McDonald's (MCD) Storms China

McDonald’s (MCD)  is planning to open 500 new stores in China over the next three years. Why? Because it can.

McDonald’s is one of a tiny handful of large American companies which can actually take advantage of the recession to build market share and expand into attractive markets overseas.

Wal-Mart (WMT) is in a similar situation, but there are not may firms on the list after those two.

McDonald’s was in fairly poor shape five years ago. It was losing customers to other fast food chains and many analysts thought its best years were behind it. One of the reasons for the pessimism was that McDonald’s had over 30,000 stores around the world and that meant it had over-expanded and saturated its market.

The world’s largest fast food operator countered by building a big breakfast business and getting into product lines including coffee and a large menu of ever inexpensive meals. The tactics worked.

There are a number of reasons not to add stores in China. The economy there is slowing. If the middle class in the world most populous nation keeps shrinking, the number of people who can afford to leave their homes and farms for a hot meal could fall. The other side of that argument is China will recover from its economic troubles like the rest of the world and that between population growth and a healthy consumer base the nation will be a market where a rapid expansion of the McDonald’s franchise will pay off handsomely.

None of McDonald’s competitors will build 500 new locations in China. It is a gamble that probably has extremely low risk, but in a recession sometimes even low risk is a luxury.

Douglas A. McIntyre