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Fast Food Is Betting Big on Emerging Markets

30 Mar 2010 - Two years ago, Don Tyson, the founder and former CEO of Tyson Foods (TSN), the world’s largest meat processor, told the Associated Press that there wasn’t “much left for Tyson Foods to do in the US.”

Two years ago, Don Tyson, the founder and former CEO of Tyson Foods (TSN), the world’s largest meat processor, told the Associated Press that there wasn’t “much left for Tyson Foods to do in the US.”

He went on to say that the company would be focusing on emerging markets, following “the expanding footprint of fast-food chains.”

Emerging markets have proven to be a collective white knight for the fast-food industry, providing double-digit growth for companies like McDonald’s (MCD), while sales have been steadily declining in the US and Europe.

Greg Schroeder, managing director and senior analyst at Wisco Research, tells Minyanville that, in the US, the fast-food market is “mature and saturated, so unit growth opportunity is minimal.” In fact, he says, over the last year or two, some chains have been closing as many restaurants as they’ve opened.

“Roughly 80% of [fast-food] locations are franchises, thus, as it requires very little capital spending to collect royalties, the parent companies have enormous cash flows,” Schroeder says. “The question becomes, ‘How do we deploy all this cash?’, and with shareholders expecting growth, emerging markets are where they’re focusing.”

In the case of McDonald’s, Schroeder says, that focus has led to “one-third, or even more, of profits generated internationally.”

One market in which McDonald’s will “aggressively start expansion” is South Korea, which is described as a “beef eater” market. “Korea is a big market for us: you’ve got 48 million people, a $30,000 average household income, and beef eaters,” Tim Fenton, a McDonald’s executive, said.

The chain plans to invest $15 million in the country this year, and $30 million in 2011.

In addition to benefiting McDonald’s investors, the push into Korea will surely also please domestic beef producers, like ConAgra (CAG).

D. Scott Brown, program director of livestock and dairy at the Food and Agricultural Policy Research Institute at the University of Missouri, told attendees at last week’s Polk County Soils and Crops Conference that the absence of a Korean export market would leave “an extra billion pounds of meat to eat here at home” and would depress prices. He tells Minyanville that fast food’s attention on emerging markets will “absolutely be helpful in regaining some of the beef industry's lost market share.”

Last week, a Taco Bell (YUM) opened for business in Bangalore, which Nation’s Restaurant News described as “an easy introduction” at a time “when the US market is not very favorable for the restaurant industry.”

“The Mexican-style food is perfect for the Indian taste palate and we will be offering a variety of vegetarian meals as well so that everyone can enjoy it,” Allan said.

India is a “key growth market” in Yum Brands’ global portfolio, says Graham Allan, president of Yum Restaurants International, which saw its unit base expand 3.6% last year, while the company’s domestic unit base contracted by about 1%.

As Hindus are forbidden from eating beef, India’s Taco Bell locations will be serving menu items including crunchy potato tacos and burritos made with potatoes and paneer, a fresh, unripened cheese, as well as chicken burritos, chicken quesadilla, chicken nachos, and chicken Crunchwraps.

That said, strap yourself in for an extremely fast and loose segue -- to Turkey.

Yum, McDonald’s, and Burger King (BKC) have all expanded to the country of 73 million. FOCUS Brands Inc., owned by private-equity group Roark Capital, which is backed in part by Goldman Sachs (GS), will follow by opening 40 Moe's Southwest Grill restaurants (which offers a burrito called “The Homewrecker,” ostensibly a nod to an ungodly amount of beans in the recipe), with the first to open its doors in Istanbul this September.

And, for those who fear America hasn’t done much in the way of winning hearts and minds in the Middle East, they seem to love our cookies.

NexCen Brands Inc. (NEXC) has signed an agreement to open 10 Great American Cookies stores in Saudi Arabia and three Great American Cookies stores in Kuwait, in addition to a Marble Slab Creamery ice cream outlet in Egypt.

The domestic fast-food market is bursting at the seams and can’t support endless expansion. Add to that a stateside atmosphere increasingly unfriendly to the Burger Kings, Wendy’s (WEN), and McDonald’s (a coalition of health professionals, parents, and corporate accountability advocates is calling for Ronald McDonald to retire, saying he has too much influence on kids), and the rest of the world seems nothing but the obvious place to be.

Source: Minyville - http://www.minyanville.com/

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