Restaurant Brands International revealed plans in August to spin off Tim Hortons China in a deal valued at US$1.7-billion.THOMAS PETER/Reuters
When it comes to growth, the big three global fast-food chains are all of one mind.
McDonald’s Corp. MCD-N, Yum! Brands Inc. YUM-N, led by its flagship Kentucky Fried Chicken (KFC) brand, and Restaurant Brands International Inc. (RBI) QSR-T, led by Tim Hortons Inc., are all heading east to emerging markets.
While the pandemic has slowed them down, their expansion in these markets is an unstoppable force, analysts say.
All three are adapting menus to local tastes, finding domestic partners, and reducing operational risks through master franchisees in these markets. The strategies are aimed at cashing in on a demographic dividend of large, young populations with rising incomes.
“How quickly they expand is very dependent on COVID-19, but it seems that they’re on track and weathering the storm relatively well,” says Daniel Sacke, portfolio manager with The Sacke Wealth Advisory Group at BMO Nesbitt Burns Inc. in Toronto.
McDonald’s has been the best performer of the big three throughout the pandemic. It’s seen as the gold standard of the global fast-food industry with 37,000 restaurants in 120 countries. It has 44 per cent of its outlets in Asia or other emerging markets, although the U.S. remains its single largest market.
McDonald’s has improved its margins, slimmed down its menus, made drive-through times faster, and invested in technology to improve digital ordering, pickup, and delivery.
It recently launched a loyalty program that attracted 21-million members within the first few months.
Mr. Sacke points to McDonald’s 45-year string of dividend increases as proof of its staying power, including increases in each of the past two years.
“McDonald’s is high quality, defensive and resilient,” Mr. Sacke says.
Dan Ahrens, portfolio manager for AdvisorShares Investments LLC in Bethesda, Md., also says McDonald’s is the gold standard and that emerging markets are a strategy for growth. He adds there’s plenty of room for the chains to grow in North America.
Mr. Ahrens manages the recently launched AdvisorShares Restaurant ETF EATZ-A, an exchange-traded fund (ETF) betting on a post-pandemic dining-out rebound and long-term trends that favour more of the same.
The actively managed fund holds each of the big three, but its top holdings include two pizza chains – Domino’s Pizza Inc. DPZ-N and Papa John’s International Inc. PZZA-Q. That’s because both offer a single product option that’s takeout or delivery, and they skirt some of the pandemic’s ups and downs.
“McDonald’s is always going to be the big kid on the block. But, [RBI] has made some really wise acquisitions,” he says. “They can’t run internationally with Tim Hortons, although it’s always going to be its bread and butter in Canada, so [RBI’s] smart to pick up other brands for the international growth.”
RBI is the third-largest global chain, with 27,000 restaurants in 100 countries. About 70 per cent of the chain is Burger King Corp. restaurants, and 19 per cent are Tim Hortons. The other 11 per cent are Popeye’s Louisiana Kitchens Inc. restaurants. In December, RBI completed its acquisition of Jacksonville, Fla.-based Firehouse Restaurant Group Inc. (Firehouse Subs) for US$1-billion. In August, it revealed plans to spin off Tim Hortons China in a deal valued at US$1.7-billion.
Chains continue to focus on China for growth
Before the pandemic, RBI announced an agreement with a partner to open 1,500 Popeyes restaurants in China over the next 10 years. Popeyes is the last of RBI’s brands to enter the Chinese market.
Burger King has been in China since 2005 and has more than 1,200 restaurants. It has also expanded into emerging markets in eastern Europe including Estonia, Latvia, and Lithuania. Tim Hortons opened its first Chinese outlet in Shanghai in 2019.
Mr. Ahrens says the spinoffs shift operating control to local partners that can adapt more quickly to changing local tastes. The parent receives an ongoing royalty payment.
“China, in particular, comes with geopolitical risks, so a long-term revenue stream at arm’s length has an advantage,” Mr. Ahrens says.
Yum! Brands, the second-largest chain by revenue, is the holding company that owns Taco Bell, KFC and Pizza Hut International LLC. It has 22 per cent of all stores in China and more than a quarter (27 per cent) of all KFC sales are now generated in China. In November 2016, Yum spun off the Chinese operations, forming Yum China Holdings Inc. YUMC-N, which pays a 3-per-cent royalty on revenue to the parent company.
Yum has an ambitious expansion program and had opened 1,534 new stores in international markets through the third quarter. About 1,000 of these were in China – almost all of which are franchises. A recent initiative is the expansion of its coffee shop chain through a partnership with Italy’s Luigi Lavazza SpA (Lavazza) chain.
While Mr. Sacke favours McDonald’s, he likes Yum’s momentum and, like McDonald’s, its investment in mobile and online technologies. He notes that 35 per cent of Yum’s sales are now generated through online ordering, double the pre-pandemic level.
“For all three players, the issues are inflation in wages, the pandemic, and commodity price inflation,” he says. “The winners will be the companies that can deal with all three effectively.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
For more from Globe Advisor, visit our homepage.