 million in operating profit.

Starbucks, meanwhile, claimed nearly 2,000 locations in China at the end of fiscal 2015, growing that figure by about 30% in just the last year. The coffee king plans to accelerate openings in the traditionally tea-drinking nation with 500 new stores in each of the next five years, for a total of 2,500, and CEO Howard Schultz has said he expects China to become the company's biggest market. China has also been the company's hottest growth market, as same-store sales in 2015 in the China/Asia Pacific region grew 9% in the past year. In no year in the last five has that figure dropped below 7%.

Success isn't guaranteed
Yum! Brands had a good run in the world's #2 economy, but its once-explosive growth has turned flat amid a series of food safety scandals, competitive threats, and company mistakes. Same-store sales have fallen in each of the past two years, and operating profit is still down from 2012. Late last year, Yum announced plans to spin off its China division into a separate business. 

McDonald's was wrapped up in one of Yum's food-safety scandals in 2014 as a mutual beef supplier was found to be using contaminated and expired products. McDonald's comp sales plummeted, but have since recovered. Other factors also threaten an expansion, such as rising local competition and increasing health concerns about American-style fast food. In a survey, 51% of Chinese said they consumed Western fast food last year, down from 67% in 2012.

Much of the world is already saturated with McDonald's. In the U.S., there is nearly one location for every 20,000 people, and the fast food giant is similarly ubiquitous in Europe. China's huge population and growing economy makes it McDonald's best opportunity to add new stores. The company also plans to refranchise most of its current locations in the country as it works toward its goal of having 95% of its restaurants franchised, a shift that should boost profitability.   

The 1,500 new restaurants announced over the next five years will only increase McDonald's store count by 4%, but for a company that was shrinking in its biggest market just last year, investors should cheer the return of aggressive growth ambitions.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$234.66 (-2.88%) $-6.97
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$110.47 (-1.78%) $-2.00
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$72.75 (-1.32%) $0.97

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