Fast Food Goes Global

Over the past half-century, fast food giants such as McDonald’s and Yum! Brands Inc. have succeeded in entrenching themselves in American culture and establishing strategic positions within the American market. However, the economic downturn in the United States over the past couple of years, coupled with steep commodity and energy prices, the housing crisis, and increased unemployment, have collectively diminished consumer spending and increased production costs. These factors stunted the growth of the fast food industry and stifled corporate profits. The ensuing stagnation has since been compounded by recent health-related initiatives promoting healthier eating, which draw consumers away from fast food and towards healthier alternatives. In turn, the entire situation prompted fast food chains like McDonald’s and Yum! Brands to change their approach. Fast food chains have refocused their attention on international expansion, particularly in the emerging markets.The term “emerging markets” encompasses rapidly industrializing nations like China, India, and Russia. These economies feature explosive growth and an expanding middle class with greater disposable income. In addition, these nations contain significant urban populations and largely unsaturated markets. Jointly, they present rather promising growth prospects for fast food chains. Eager to take advantage of such favorable economic conditions, companies like McDonald’s and Yum! Brands have consistently remained at the forefront of establishing hundreds of new stores in these locations.

Although McDonald’s, which boasts over 32,000 locations in 117 countries, may be the world’s largest hamburger fast food restaurant chain, it is struggling to keep up with its competitor, Yum! Brands Inc. The rapidly expanding and innovating corporation, which owns KFC, Taco Bell, and Pizza Hut, has created a tremendous presence overseas, arguably more so than McDonald’s. It operates an impressive 38,000 restaurants in 110 countries, earning the title of the world’s largest restaurant company.

The two juggernauts together have sparked an industry-wide search for new markets, which has in turn fostered intense competition among opposing chains. This phenomenon is nowhere more evident than in China. With a middle class of over 300 million people and estimates that the figure could reach 500 million within a decade, China is potentially a very lucrative market.

Even though Yum! Brands has already established itself as the prominent fast food company in China, it is constantly seeking to expand its reach. In order to increase brand recognition of KFC in China, Yum! Brands has been opening the equivalent of a new KFC location almost every day. Of its 1,400 new restaurants in 2009, Yum! Brands opened 509 in China alone. In an effort to keep pace with Yum! Brands, McDonald’s has been forced to constantly innovate and expand.

McDonald’s expects to increase spending in China by 40% in 2011, as well as remodel 80% of its existing locations by 2013 as part of its $1 billion global investment project. This comes in response to Yum! Brands’ current domination of the Chinese sphere with 4,000 outlets in the country and 40% of the market share. As of now, McDonald’s clearly lags behind, possessing only 16% of the market share and having just 1,900 restaurants in China.

In addition to trying to outpace the local competition, fast food companies like Yum! Brands have begun to buy out these smaller companies. In April of this year, the company made a preliminary offer to acquire a larger share of the Chinese company Little Sheep Group Ltd., a casual-dining chain that specializes in “hot pot” dishes.

It is important to note, however, that the transition to a more global outlook is not solely limited to the two biggest players in the industry, nor is the growth limited just to China. Other chain restaurants, including Starbucks, California Pizza Kitchen, and Domino’s, all have plans to enter and expand their number of stores in China as well. Fast food chains have also sought out various markets in Eastern Europe, especially Russia. In fact, McDonald’s recently announced its plans to increase its store count in Russia by 15%, which amounts to building 40 new restaurants. This would be in addition to its $174 million investment and 30 new restaurants constructed in 2010.

Despite the massive penetration into these developing economies already, the most significant growth has yet to come. In an attempt to gain larger footholds in regions like India, the two fast food mammoths have made ambitious long-term investments that will likely materialize within the next few years. Most notably, Yum! Brands has plans to quadruple the number of its restaurants in India by 2015, which would bring its number of locations in India to a grand total of 1,000. Already a major contributor to the company’s revenues, Yum! Brands expects that Indian operations will bring in $100 million in net income in that same year. What’s more, the fast food company hopes to derive as much as 60% of its earnings from emerging markets by 2015, which would constitute double what these very same markets earned Yum! Brands just five years ago. To accomplish this, Yum! Brands expects to invest over $120 million to fund this additional expansion, on top of the $100 million invested in 2009. In an effort to keep up, McDonald’s expects to open 30 new restaurants in India in 2011 alone as part of its $1 billion global investment project that is currently underway.

With over 245 million people and a large urban youth population, Indonesia is rapidly becoming an attractive market as well. Yum! Brands recently opened its 400th KFC  in Indonesia, just 32 years since the first one opened there in 1979. And the company shows no indications of stopping at 400. According to the Managing Director of the Asia Franchise Business Unit of Yum! Restaurants International, Yum! Brands plans to have over 1,000 KFC and Pizza Hut restaurants in Indonesia by the year 2015.

However, gaining entry into new markets can be difficult, and requires more than merely constructing the physical plant. Rather, it entails tailoring the operations to the specific region, and more specifically, adapting to the needs of the new clientele. In order to stimulate demand for their products, fast food chains have developed unique food options to cater to the differing tastes endemic to that particular nation. Although such menu alterations may be costly, they are integral parts of capturing market share from local restaurants. For example, McDonald’s removed its iconic hamburger from its menus in India because there, the cow is considered a sacred entity. Instead of beef, McDonald’s offers an extensive vegetarian menu, which features 100% vegetarian patties consisting of potatoes, peas, carrots, and Indian spices. McDonald’s has also launched new additions to its McSpicy line, in hopes of attracting a larger number of customers. Beyond India, the company offers shrimp burgers in Japan, a rice and bean dish in Costa Rica, Big Macs wrapped in pitas in Greece, and burgers with rice patties rather than buns in China.

In the case of China, the fast food giants didn’t stop with simply diversifying their menu options.They have also altered operations in order to adapt to the new environment. McDonald’s has employed a strategy to broaden its reach, increase accessibility, and ultimately bolster ales. To do so, the fast food chain plans on renovating existing locations, increasing the number of drive- through outlets in big cities, and expanding the number of restaurants that feature delivery services, 24-hour service, and McCafés. Yum! Brands has similar ideas to stay competitive, hoping to offer breakfast, home delivery, and 24-hour service in its KFC and Pizza Hut chains. Moreover, Yum! Brands has hired Chinese managers to run its operations in China to gain insight into how the Chinese market works. The fast food company has also taken steps to enhance its perception as a more upscale dining experience by offering menu options like wine and escargot at its Pizza Hut locations in China.

While investments in developing economies have the potential to be incredibly profitable, emerging markets like China also pose potential problems for fast food chains. Such high growth environments often bring high levels of inflation, which translates into higher commodity prices, rent, and labor costs. Despite the elevated costs, the move to emerging markets appears to already be paying dividends. Yum! Brands’ recently released a quarterly report indicating a 13% increase in same- store sales, coupled with a 15% rise in transactions in its Chinese restaurants. Furthermore, 54% of its total profits came from China. McDonald’s appears to be trailing a bit, but still posted a 3.2% increase in sales in the Asia Pacific, Middle East, and Africa region. Evidently, with so much room for expansion in these developing markets, the possibilities seem limitless.