McDonald`s (MCD) is growing but that is slowly. It`s share price moved only 8% in 2013, and McDonald`s rewarded its shareholders with a 10% increase to its dividend. The surged 4% YTD. They delivered a high return on equity and their growth in its top and bottom lines was decent.
McDonald`s holds a market share of 31% in the fast food industry. How can McDonald`s continue to grow? Because the domestic market is saturated, they are now expanding in emerging markets, particularly China, where they have a great opportunity.
The U.S fast food industry is expected to grow 10% during the period of 2013 – 2018. Emerging markets are attractive to fast food players due to their large populations, fast population growth, concentration of younger consumers and growing demand for Western diets.
China is important for McDonald`s and it is the third largest market for the company after the U.S and Japan. They holds a 15% market share of China`s fast food market. They experience a strong growth in the region.
China`s fast food & takeaway market grew 80% from 2007 – 2012 to RMB 1 trillion ($162 billion). The market is expected to hit RMB 1,8 trillion ($292 billion) by 2017. All this is driven by economic growth in China, and McDonald`s is investing heavily in China to benefit from this growing market.
McDonald`s will open 1,600 new restaurants around the globe and spend $3 billion this year. China will get one of the biggest shares. They will open 300 locations in China, and that`s up from 250 last year and quadruple the number in 2004. Their goal is to have more than 2,000 restaurants in China by the end of 2014.
McDonald`s share price and earnings have underperformed relative to the S&P 500 and restaurants peers over the last 12 months. Have a look at the chart below. I have compared McDonald`s and S&P 500 so you could see by yourself.
(Picture: McDonald`s vs S&P 500)
In my opinion; both McDonald’s and Burger King is now trying to be everything for everyone. Can you imagine Burger King selling you a salad? Or a wrap? Come on; what`s next? For all I know, they will start to sell sushi next week. In-N-Out Burger, Chick-fil-A and Five Guys haven`t changed their menu in years. A big menu is making McDonald`s slower.
Many switch to restaurants perceived as more natural, simple and healthy, like Chipotle Mexican Grill (CMG) or Taco Bell which is built on this trend. McDonald’s franchisees lose out and this will be a slowly process as franchisee satisfaction is driven so largely by cash flow. McDonald’s need to take drastic action on their meny complexity and food integrity. Before that I expect the share price to languish.
Reports today:
10:30 a.m EST Crude Oil Inventories
01:01 a.m EST 10-y Bond Auction
02:00 a.m EST Fedral Budget Balance
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