The Fast Food Risk In BRIC & Emerging Market Nations (YUM, MCD, ARCO, SBUX, WEN)

China, India, Brazil… all part of the BRIC nations along with Russia.  The growth of those three nations has been slowing and the concern is growing that these nations and much of Latin America are seeing much of their growth projections cut each week.  The data from China alone may look high for the U.S. or Europe, but the growth slowdown is enough that it almost looks recessionary as far as business planning is concerned.  So what about questioning the theory of “You gotta eat!” in these BRIC and emerging markets.

As nations grow and grow the consumers there tend to want the same luxuries and comforts that Americans and Europeans have enjoyed and taken for granted. It is hard to imagine, but the fear is that the growth rates are slowing so much that even the emerging fast food growth is in jeopardy in these markets.  As it turns out, many growth nations are just recently moving to a ‘three meals a day’ economy for the people and some markets have been even worse than that.

Recent evidence and share performance has been dismal in shares of Yum! Brands, Inc. (NYSE: YUM), McDonald’s Corporation (NYSE: MCD), and Arcos Dorados Holdings Inc. (NYSE: ARCO).  The fear is growing that things could go beyond tepid growth.  These shares are pricing in a slowing of growth rates that it might look or feel like contraction when you compare emerging markets to developed markets.  And what about the growth ambitions of Starbucks Corporation in China and elsewhere?  And what about that turnaround that never seems to gain traction from The Wendy’s Company (NYSE: WEN)?

Yum! Brands, Inc. (NYSE: YUM) only lost about 1% on Monday to close at $64.23 after Raymond James cited slowing Chinese growth in its analyst downgrade.  Its KFC unit is huge in China and is said to be more than 40% of the sales for YUM.  It seems hard to imagine that the Chinese growth slowdown would keep the Chinese from wanting that fried chicken, but the drop on last Friday is worse than we have seen in ages… shares fell to $64.70 from $70.36.  Yum’s equity market capitalization rate is now just under $30 billion and the $64-handle on the stock compares to a high of $ 74.44.

McDonald’s Corporation (NYSE: MCD) has been planning to have up to 2,000 stores by the end of 2013, up from a prior target of 1,350 stores. If YUM!’s KFC brand is truly facing as much trouble, one might ask whether maybe McDonald’s should consider rolling out those Golden Arches at a tad slower rate.  It is hard to fathom, but under the current conditions it is a fair thought.  McDonald’s shares are now down around $86.32 from a recent high of $102.22 and that is a significant selloff considering that this is supposed to be such a defensive stock.

Arcos Dorados Holdings Inc. (NYSE: ARCO) operates and franchises McDonald’’s restaurants with locations in 19 nations and territories through Latin America and the Caribbean.  If you saw the reaction from the last earnings report you might think that the Latin population was suddenly going to no longer grow.  Shares fell from about $18 to under $15 in a hurry and now the stock sits at $12.53.  What is so interesting here is that this was a $28 stock last September and this stock’s price actually rose last summer after its spring IPO debut at a time when many stocks were in free fall.

Starbucks Corporation (NASDAQ: SBUX) may be a different initiative than traditional fast food, but the end result and goal may be one and the same.  The coffee-house giant recently said that sales in China grew by 20% and that market is among the highest margin markets that Starbucks.  Starbucks has almost 600 stores and plans to have 1,500 by 2015 to make China its second largest market at that time.  Starbucks has already taken many initiatives to grow selectively throughout Latin America.  It seems unlikely that Starbucks would slow its growth plans, but one has to wonder if the company should keep that growth a bit more tepid as it continues to perfect its U.S. operations.  Starbucks has close to a market value of $40 billion already.

And what about this persistent and unrealized turnaround at The Wendy’s Company (NYSE: WEN)?  This chain recently moved up toi the #2 hamburger chain.  While it decides what to do to expand its hours and offering in the U.S., it still has a focus on international growth and much of that growth will be in the emerging markets.  The company’s most recent projection on top of the 6,500 Wendy’s stores in the U.S. and 27 international markets notes new restaurant development announcements in Singapore, the Middle East and North Africa, the Russian Federation, the Eastern Caribbean, Argentina, the Philippines and Japan. It even stated, “We believe that we have the opportunity to open more than 8,000 Wendy’s restaurants outside of North America.” Wendy’s stock is at $4.50 per share and its 52-week range of $4.29 to $5.62 has been more of the same as this has been stuck in a $4 to $6 range for most of the last three and a half years.  The company has a market value of only about $1.75 billion this trades at a discount to sales rather than at a multiple of sales like the larger fast food peers.  Does Wendy’s need to consider slowing some of those growth opportunities?

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It seems almost infathomable that these fast food (a.k.a. casual dining) would really be facing a serious growth slowdown in these emerging markets and BRIC nations.  These represent huge growth opportunities for the long game out a generation or two.  Still, what do you do when the core underlying growth of an economy you want to enter is not as robust as when you made your growth projections?

We do not see these fast food outfits contracting their international and BRIC efforts. Not in the classical sense as you would see in the more established markets in North America or Europe.  That being said, if the global economies continue to see slower growth then it is very reasonable to think that some of these growth ambitions may either slow down or might be back-end-loaded.

JON C. OGG