Fast-Food Wars: McDonald’s vs. Yum! Brands in China

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When fast-food giants McDonald’s Corp. (NYSE: MCD) and Yum! Brands Inc. (NYSE: YUM) reported fourth-quarter and full-year results for 2013, both chains said that U.S. sales were flat at best for both periods. When McDonald’s reported January same-store sales Monday morning, U.S. same-store sales were down 3.3% compared with January 2013 sales.

McDonald’s reported that same-store sales in China were flat in the fourth quarter, while Yum! said that its sales in China were down 4% in the quarter and 13% for the full year. Both companies have been hit by concerns over avian flu and tainted chicken supplies that surfaced late in 2012. Yum! was hit harder, and it has taken the company a full year to climb back to its relatively small sales decline last quarter.

There is not much that either company has been able to do to light a fire under U.S. growth. Europe, which for McDonald’s did show 1% same-store sales growth in the fourth quarter and another 1% jump in January, has been a better growth area for Yum! Brands. Total sales grew 5% in continental Europe in the fourth quarter, and United Kingdom sales rose 3%, French sales rose 10%, Russian sales rose 47% and German/Netherlands sales were up 12%.

The main battle will be waged in China, where McDonald’s plans to add 300 stores this year to bring its total in the country to more than 2,000. Yum! already has more than 4,400 KFC and 1,000 Pizza Hut stores in China.

Yum!’s KFC brand is the most popular foreign brand in China, and it was built largely by catering to local tastes in its menu choices. McDonald’s has added some menu items that address Chinese tastes, but hamburgers are an acquired taste in a country more used to pork, chicken and fish.

The plans that McDonald’s has to grow its business in China may not show up in corporate profits for several quarters, or even longer. Yum! appears to have turned the corner on the chicken supply issues it had all of last year. Combined with substantial brand advantage from KFC and Pizza Hut, China is Yum!’s to lose.

McDonald’s may have a good strategy for growing its Chinese business, but the company waited too long and let Yum! build too large a lead. Competition from other companies like Starbucks Corp. (NASDAQ: SBUX) and Dunkin’ Brands Group Inc. (NASDAQ: DNKN) that are also putting significant focus on China makes McDonald’s path to glory even trickier.

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